UK and US will lead Covid recovery as vaccines rolled out around the world

The enormous stimulus package in the US has certainly also played its part. If we combine Biden’s latest $1.9tn package with those of the Trump administration since the beginning of the pandemic, the US has injected the equivalent of 25 per cent of its gross domestic product in response to the Covid-19 crisis. We have to go back to the Second World War to observe deficits of the same magnitude.

And with this extra money, Americans have started to do what they do best: shop. US retail sales jumped 9.8% overall in March versus February 2021, with restaurants up 13.4% and clothing retailers up 18.3% – providing the first indications of the anticipated consumption boom. Our research team has therefore revised its growth forecast for 2021 to 7%+ in the US.

And the UK is not far behind. With data suggesting the Q1 contraction will be smaller than previously feared, our GDP forecast for this year rises to 6.9%.

But with an anticipated boom in consumption, naturally an anticipated rise in inflation follows. UK consumer prices have started to edge up, driven mainly by higher energy prices and while we expect even higher readings over the next few months, we view these high inflation readings as a red herring. We see this inflation increase as transitory, reflecting depressed prices from a year ago rather than a spike in prices today.

We also view it as good inflation, resulting from recovering economic activity, rather than bad inflation, reflecting a loss of trust in the world’s currencies.

There is a fear among some that inflation will spiral out of control but we expect a rise close to the 2% inflation Bank of England target later this year, and lasting employment combined with mid-term headwinds from Brexit should prevent inflation from rising much further next year. All in all, the temporary rise of inflation will not make the Bank of England nervous, as the inflation target at this stage does not appear at risk of being breached.

Elsewhere, we would say that the recovery remains uneven across regions and countries. Looking at our GDP forecasts, the Eurozone (5%), Switzerland (3.6%) and Japan (2.9%) all lag in their expected recoveries when compared to the global economic growth forecast of 6.5%, while China has already entered the post-recovery phase and is in for a spring-cleaning of its policy measures and financial markets.

While the Eurozone is slightly lagging, vaccine supply will be ramped up in the coming months, which allows for more reopening of economies. The main risk that remains is that vaccines may fail a few mutations down the road, but we suspect markets will only this bridge when they get to it.

India is the other major story at the moment with their second wave looking far worse than the first, with new cases rising to over 330,000 as of April 22.

Thankfully, morbidity rates in this wave are so far lower than last year’s wave, but if they rise, more stringent restrictions including a nationwide lockdown cannot be ruled out.

However, the economic forecasts and decline in the stock markets appear very small, relative to the rapid rise in infections. Businesses in India were blindsided by Covid last year, but having lived through that experience, they are better prepared to respond this time. Another reason for the market reaction being so sanguine is vaccines. India is the world’s largest producer of them, and while the roll-out has been slow to date, production and distribution can be rapidly increased.

In short, we continue to expect a strong global recovery starting in Q2 as economies reopen, vaccinations progress, and pent-up demand drives consumption.

Stuart Paterson is executive director of

Julius Baer International.