International economy: A delayed, not derailed, recovery
While the expected synchronized nature of the global recovery has been delayed, it has not been derailed. Looking ahead, it is reasonable to expect a fully recovered global economy 18 months from now, with above-trend growth in between.
Global Market Strategist
The global economy continues to make progress in moving on from the pandemic, but with still uneven regional trends. Countries in North Asia continue to be at the front of the pack, with China already in its fifth consecutive quarter of growth. Its focus has now turned squarely to its priorities for the expansion ahead: passing the baton back to the consumer and normalizing its fiscal and monetary policies. Perhaps exactly because it did not need vaccines for life to return to normal domestically, its population has not felt the same urgency for vaccinations as in other regions. Improvement on this front will be important in order for the region to reopen its borders and permanently move on from the threat of localized lockdowns. The pickup in daily vaccination rates in China in May is encouraging.
In contrast, other regions have disappointed expectations relative to the turn of the year, primarily due to renewed national restrictions on activity and a slower-than-expected vaccination pace. The Eurozone is a prime example, with an unexpected contraction in activity in the first quarter. This disappointment contrasted with positive surprises in the U.S.; however, the tables have begun to turn. Optimism toward the U.S. recovery might be nearing a peak, while it has begun to lift off the floor across the Atlantic. Since April, countries in Europe, like Germany and France, have substantially improved the daily pace of inoculation, now vaccinating a higher percentage of their populations on a daily basis than the U.S. As a result, green shoots have begun to emerge in the data, with the Eurozone composite PMIs rising 3.7 points from March to May. One additional catalyst awaits Europe in the second half: the beginning of the disbursement of funds from the EU Recovery Fund, which sets up a much more even playing field for periphery countries in the cycle ahead. In order for Japan to join Europe in its own acceleration, it will be key for the country to improve its lagging vaccination rate.
In emerging market (EM) regions outside of North Asia, such as Southeast Asia and Latin America, news around the pandemic has been worse than expected, with powerful second waves causing likely activity contraction in the second quarter. While the pace of vaccinations remains slow, even in these regions, the pandemic is expected to come to wind down, although perhaps by relying more heavily on the population acquiring natural immunity to the virus.
While the expected synchronized global recovery has been delayed, it has not been derailed. Looking ahead, it is reasonable to expect a fully recovered global economy 18 months from now, with above-trend growth in between. The waves of enthusiasm will roll from region to region, with the timing of such changes impossible to get exactly right. Rather, long-term investors should keep their eyes on the horizon.
Exhibit 3: Daily vaccination rates have picked up in Europe and China
% Of population receiving a dose per day
These moves will be felt in the U.S. dollar, with the initial disappointment having caused the dollar to strengthen 1.3% in the first quarter, while building international enthusiasm has caused the dollar to weaken -0.6% since March. Ultimately, the more even global economic cycle ahead continues to suggest a weaker dollar path, albeit with short-term bumps along the way. This expected depreciation of the U.S. dollar should provide a currency boost to international returns for U.S. dollar-based investors.
As activity picks up, global headline and core inflation have perked up, moving up from 2020’s low of 1.1% and 1.3% to April’s 2.7% and 1.9%, respectively. While some effects are likely temporary, the change in fiscal policies in regions such as Europe and countries like the UK suggests more upside risk to developed market ex-U.S. inflation in the cycle ahead. Within emerging markets, the focus will remain on raising interest rates to combat unwanted increases in inflation, as central banks continue to work on their policy credibility.
Exhibit 4: With a strong international economy up ahead, the U.S. dollar should weaken
Real GDP growth: U.S.-intl. (5-yr. Moving avg.) U.S. dollar: 100 = 1984