Why Nomura Expects “Turbo-Charged Global Inflation”

Why Nomura Expects “Turbo-Charged Global Inflation”

Economist Lewis Alexander, and his team at Nomura, wastes no time in his latest monthly global economic outlook report – titled aptly enough “Turbo-Charged Global Reflation” to get to the point: “in addition to vaccines and policy stimulus, an economic recovery synchronized across regions will add further impetus to global reflation.”

What follows is a comprehensive and mercifully succinct summary of Alexander’s views covering every global region, and justifying why Nomura believes a tidal wave of inflation is about to be unleashed:

United States

  • Democratic control in Washington means more fiscal stimulus, but partisanship and narrow majorities will likely constrain policy.

  • The pandemic will weigh on short-term activity, but the vaccine outlook is positive for the medium term.

  • We expect constant Fed asset purchases through 2021 before a gradual taper in 2022, but risks skew towards earlier action.

  • The Fed will likely stay at the ELB at least through Q2 2023 with inflation remaining the key determinant to liftoff.

  • The unemployment rate will decline more gradually from here as the pace of recovery slows relative to the post-lockdown rebound.

  • COVID-19’s impact on service prices and the impact of labor market slack, particularly on rent, will weigh on core inflation.

  • Notable risks include new SARS-CoV-2 variants along with both upside and downside risk around fiscal policy.

Europe

  • With lockdowns still in place we see euro area GDP falling at a similar pace to Q4 in Q1, then recovering from Q2.

  • While underlying inflation remains low, base effects and policy changes should raise headline inflation sharply this year.

  • With GDP rebounding and inflation rising in the short term, we expect the ECB to keep policy on hold this year.

  • UK lockdowns should have a smaller effect on GDP than last spring. A full recovery in GDP takes until beyond 2022.

  • While pent-up demand and policy stimulus should be supportive, we expect a renewed fall in GDP in the current quarter.

  • After another £150bn of QE we think the BoE is done with easing. We do not expect negative rates, but risks remain.

Japan

  • As the government declared another state of emergency, q-o-q real GDP growth in Q1 2021 should be negative again.

  • With the prolonged pandemic pushing down inflation, suspension of the GoToTravel campaign will technically increase the rate.

  • We do not expect the Suga cabinet to make any significant change in economic policy and in BOJ’s monetary policy.

  • The risk is renewed yen appreciation, caused by deepening US-China tensions and further risk averse moves in markets.

Asia

  • Asia’s growth cycle appears to be headed higher, led by exports and investment, but private consumption should join in H2 2021.

  • Vaccinations, faster global growth, the tech upcycle and lagged effects of easier financial conditions should support the recovery.

  • Positive growth surprise likely in China, India, Singapore, Korea and Taiwan, but Thailand, Malaysia and Philippines likely to disappoint.

  • Higher inflation is likely on base effects, the end of government subsidies, higher commodity prices and a narrowing output gap.

  • Policy rates will likely be left unchanged this year, but hikes are likely in China, India, Indonesia, Malaysia and Philippines next year.

  • China: We expect the growth recovery and Beijing’s gradual policy normalization to resume following the containment of Covid-19.

  • Korea: We expect Korea’s sequential growth momentum to improve in Q1 on stronger-than-expected export growth.

  • India: Economic normalization amid above-target inflation suggests rates on hold and a gradual withdrawal of excess liquidity.

  • Indonesia: Rising inflation amid debt monetization and current account deficits could test monetary policy credibility.

  • Australia: The stronger-than-expected rebound continues, though central bank guidance, for now, remains dovish.

Tyler Durden
Wed, 03/10/2021 – 05:35

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