Q4 macroeconomic outlook

by Sean Tweedie | October 28, 2021

It is crazy to think that we are more than three quarters of the way through the year. As we transition through the fourth quarter let us take a look at the broader aspects of the macroeconomic outlook.

On global growth:

According to Bloomberg consensus estimates, it appears that global growth has peaked. However it remains at relatively high levels and is set to remain above trend into 2022. In the G7, Quarter 3 GDP rose by 6% and is expected to soften to 4.9% in Quarter 4. During Quarter 3 we saw GDP expand by more than 9% in the UK and the Euro Area. See Figure 1.

Figure 1

On lockdown restrictions:

Ten months after the first Covid-19 vaccine became available, 3.5 billion people (45% of the world’s population) has received at least one vaccine shot. Although some supply problems to emerging markets still exist, they are improving. Importantly, India is currently vaccinating 7.5 million people per day. There are also new breakthroughs in medication. Very recently Merck announced a pill that would reduce the risk of hospitalisation or death by around 50%. As daily cases reduce, countries have been allowed to loosen lockdown measures which has supported growth and allowed economies to recover.

On monetary policy:

As we mentioned last month, the actions of central banks are important in gauging the direction in the foreign exchange market. Central banks are set to reduce monetary support over the coming months and years as the effects of the pandemic begin to recede. Many central banks have already begun reducing their asset purchases with the aim of ending Quantitative Easing programs. New Zealand ended their Quantitative Easing program and Norway raised rates last week. The Federal Reserve is expected to announce their tapering of asset purchases in November and is expected to begin raising rates late 2022 and early 2023.

On pent-up demand and consumer confidence:

There is a fair amount of stimulus funds that have not made its way into the economy. In the US, it is estimated that households are sitting on $2.4 trillion in excess savings (or about 15% of annual consumption). See Figure 2. Consumer confidence still remains relatively low despite an improvement in the economy. Consumer confidence is important as it drives household consumption and in turn the demand for goods. We expect consumer confidence to improve into next year and coupled with the pent-up demand should support manufacturing and growth.

Figure 2

On currencies:

The recent strength in the dollar has faded somewhat. The DXY recently hit a 13-month high of 94.50 but failed to break above this level. Since then, the DXY retreated and is currently around 93.80. As we have mentioned before, the dollar is countercyclical which means it moves in the opposite direction to the global business cycle. The strength in the dollar has largely been attributable to upbeat economic surprises in the US relative to its trading partners. While US growth remains robust, global growth momentum will rotate from the US to other developed economies, which creates a headwind for the dollar. On a Purchasing Power Parity (PPP) basis which measures fair value, the dollar is still relatively expensive by around 15%. See Figure 3. Although PPP is not the best timing model it does help indicate the value that the currency will move toward over time. Furthermore, data shows that speculators are net long the dollar which makes it vulnerable to a positioning reversal. As we see growth rotate from the US to the rest of the world the earning prospects on non-US equities will rise and in turn reduce the appeal of US equites. The dollar has been supported by strong equity flows into the US. If the appeal of US equites were to drop off, we would see less flows into the US which will hurt the dollar.

Figure 3

So, to conclude:

There are several factors currently indicating a global economy that is strengthening amidst waning pandemic effects. We should see global growth get a welcome boost that will support currencies that have lagged the US up to now. The Federal Reserve may also lag other central banks in raising interest rates. In an environment like this, and barring any shocks, the dollar is unlikely to perform well.


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