Even as a resurgent COVID-19 threatens to dent the fragile economic gains scored since the second quarter, one Wall Street bank is touting the return of a synchronized, global recovery next year.
Morgan Stanley is now penciling in world growth will run as high as 6.4% in 2021. In a Sunday note, they said global economic output would return to levels last seen before the pandemic at the end of 2019.
As for the world’s two largest economies, the bank estimated China would be back to its pre-COVID state by the end of this year, and for the U.S. to make a similar comeback at the tail-end of 2021.
A combination of policy support via the loose financial conditions fostered by central banks and governments opening up their purse-strings will work in concert to power the global economic engine, they said.
In addition, positive vaccine developments in the past few weeks could ease the concerns of business owners who can now see a clear end to the COVID-19 pandemic.
Analysts have called for the return of a synchronized recovery across the world before, with the last time being nearly three years ago when Europe looked as if it might escape its economic doldrums. But the global rebound dissipated faster than hoped, prompting the International Monetary Fund later to scale back its international growth forecasts.
Like then, Morgan Stanley expected developed and emerging economies to contribute to the world recovery.
Unlike in the past, central banks of developing nations have been able to cut interest rates without fear of weakening their exchange rates and sending inflation out of control. Some, like Poland, have even flirted with unconventional monetary policies such as quantitative easing.
One of the more surprising forecasts from Morgan Stanley is for inflation to reach the Federal Reserve’s 2% target in the latter half of next year, potentially testing the central bank’s willingness to support the U.S. recovery.
A new focus on impoverished households that spend a larger share of their income have seen U.S. policy makers and legislators lean toward more direct fiscal aid measures and more stimulus, they said.
But Morgan Stanley conceded that a disorderly rise in price pressures could force the Federal Reserve to reverse its supportive policy stance earlier than Fed officials had expected. A U.S. central bank putting on the brakes remained an outside risk to this overwhelmingly bullish outlook.
In markets, the S&P 500
and Dow Jones Industrial Average
started the week on a positive note. European
and emerging market equities
traded over 1% higher on Monday.