Projections point to fast global recovery
Optimistic global growth projections may prompt a quicker normalization of monetary policies, with fiscal stimulus measures and the steady pickup in vaccination rates signaling a much-faster economic recovery and opening-up, experts said on Thursday.
Officials from the United States Federal Reserve said they expect economic growth to be much stronger this year, while the unemployment rate will be lower than the projections in December. The Fed’s median projection indicates that the US GDP may rise by 6.5 percent this year, compared with 4.2 percent earlier. That would be the fastest growth pace in four decades, said the Fed.
Several international institutions are also revising their GDP projections on China.
Fitch Ratings, a global credit ratings firm, raised China’s GDP growth forecast to 8.4 percent for this year, compared with 8 percent earlier, on the back of a strong recovery in exports and improving global demand.
Experts, in general, have a more optimistic outlook on the world’s two largest economies as the US Fed has raised projections for both inflation and the labor market, while China’s strong recovery continued to trigger a global rebound.
Though the US Fed kept interest rates at near zero on Wednesday, it has sent strong signals that there would be no further increases till 2023. At the same time, it has also reaffirmed its commitment to the quantitative-easing program by buying $120 billion in bonds every month — $80 billion in Treasury securities plus $40 billion in mortgage-backed debt.
“We will be carefully looking ahead,” Fed Chairman Jerome Powell said, adding “the path ahead remains uncertain”.
With key indicators like economic activity and employment improving steadily, David Chao, a global market strategist for Asia-Pacific (excluding Japan) at Invesco, a US investment firm, expects the favorable macro backdrop and better economic activity to boost US bond yields to around 1.9 percent by the end of the year.
Though the Fed has reaffirmed its dovish stance amid soaring inflation expectations, there are still concerns about a possible monetary policy tightening, despite assurances by the Fed chair to the contrary, said Chao.
The Invesco strategist expects the US dollar to weaken in near-term, given the Fed’s pledge on ultralow interest rates. Investors should focus on appreciating emerging markets and Asian currencies, he said.
Following the rise in US bond yields, in response to the $1.9 trillion stimulus plan and amid higher inflation in some economies, bond yields in the Asia-Pacific region have risen significantly as well.
The acceleration of US bond yields, a result of the financial markets’ pricing in stronger US economic growth and inflation, spooked global markets in February, because substantially higher market interest rates could put pressure on asset prices and choke economic growth, said experts.
Louis Kuijs, head of Asia Economics at Oxford Economics, believes that pressure on yields and the spillover effects of a US strong stimulus would remain modest in China, but the potential volatility, especially in the stock market, should be watched. That is because of the market concerns over frothy valuations amid prospects of a less accommodative monetary policy, he said.
Fitch Ratings revised global GDP growth projections to 6.1 percent on Thursday from 5.3 percent in December, as fiscal support is being stepped up sharply, economies are adapting to social distancing and vaccination rollout gathers momentum. Global GDP fell by 3.4 percent in 2020.