Goldman is turning uber-bullish on Planet Earth:
After the slower-than-expected start in December and early January, global vaccinations have picked up roughly in line with our forecasts over the past month. However, there is still a lot of room for improvement. In the US, the problem has been largely distribution; by our estimates, only about one-third of all doses produced by Pfizer and Moderna for the US market have been administered so far. Going forward, daily shots should continue to trend higher from 1½ million over the past week to 3+million by the end of April. In the EU, the problem has been more severe and mostly related to a lack of supply, although we expect improvement in coming weeks as Pfizer shipments pick up and the AstraZeneca vaccine becomes broadly available. We still expect the 50% vaccination mark to be reached in April in the UK, May in the US, and June in the EU, with most high-risk groups protected 1-2 months earlier. Combined with the temperature effects, this should largely resolve the acute public health crisis
If our optimism on the health situation proves justified, global growth is likely to turn sharply higher in coming months. This is becoming the market consensus for the but we think it will also apply to Europe. The first quarter as a whole will probably showa slight contraction in the Euro area and a more sizable drop in the UK, but this is mostlybecause of weakness at the very start of the year. From this point forward, we expect agradual pickup that sets the stage for strong Q2 growth, especially in the UK. For the year as a whole, we have shaved our forecast slightly to 5.0% in the Euro area but raised it to 6.2% in the UK, on the back of rapid progress on vaccinations and the sharp decline in infections.
Although we still don’t expect Congress to pass President Biden’s entire $1.9trn covid relief package, we have raised our assumption further from $1.1trn to $1.5trn. It is now clear that the administration will rely on Democratic support only, and that moderate senators such as West Virginia’s Joe Manchin are on board with most of the proposed measures. The impact on our growth forecast is smaller than one would expect from an extra $400bn. Much of the additional funding is likely to go into areas such as aid to state and local governments and education-related funding, where it will probably take several quarters—well into 2022 and perhaps beyond—to spend out. Nevertheless, we have nudged up our 2021 growth forecast further to 6.8%, which is 2.7pp above the Bloomberg consensus (although many of the more active forecasters have moved up significantly over the past month).
Is the Biden package too much of a good thing? Former Treasury Secretary LarrySummerspoints out that it is three times as large as the CBO’s estimate of the output gap of $670bn (3% of potential GDP). Together with pent-up savings from earlier stimulus rounds, he thinks this will push aggregate demand above supply to an extent that could cause much higher inflation. We are not as concerned, and not only because we still don’t expect the entire $1.9trn to pass. First, the multiplier on some parts of the package such as state and local government aid is probably low, as noted above.Second, important parts of the package (e.g. the $1,400 tax rebates) are one-off in nature while others (e.g. unemployment benefits) will shrink automatically as the economy recovers; this reduces the risk of sustained overheating. Third, we see more slack in the economy than CBO. The employment/population ratio remains nearly 4pp,or 6½%, below the pre-pandemic level, even though employment is normally less cyclical than GDP (a relationship known as Okun’s law). Admittedly, Okun’s law is off at the moment because the remaining weakness is so concentrated in the most labour-intensive sectors. But even adjusting for this fact, we think the economy is further below full employment of resources than the CBO estimates suggest.
With all that said, the outlook for global monetary policy is shifting in a less dovish direction. On the back of the further upgrade to our fiscal assumptions—as well as the 0.4pp drop in the unemployment rate in Friday’s otherwise mixed employment report—we have pushed down our forecast for the unemployment rate to 4.1% at the end of2021, with further gradual declines thereafter. The inflation outlook has also firmed, not only because of an improved labor market but also because wage growth has continued to come in above expectations. We now expect core PCE inflation to breach the Fed’s2% goal on a sustained basis in mid-2023, a couple of quarters earlier than before. This has led us to pull forward our forecast for the first hike in the funds rate to 2024 H1, from H2 before, and we expect the FOMC to start tapering its $120bn/month QE program in early 2022.
Consistent with our outlook for cyclical strength, we have lifted our government bond yield forecasts and remain above the forwards across the major markets. We have also pushed back our forecast for Euro appreciation because we worry that higher US rates will overshadow the improvement in the European growth outlook in the near term, although we still expect the trade-weighted dollar to depreciate this year given its negative correlation with global growth. We also retain a broadly positive view on commodities in view of the strong growth outlook, with a preference for oil and industrial metals. The equity market call is a bit more complicated; the newsflow on growth and the implications for earnings should be very positive, but upward pressure on interest rates might act as a headwind. But on balance we still think that cyclical improvement is likely to result in higher prices over time.