Global Outlook Q2 2021: Mind the Gaps

Global economic growth prospects are optimistic with the rapid roll-out of vaccines and substantial fiscal stimulus. While Europe will have a dynamic and sustained rebound, US forecasts are even higher with the Biden administration’s aggressive actions. However, Europe has the greatest room to exceed growth expectations due to the ECB’s reassessment of its policy framework and progress towards more flexible fiscal rules. China’s expected growth is slower over the next few quarters with a disappointing vaccine roll-out and financial risk control triggering credit tightening. Developed market central banks are expected to respond decisively to downward shocks and cautiously to positive news on growth and inflation, while emerging markets have already tightened monetary policy and hiked rates. This gap is due to pressure from commodity prices (especially food) and less anchored inflation expectations so emerging markets maintain traditional targeting in contrast to the flexibility in the developed markets. Finally, Europe leads sustainable finance initiatives and has taken a clear lead on regulation and policy in the space. The relevance of climate change to the ECB’s price stability mandate will result in two sets of measures in its strategy review: a protective approach with disclosures of climate risk on all assets on its balance sheet; and a proactive approach where they will deviate from market neutrality in corporate asset purchases by underweighting issuers with high climate risks. This will boost sustainable investing and grow green bond issuance by 50% in 2021.