The strong start in markets from early January experienced some setback this week on rising infections, as countries are hit by a second wave of COVID-19 despite vaccinations gathering pace as well as bond markets falling back (in yields). With President Biden taking office and the significant fiscal expansion that is about to be discussed together with the bright spots from the Chinese economy, there are reasons to be optimistic about the medium-term outlook, but some retracement could be expected in the very near term. This week, Chinese GDP surprised to the upside, rising 6.5% y/y (consensus 6.2%) from previous 4.9%, partly due to upward revisions to Q3, confirming an overall strong finish to 2020 as also indicated by earlier released data. We still expect to see a gradual decline in economic momentum during 2021 as the catch-up effect, stimuli and strong exports of electronics and medical supplies are likely to fade. In the short term, China may also take a small hit from new lockdowns – especially if it reduces Chinese New Year travelling and festivities (starts around 11 February).
On Monday, we published our Five Top Macro Questions for 2021. In this piece we discuss COVID-19, economic normalisation, inflation, fiscal and monetary policy and politics. We argue that while the US and Europe will continue to struggle with COVID-19 near term, we expect restrictions to be removed altogether when the vaccination process has progressed sufficiently. We argue that economic policy will remain accommodative this year but that the Fed more seriously will start tapering talks in Q4 21. Last, but not least, we argue that this year is likely to be a quieter political year.
With regard to COVID-19, the situation in Europe continues to be serious, not least in Spain, where we have seen a sharp worsening as the government drags its feet on restrictions. In the US, the situation has improved and it seems like we have seen a peak. That said, the number of new cases remains very high. The vaccination process has been speeding up slightly but needs to speed up even more. In COVID-19 Update: Tail risk – that vaccines are ineffective against new mutations, 21 January, we debate this risk. On Friday next week, the EMA is set to discuss the AstraZeneca vaccine.
We do not expect any major policy changes at next week’s FOMC meeting after the Fed changed its QE forward guidance at the December meeting. We expect Fed chair Powell will be asked about the tapering process on the back of the previous weeks’ discussions, see Fed Monitor: Still too early for the Fed to start the normalisation process, 13 January.
Next week, focus also turns to the World Economic Forum. Global leaders will head (virtually) to Davos to discuss how to rebuild trust across countries. Xi Jinping and other Asian leaders (Modi etc.) are set to speak and Germany’s Chancellor Merkel and French President Macron will also participate. Seminars take place from Monday through Friday. IMF is set to publish its World Economic Outlook (WEO) on Tuesday.
The German CDU party elected Armin Laschet as its new leader. He is expected to continue the ‘Merkel era policies’ and is a consensus building candidate and a pro-EU centrist. The Italian political turmoil is set to abate near term after PM Conte won two no-confidence votes in the Senate.
