The recovery of the economy hinges on seemingly temporary inflation levels

The recovery of the global economy depends on how the COVID-19 pandemic evolves. Despite the slight upward trend in global cases, recent news about COVID-19 has been very positive, with global case figures approaching the lows recorded in March. This path to recovery seems to be more solid in developed countries—where infections are at the same level as in October 2020—than in emerging countries. Infections in emerging countries remain relatively high with a daily average number of cases of 342,000, compared to 82,000 in the most advanced countries. Some countries like the United States, the United Kingdom, France, Spain, Italy, the Netherlands, Switzerland and Sweden have high vaccination rates and are therefore gradually lifting restrictions, while others, such as India, Peru, the Philippines, Argentina, Colombia, Iran, Indonesia and Brazil still have low vaccination rates and stringent restrictions in place.

In terms of activity, corporate surveys indicate that the global economy is continuing to rebalance, and is moving away from industry to focus on services. Moreover, a strong rebound in global growth is likely to occur during the second quarter as the Chinese economy regains momentum and advanced economies benefit from the easing of restrictions on activities and the return of household demand. Therefore, it is generally agreed that global GDP growth for 2021 will be close to 6.0 percent, (the highest in decades) and slightly above 4 percent in 2022.

In the United States, as health conditions improve and the economy reopens, the fiscal stimulus, rebound in employment and increased optimism will drive consumption growth. A slightly delayed rebound in inflation was observed in 2021, which will extend into 2022. In the eurozone, restrictions are starting to ease as the health situation improves, enabling the hospitality and non-essential retail sectors to reopen and thus boosting the prospects of Europe's tourist hotspots. GDP is expected to rise sharply during the second and third quarters of 2021 and inflation could reach 2.5 percent in the second half of the year, driven by price increases in hospitality, supply bottlenecks and base effects. Emerging markets will see lower quarter-on-quarter growth in the second quarter than in the first because, although the consensus is that these markets will return to a good growth pace, the reality is that only a few have managed to control the rise in COVID-19 infections; which will mark great differences between them.

Furthermore, inflation, which reflects the strengthening of recovery, supply bottlenecks and increasing cost pressures, is expected to be 3.5 percent this year, but this is on a temporary basis given that, in most economies, this acceleration of the CPI is due to temporary factors that will be staggered throughout 2021 and 2022. That said, inflation risks are increasing in intensity and duration, as supply problems, spiraling inflation expectations, or the shift of all the effects of the energy transition or relocation of production to the consumer, mean this level may become permanent.

The problem with this risk is that it does not need to materialize but if markets think that the monetary authorities can anticipate it, there may be a "slip-up" in monetary policy similar to the one from eight years ago. In this situation, the envisaged scenario is fairly serious and could turn the current recovery into a relapse more akin to previous crises than that of the COVID-19 crisis.