With vaccines on the horizon, signalling an end to the COVID-19 pandemic is closer, the economists at BNP project a healthy rebound in economic activity globally in the second half of next year, with rising inflation expectations, but rates remaining at the zero lower bound for at least the next two years.
“The prospect of a vaccine — if not several — being widely distributed in H2 2021 will enable corporates and consumers to envision a post-COVID world at last, we expect, and revive investment and spending plans,” said BNP’s 2021 outlook report. “This sets the stage for a strong economic recovery."
Gross domestic product, they predict, will grow 3.7% in 2021 and 3.2% in 2022.
They see inflation expectations rising next year, although inflation, as measured by the consumer price index will get as high as 1.9% the next two years, below the Federal Reserve's 2% target.
"Monetary policy is likely to remain exceptionally accommodative, reflecting an asymmetric reaction from central banks," the report said, with central banks "quick to respond to negative news but cautious in responding to positive developments."
"The policy response by Fed and other central banks and good news on vaccine deployment, gives us a positive view on inflation over the medium term," Daniel Ahn, chief U.S. economist, head of markets 360 North America at BNP Paribas, said during its 2021 outlook virtual conference.
“We expect they will respond to poor macroeconomic data but overlook signs of improvement, and therefore remain accommodative,” the report said. “Monetary policy is likely to remain exceptionally accommodative, reflecting an asymmetric reaction from central banks in which they will be quick to respond to negative news but cautious in responding to positive developments. We expect this, along with an expansionary fiscal stance, to support economic activity.”
With the Fed's new strategy likely letting the economy "run hot," as inflation surpasses 2%, the report said, "puts pressure on the ECB and other central banks to also remain accommodative."
Employment trends
The Conference Board Employment Trends Index rose to 98.81 in November from 98.32 in October, its seventh straight gain, but the index remains 10.2% below its year-ago reading.
Despite the rise, ETI's “pace of improvement has moderated compared to previous months,” said Gad Levanon, head of The Conference Board Labor Markets Institute. “The index signals that the recovery of the labor market may be slowing further, or even come to a halt, throughout the winter" as the number of people with COVID-19 rises.
If government restrictions to prevent spread of the virus and uncertainty about a stimulus package remain, they pose "risks to a sustained labor market recovery. People working in industries most impacted by restrictions, such as restaurants, travel, accommodation and out-of-home entertainment, will be the most affected over the coming months. As a result, the decline in the unemployment rate may pause during the winter before sharply dropping later in the year after the large-scale vaccination boosts the economy.”
Also released Monday, consumer credit rose $7.23 billion in October, after a downwardly revised $15.0 billion increase in September, first reported as a $16.2 billion gain.
Economists polled by IFR Markets expected a $16.0 billion increase.
Revolving credit dropped $5.5 billion while non-revolving credit rose $12.7 billion.
Revolving credit includes credit card debt. Non-revolving debt includes automobile loans, loans for mobile homes, education, boats, trailers, or vacations.