International economic outlook: October 2021

Summary

Forecast Changes

• As the outlook for the global economy continues to soften, we have again revised our 2021 global GDP forecast lower. We now expect the global economy to grow 5.8% this year as the recovery stalls amid ongoing COVID-related disruptions as well as a sharp economic deceleration in China.
• But despite a worsening growth outlook, we have brought forward the timing of interest rate hikes for a few notable central banks. Given rising inflationary pressures and hawkish policymaker commentary, we now believe the Bank of England will begin its rate hike cycle at its November meeting. In addition, local fiscal and political worries as well as elevated inflation lead us to believe the Brazilian Central Bank will take an even more hawkish stance on monetary policy.
• With global growth still trending softer and the Fed likely to taper asset purchases in the near future, we continue to believe the U.S. dollar can broadly strengthen through the end of this year. In addition, we believe dollar strength could persist into early 2022 as the Fed continues to trim asset purchases and financial markets may be priced for too much monetary tightening at select foreign central banks.

Key Themes

• The global economy continues to face a flurry of issues. COVID-related growth disruptions have been persistent, while regulatory changes and property sector challenges have weighed on China's economy. As the Northern Hemisphere heads into the winter and holiday months, another wave of COVID infections seems quite likely, while issues in China will likely linger for the time being. Against this backdrop, the outlook for the global economy has softened, and we think risks around our global growth forecast remain tilted to the downside.
• Even though growth prospects have slowed, inflation expectations continue to rise. We can point to supply chain disruptions and higher commodity prices as drivers of price pressures, and expect these rising inflation pressures to result in further monetary tightening from central banks around the world. However, while we agree on the direction of monetary policy, we believe financial markets may be expecting foreign central banks to normalize monetary policy at too quick of a pace, especially the Bank of England.
• Our forecast for a stronger U.S. dollar through the end of this year remains intact; however, we believe there is increasing scope for a resilient greenback into 2022 as country-specific factors and fundamentals evolve in a way that could be conducive to foreign currency weakness. As financial markets reprice monetary policy expectations abroad and the Fed tapers asset purchases in 2022, foreign currencies could weaken. In addition, local political developments across the emerging markets could result in idiosyncratic events weighing on emerging market currencies throughout next year and also contribute to broad U.S. dollar strength.

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