Q4 2021 Global Outlook: Moderation in growth after a strong rebound
16 Sep 2021
The world’s economic response to the COVID recession has been, for the most part, a resounding success. Faced last March with a sharp decline in activity, countries responded with unprecedented monetary and fiscal stimulus. The result was a V-shaped recovery, despite repeated surges in infections across the world. But what comes next?
Three themes loom large as our Research analysts survey the macro landscape.
Global growth is slowing
A slowdown is not entirely unexpected: developed economies do not grow at an annual rate of 6% ad infinitum. But whether it is due to constraints on production, new COVID outbreaks or China’s zero-tolerance policy on the Delta variant, global growth is clearly shifting to a lower gear.
Second-quarter GDP in the US was weaker than consensus expectations, and Q3 is tracking lower as well. As for China, our Research team has cut its 2021 growth forecast to 8.2% from 9.4%. The euro area continues to do better than expected, making it an outlier for now.
Asia-Pacific has borne the brunt of the Delta wave
Source: WHO, CEIC, Barclays Research
Bond markets still believe in the Fed's inflation credibility
Inflation readings in the US have been sharply higher than expected for several months, and the EU has seen a similar trend recently. But bond markets have been unruffled, falling in line with the US Federal Reserve’s view that inflationary forces will ease next year. Our analysts agree and believe there is little risk that central banks will lose credibility by falling behind the inflation curve. A well-behaved bond market has been a benign backdrop to the risk rally all summer, and that should continue, even as the Fed moves toward cutting asset purchases by the end of the year.
China's policy shifts are sparking alarm, but macro effects are limited
Some US-listed Chinese stocks have dropped after a series of regulatory moves in Beijing targeted at narrowing gaps in wealth. Our analysts are sanguine, arguing that China is not really turning away from the market reforms that drove its decades-long economic miracle. They believe that the bigger risk to China’s near-term growth comes from the government’s zero-tolerance policy on COVID.
China's COVID response remains more stringent than others'...
The index is a composite measure based on nine indicators including school closures, workplace closures, and travel bans, rescaled to a value from 0 to 100 (100 = strictest).
Source: Our World in Data COVID-19 Stringency Index, Barclays Research
...which weighs on activity
PBoC = People’s Bank of China. NBS = National Bureau of Statistics. PMI = Purchasing Managers’ Index. "total social financing” is a broad measure of credit and liquidity in the economy.
Source: Wind, Barclays Research
So what does that mean for asset allocation? For the past five quarters, our Research team has been overweight risk assets over core bonds and continues to prefer equities over fixed income, though it is a much closer call now than before. More positive earnings surprises are expected relative to the market consensus and real yields on most high-quality fixed-income assets are punishingly low.
Moreover, our analysts agree with the market-implied view that as and when the Fed starts to hike, the terminal Fed policy rate should end at a lower point than in the previous cycle. The path of least resistance is still for equities to outperform bonds.
That does not imply that this path will be smooth, especially with the Fed set to taper. The autumn is likely to be more exciting than the summer.
Read the full report
Barclays’ Global Outlook, published quarterly, contains recommendations for investors across all major economies and markets. Global Outlook: Looking past the V is available to Investment Bank clients on Barclays Live.
Ajay Rajadhyaksha is Head of Macro Research at Barclays, based in New York. He oversees the global research and strategy efforts of the economics, rates, FX, commodities, emerging markets, securitised, and asset allocation teams. Since joining Barclays in 2005, Ajay has held various positions, including Co-Head of FICC Research and before that, Head of US Fixed Income Research and US and European Securitised Research.