Policymakers are steering economic policies in divergent directions, reflecting countries’ different economic recovery paths and inflation outlooks. Recent data support our view that growth is accelerating in the euro area, remaining notably above trend but moderating in the US and slowing in China.
In the US, we revise our second-quarter GDP growth forecast lower to 8.5%, reflecting supply bottlenecks. For the July FOMC meeting next week, we expect the focus to be on strategy, including how to taper when the time comes, and look for a more hawkish tilt in the committee's assessment of the balance of risks.
In the euro area, rising infections are unlikely to prevent a solid economic recovery this summer, in our view, but could lead to the reintroduction of some mobility restrictions later this year. Uncertain COVID-19 developments imply that the ECB will be loose for longer and nimble in calibrating the near-term pace of the pandemic emergency purchase programme.
In the UK, the final easing of restrictions this week marks a new and important stage in the pandemic, with great uncertainty as to how this wave will unfold in terms of hospitalizations. July PMIs, though still at high levels, suggest greater caution among households and firms. Monetary Policy Committee members remain divided on the outlook.
In Japan, after a one-year delay, the Tokyo Olympics are finally underway. Even without spectators, the decision to hold the Games ran against public opinion. Whether the government can turn sentiment and contain infections may affect stimulus prospects prior to the upcoming elections. Exports continue to pick up with economic normalization overseas, but could slow as pent-up demand cools and DM spending shifts from goods to services.
In China, we expect next week’s Politburo meeting to take a cautious view on growth and macro policy to stay accommodative to stabilize domestic demand amid repeated local COVID outbreaks. Our high-frequency tracker suggests moderation in the manufacturing sector and a gradual and uneven recovery in the services sector.
In Emerging Asia, the region is registering record COVID-19 cases and deaths. Restrictions imposed to contain the spread pose renewed headwinds to growth in Southeast Asia, while tech exports may keep North Asia relatively insulated. Vaccination rollouts remain slow, with only Singapore, Malaysia and Korea likely to hit critical inoculation levels this year.
In EEMEA, despite rising number of COVID-19 cases globally and a reversal in some commodity prices, central banks in this region still prefer to sound hawkish.
In Latin America, the political situation in most of the region remains highly volatile and is a key determinant for the economic outlook. The next political tests will come from the presidential inauguration in Peru next week and elections scheduled in Argentina and Chile for September and November, respectively.
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