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Economists at Danske Bank continue to see April as the overall turning point in terms of overcoming the COVID-19 shock, avoiding new restrictions in the fall despite the challenges in rolling out vaccines in many countries. Given its robust growth, the US will reach its pre-corona GDP trend line in Q3 this year (like China did already last year), while it will take substantially longer in the euro area and Japan (not before 2023).

Key quotes

“We continue to see a risk of further resurgence in Europe in March as the more contagious British variant has taken over and the season is not yet helpful. However, we look for a turning point during April when warmer spring weather arrives as this normally reduces spread of contagious diseases such as the flu. With most people vaccinated when the autumn season arrives, we believe new restrictions will not be necessary at that point in the US and Europe and the economies can stay open.”

“The US economy is set to significantly outpace both the euro area and Japan in 2021 due to a more forceful policy support and a faster roll-out of COVID-19 vaccinations, allowing a faster normalisation of economic activity. We have raised our growth expectations for the US economy to 7.5% in 2021 (from 3.3% in December).”

“Although the euro area GDP growth will benefit from the higher US growth (by 0.1-0.2 pp), we have revised down our 2021 GDP forecast to 4.4% (4.9% previously), reflecting more stringent containment measures in H1 21 than previously anticipated, which are delaying the upswing (however, not derailing it).”

“In Japan, we have revised our GDP forecast higher looking at 2020-22 as a whole, as the economy seems to have struggled less than expected with the soft lockdown imposed by the government. A new record budget for the fiscal year 2021 and the large fiscal package in the US are also key. The recent surge in USD/JPY gives exporters good conditions for benefitting from US stimulus.”

“We expect the Fed will allow inflation to move higher without offsetting by tightening monetary policy prematurely (expecting tapering only to begin in early 2022) and forecast PCE core inflation will move close to 2% by year-end 2022. In contrast, in the euro area, after peaking at 1.6% in Q4 21, we see core inflation drop back and fluctuate around 1.0% in 2022.”