GDP growth into 2022 will start to look more synchronized, with a broadening of EM domestic demand and U.S./Europe slowing but still achieving above-trend growth. Beneath the surface, though, divergence will remain. EM economies will suffer more scarring than DM economies. Spare capacity will be used up at different times, which points to divergence in monetary policy normalization within DM and EM countries. Finally, DM economies are removing fiscal support but want public investment to expand, while EM economies’ fiscal space is more limited.
These ongoing divergent forces will mean that the 20 countries that we cover have different trends for GDP and inflation, which will also affect forward guidance for monetary policy.
Risky financial markets have discounted a lot of the economic good news, while real bond yields remain low by historical standards. This makes for a trickier environment for asset allocation over the next 15 months to end-2022.