Global economy close to solid recovery

A year ago, when the global economy was in the depths of the COVID-19-induced recession, we argued for a V-shaped recovery and the return of inflation. Twelve months on, despite the clear signs of a strong recovery, the debate is now on whether this was just a spurt driven by policy support and reopening. If so, global growth could slow down as it did in 2012 when policymakers withdrew fiscal and monetary policy support.

Our (Morgan Stanley's) three-factor framework has shaped our thinking about this cycle. First, the COVID-19 pandemic is an exogenous shock, unlike the global financial crisis that was caused by excessive private sector leveraging. Second, in the absence of moral hazard issues, policymakers responded actively and aggressively. And third, as the declining share of wages in GDP and rising income inequality came to the fore, an inclusive growth environment emerged as a goal of both monetary and fiscal policy. The bias will be to err on the side of keeping policies expansionary.

Against this policy backdrop, we foresee a sustained recovery.