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The virus's Atlantic divide

  • The path towards population immunity has become more complicated, as the new virus mutations pose significant risks to the vaccination timeline.

  • Despite this risk, continued policy support by core central banks and the promise of large US fiscal stimulus are a cause for optimism.

  • Last week, the ECB and Bank of Japan repeated their commitment to keep their policy accommodative. We expect the same from the US Fed this week.

  • In the United States, vaccinations are broadly in line with our expectation for January, though the pace will need to accelerate to keep the US on track for herd immunity by the third quarter. We revise lower our outlook for US GDP growth in the fourth quarter to 3.5% from 5.0% previously.

  • In the Euro area, we have downgraded our first quarter GDP forecast to -1.5% quarter over quarter. We continue to expect Euro area GDP to reach pre crisis levels in the first quarter of 2022.

  • In the UK, incoming fast data, including disappointing January PMIs, continue to suggest that the third lockdown is having a greater economic impact than the second did.

  • The Bank of Japan is reviewing policy until March, buying some time in the process. Fine-tuning the current framework for sustainability may be the most likely outcome for now.

  • In China, the visible improvement in the fourth quarter GDP was in line with our above-consensus forecast. We expect manufacturing sectors to remain the main engine driving growth.

  • In Emerging Asia, Korea’s tighter social distancing rules likely weighed on domestic consumption in the fourth quarter. We expect fourth quarter GDP to rise by 0.6% quarter over quarter, slowing from the 2.1% growth in Q3.

  • In EEMEA, the South African Reserve Bank kept rates on hold at 3.5% but brought forward the timing of potential policy normalization by one quarter to 2Q 21. We now expect hikes to commence in the fourth quarter.

  • In Latin America, the region has a busy electoral calendar, which implies non-negligible risks given the possibility of the rise of populists.

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