Monthly economic update: Hardly a happy new year

What a disappointing start to 2021. Our Monthly Economic Update for January looks at where we are right now globally. And while the virus, vaccine and lockdowns are still all too familiar, it's worth noting that things will get considerably better. The next few months, however, are likely to be bleak. We look at what will be driving the synchronised recovery in 2021, examining the major trends in the biggest global economies and markets:

US: Straining at the leash

The US has, so far, avoided the economic strife seen in Europe resulting from new lockdowns, but caution is warranted given evidence of the new strain having arrived. Nonetheless, as the vaccination programme gains momentum, the economy re-opens and further fiscal spending materialises, vigorous growth will return.

Eurozone: A false start to the new year 

With Covid-19 cases swelling again in the last few months of 2020, several European countries had to tighten containment measures and extend them into this year. The risk now is that GDP contracts again in the first quarter. The slow start to the vaccine campaign is not helping either, but GDP growth should pick up from the second quarter onwards.

UK: Strict shutdowns to give way to sustained spring recovery 

While we expect strict lockdowns to trigger a 3% fall in UK GDP in the first quarter, the more optimistic outlook for vaccinations means a sustained recovery could start in the spring. The longer-term recovery will depend on how quickly government wage support is removed, but also on the drag from lower investment and hiring as a result of new UK-EU trade ties.

China: Deleveraging reform resumes

The Chinese economy has recovered well, and therefore the government has restarted structural reform. We have revised our USD/CNY forecast for 2021. The risk is a spike in Covid cases due to huge numbers of people travelling over the Chinese New Year.

FX: Dollar downgrade

Despite broadening lockdowns, the recovery trade in FX markets is in full swing and the dollar bear trend is showing no signs of slowing. Trying to time a correction is tricky and instead, we are focusing on lowering our end-year dollar forecasts.

Rates: Collateral damage 

Despite ongoing Covid angst, steeper yield curves led by higher long rates gel with a positive vibe for the future. The vaccine helps enormously but big issues remain. Large negative real rates remain indicative of macro stress, and they have moved even deeper negative of late. We still look for higher market rates in 2021, helped by a reflation theme.