The outlook for the global economy improved over the past three months. Governments increased policy support, and rising vaccination rates allowed some countries to reduce restrictions on activity. In the US, declining COVID cases and an ambitious vaccine rollout resulted in an earlier and more broad-based reopening than in other advanced countries. The recovery picked up speed with real GDP accelerating in both the first and second quarters of 2021. Increasing fiscal support, an improving labour market and the large cache of savings on household balance sheets will keep the US economy growing at a solid clip in the second half of the year. Concern has shifted from whether the economic recovery will be strong enough to whether it will be too strong, re-igniting long-dormant inflation pressures. The Biden administration’s aggressive spending won’t only bump up US growth prospects but opens the door for a firming in demand that will help Canada and other trading partners emerge from the pandemic stronger.<\/p>\n
Central bankers and governments remain committed to keeping support measures in place until economies have returned to pre-pandemic trends. Interest-rate increases are off the table in 2021 with small tweaks to non-traditional programs more likely if central banks make any changes at all. The Bank of Canada has led the pack in scaling down its quantitative easing program, though we expect the US Federal Reserve will follow suit late this year. Both are expected to raise the policy rate by 50bps in 2022. No rate moves by the BOE or ECB are expected until 2023. Central banks will move at a measured pace to avoid derailing confidence or destabilizing financial markets.<\/p>\n
Government support measures to help economies make it through the crisis are continuing aimed at sustaining growth and facilitating a full recovery in labour markets. Following a $900 billion package announced in December 2020, the US government approved another $1.9 trillion in direct relief to US households and small businesses at the end of the first quarter. The Biden administration is also looking to pass a large American Jobs Plan to finance infrastructure investment. Canada’s federal government, in its April budget, extended some pandemic-related support programs for workers and businesses and announced more than $100 billion in new spending over three years. In the near term, these measures will support a rebound in consumer spending with investment activity likely to follow as demand ramps up. <\/p>\n
The combination of low interest rates, waves of government support and the acceleration of vaccinations that allow the reopening of hard-hit sectors will fuel robust growth in many advanced economies. Our forecasts are for Canada, the US and UK to grow at a greater than 6% pace in 2021 with solid gains ranging from 3% to 5% expected in 2022. The euro area economy is projected to build momentum after a soft start to the year and slower reopening with GDP increasing by 4.5% in 2021 and 3.6% in 2022. <\/p>\n