Markets Update: 2021 Global Growth Outlook

Episode Summary

Executive Summary: Jan Hatzius said the December payroll decline was a virus-driven setback, not a change to his upbeat 2021 outlook. He expects U.S. growth to rebound sharply in spring as vaccinations accelerate, fiscal stimulus expands after the Georgia runoffs, and major central banks stay dovish. He also sees Europe recovering strongly, while China has less upside because it is already near trend and may tighten policy.

Main Topics: U.S. labor market weakness and near-term virus drag (Priority: 5/5): Hatzius argued the December jobs decline reflects the winter COVID surge, especially in leisure and hospitality, but broader activity indicators remain mixed rather than collapsing. 2021 U.S. growth outlook and vaccination-led rebound (Priority: 5/5): He maintained a well-above-consensus U.S. GDP forecast, expecting a strong spring recovery as seasonality improves and vaccination leads toward herd immunity in Q2. Post-Georgia runoff fiscal policy and stimulus expectations (Priority: 5/5): The Georgia result increases the likelihood of another sizable COVID relief package with checks, state aid, unemployment extensions, and other targeted support. Global growth outlook: Europe strong, China more constrained (Priority: 4/5): Europe is expected to recover faster from a deeper hole, while China has less room to rebound because it has already returned to pre-crisis levels and may restrain credit growth. Monetary policy and central bank dovishness (Priority: 4/5): He expects the Fed, ECB, Bank of England, and Bank of Japan to remain accommodative, with rate hikes far off and asset purchase tapering a more immediate debate. Lessons from COVID for policymakers and markets (Priority: 3/5): Hatzius said the crisis showed the economic damage of pandemics, the adaptability of market economies, and the effectiveness of aggressive fiscal and monetary response.

Key Arguments: The December payroll decline was concentrated in virus-sensitive leisure and hospitality, while excluding that sector employment rose, suggesting the economy is slowing but not breaking down. High-frequency indicators such as ISM and consumer spending have held up reasonably well, implying resilience compared with the spring 2020 shock. A strong 2021 rebound remains likely because virus pressure should ease seasonally and vaccination should accelerate enough to support herd immunity in Q2. The Georgia runoff outcome makes another COVID relief package likely and relatively quick, with roughly $750 billion in additional support as a baseline. Longer-term Biden fiscal priorities may emerge later in 2021, likely financed partly by higher corporate taxes, though a 25% corporate rate is more plausible than 28% in a 50-50 Senate. Europe should outperform current consensus because it is farther below potential and has more room to recover as restrictions ease and policy stays supportive. China is the exception: it is already back near pre-COVID trend, so future growth is more limited and policymakers may prioritize reducing financial imbalances over more stimulus. Despite rapid growth, inflation is expected to stay subdued because the Phillips curve is flat and labor-market tightening should translate into only modest price pressure. Fed rate hikes are unlikely until 2024-2025, while tapering of asset purchases could start in 2022 rather than late 2021, reflecting the Fed's vaguer guidance on 'substantial improvement'. The pandemic reinforced that large, early fiscal and monetary responses were effective and likely preferable to cautious under-response in severe demand shocks.

Data Points: U.S. GDP growth forecast for 2021: 6.4% - Hatzius’s forecast remains well above consensus, with no change after the weak December jobs report. Forecast vs. consensus: More than 2 percentage points above consensus - He said Goldman remains on the optimistic side relative to forecasters. December U.S. payrolls: -140,000 - The unemployment report showed the first monthly job loss since April. Leisure and hospitality employment change: Nearly -500,000 - The employment decline was concentrated in virus-sensitive leisure and hospitality. Employment excluding leisure and hospitality: +350,000 - Illustrates underlying labor-market resilience outside the hardest-hit sector. Previous fiscal package: $900 billion - He cited the recent relief bill as the base for further stimulus. Expected next COVID relief package: About $750 billion - Baseline estimate for another package after the Georgia runoff outcome. Additional tax rebates: $300 billion - Largest proposed component of the expected relief package. State and local government aid: About $200 billion - Identified as a key Democratic priority and sticking point. Unemployment insurance top-up: $300 per week - Currently extended into March; expected to continue through mid-year in the new package. Corporate income tax rate forecast: 25% - Hatzius lowered the expected Biden corporate tax rate from 28% due to Senate constraints. Europe GDP growth forecast: 5% to 6% - He said Europe should grow well above consensus in 2021. China GDP growth forecast: About 8% - China is the one major economy where his forecast is slightly below consensus. Fed monthly asset purchases: $120 billion - Current pace of Treasury and mortgage-backed securities purchases. First Fed rate hike timing: Second half of 2024 - Pulled forward from early 2025 after the growth upgrade. ECB rate hike timing: 2025 - He does not expect hikes in Europe until 2025.

Pivotal Quotes: "It was a stark reminder that the virus is still a very significant depressant on economic activity." — Jan Hatzius: His reaction to the weak December payroll report and renewed COVID surge. "Our overall forecast for 2021, if you take GDP, is 6.4%." — Jan Hatzius: He reiterated his above-consensus U.S. growth outlook. "This looks like, as I said, a Keynesian triumph in these two crises." — Jan Hatzius: His assessment of aggressive fiscal and monetary policy responses during the pandemic and the 2008 crisis.

Implications: Investors should expect a near-term virus drag followed by a spring rebound, more fiscal stimulus, and prolonged easy money. Europe has meaningful catch-up upside; China may slow from policy restraint. Growth is strong, but rate hikes remain distant.