World Economic Prospects Monthly

Abstract

Overview: Stronger recovery will not unleash inflation ▀ Although we have upgraded our global GDP growth forecast for 2021 again, to 6.0% from 5.6%, we do not expect this to trigger a sustained rise in inflationary pressures. We still view the pandemic as being disinflationary and expect the low inflation/low yield environment of the past decade to persist. ▀ The US looks set for an even bigger fiscal boost than we had expected a month ago, and its GDP growth is now seen at 7.0% this year. We expect the full $1.9trn of fiscal measures to be passed, rather than the $1.3trn package previously assumed. Strong US demand and a fall in global Covid cases bode well for the world economy. ▀ However, a growing concern is that the ongoing substantial global fiscal support, combined with the release of pent‐up demand as restrictions are eased, may cause a sustained pick‐up in inflation. Although we expect some factors, many of which are a direct consequence of the pandemic, and rising oil prices to lead to higher headline inflation in the short term, we do not see a sustained overshoot of inflation targets. ▀ First, fiscal policy is expected to be a bit tighter at a global level this year than in 2020 and, while households have built up large stocks of savings over the past year, the unwind is likely to be gradual and a large share of these unplanned savings may be permanently saved rather than spent. ▀ Second, we do not see a strong argument why higher costs and inflation in the short term will lead to an inflationary spiral. Workers are in no position to push up wages in response to the near‐term rise in inflation. And while some sectors that have seen surges in demand during the pandemic may be able to pass on higher costs and even expand their margins, this will be offset by weaker price pressures among the sectoral losers from the pandemic. ▀ Although a rise in bond yields from their record lows seems justified, we doubt central banks will come under pressure to raise policy rates any time soon to contain inflation.