The world economy is on track for a synchronous rebound that will gain traction from March 2021 onwards, according to Morgan Stanley economists led by Chetan Ahya.

In their outlook for the year ahead titled ‘The Next Phase of the V,’ the economists expect both developed and emerging economies to drive the next phase of global reflation with global growth hitting 6.4% in 2021, spurred by highly supportive fiscal and monetary policy.

“Our growth forecasts remain significantly higher than the consensus, especially for the U.S. and EMs,” they wrote in a note. “The difference between us and consensus lies in our assessment of the impact of the COVID-19 shock on private sector risk appetite and the effectiveness of a substantial policy stimulus.”

The U.S. bank highlights three stand out features for world growth in 2021:

• A synchronous recovery driven by a more expansive reopening of economies and the extraordinary monetary and fiscal support now in place. Global GDP is on track to resume its pre-COVID-19 trajectory by 2Q21, according to the bank. “We expect China to return to its pre-COVID-19 path this quarter, and the US to reach it by 4Q21.”
• After a prolonged period in which EMs have faced a series of cyclical challenges, macro stability is now in check and their pace of recovery is catching up. “EM growth rebounds sharply in 2021, helped by a widening U.S. current account deficit, low U.S. real rates, a weaker dollar, China’s reflationary impulse, and EMs ex China’s own accommodative domestic macro policies.”
• They see different inflation dynamics taking hold, especially in the U.S. “The COVID-19 shock has accelerated the pace of restructuring, creating a significant divergence between the output and unemployment paths. With policymakers maintaining highly reflationary policies to get back to pre-COVID-19 rates of unemployment quickly, wage pressures and inflation will pick up from 2H21. We expect underlying core PCE inflation to rise to 2%Y in 2H21 and to overshoot from 1H22, with the riskthat it happens sooner.”

Risks to the bullish outlook hinge on the virus and vaccine developments, the bank said.

“A sharper rise in hospitalisations in the U.S. or Europe could prompt policy-makers to adopt stricter lockdown measures than our base case, and approval of vaccines for emergency use could come later than January 2021,” said the economists.

“Looking a bit further out, we see scope for upside inflation risks from 2H21, which could create a disruptive shift in expectations on Fed policy.”