BlackRock Investment Institute

Macro insights

Divergences in economic restarts

The IMF turned more bullish on global growth in its World Economic Outlook update, playing catch up to the consensus yet again. Its U.S. forecast now implies a cumulative GDP loss – what matters to financial markets – at just over 7% for the U.S. This is less than half the loss it expected a year ago, as the chart below shows.

A smaller shortfall

Chart showing IMF estimates of the shortfall in GDP growth being revised up

Sources: BlackRock Investment Institute, IMF, with data from the IMF and Reuters News, April 2021. Notes: The green line shows an estimate for the cumulative U.S. GDP shortfall compared with the pre-Covid trend, based on the IMF forecast of April 2021. The yellow line shows an estimate based on the IMF forecast of April 2020. The shaded orange area shows the range of cumulative losses per the latest Reuters consensus . There is no guarantee that any forecasts made will come to pass.

The updated estimates from the IMF once again underscore why risk assets have done so well over the past year. They also echo our view that the Covid shock is more akin to a natural disaster than a regular business cycle recession. We see this distinct nature and unprecedented policy support leading to a much smaller activity shortfall, especially compared with that after the global financial crisis. Permanent scarring of productive capacities was likely avoided due to the comprehensive policy response, in our view. Consensus estimates now call for U.S. growth to return to its pre-Covid trend by the end of the year.

Divergences in restart trajectories are becoming more apparent. The U.S. is in pole position as its vaccine rollout accelerates. Vaccination in the euro area is also picking up momentum after initial delays that left it lagging other developed economies. The IMF outlook is less optimistic on emerging markets, where a slower rollout of vaccines, more limited policy space and greater reliance of tourism could weigh on activity in the longer term. The IMF’s projected loss in global economic output in 2024 relative to the pre-Covid trend is almost entirely due to an expected shortfall in emerging markets.

Emerging market assets have been under pressure this year. The focal point of Covid dynamics has shifted to emerging markets, particularly larger countries such as Brazil, India and Turkey that have seen rising new cases and fatalities. Relief from vaccination still appears months away suggesting mobility restrictions could remain in place for much longer than in developed peers.

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