Economic outlook

Q4 2021: Recalibrating expectations

Our fast-moving recovery is steering into headwinds from policy, global growth uncertainty and pandemic-related supply disruptions. With valuations high across the board, markets enter Q4 with healthy growth, but waning tailwinds.

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October 12, 2021 | 20 minute read

The focus is back on growth as 2021 enters its final quarter. Our fast-moving recovery is steering into headwinds from policy, global growth uncertainty and pandemic-related supply chain disruptions. Inflation is also in the mix and could prove a challenge to policymakers, investors and consumers. With valuations high across the board, markets enter Q4 with solid momentum, but waning tailwinds.

For the first time in over a year, the consensus forecast for GDP is being revised lower. As recently as August, the forecast for Q3 GDP was over 7.0%, but has since been revised down to 5.0%. Over the past several weeks, disappointing data have caused even further erosion in growth expectations with the Atlanta GDPNow at only 1.3% for Q3. At the start of the fourth quarter, decelerating growth is top of mind.

Our economy is just a year and a half into the current recovery, which has been super-charged by zero interest rates, trillions of dollars of fiscal stimulus and quantitative easing. So far, real GDP growth has eclipsed the 2.3% average of the five years preceding the pandemic. Given the epic dislocation in economic activity and employment, our economic recovery has been resoundingly strong. But the tailwinds that powered growth rates far above our underlying potential growth are dissipating. As we enter 2022, we believe some of those tailwinds could turn into headwinds.

The resurgence of COVID-19 in late summer was a stumbling block. The delta variant caused cases to rise sharply in the U.S. and around the world. In the U.S., where vaccination rates are relatively high, mobility did not suffer significantly despite localities that experienced severe outbreaks. But in emerging countries and regions, specifically Asia where vaccination rates had lagged, fresh shutdowns exacerbated supply chain problems that have become a hallmark of this recovery. The end of Q3 served as a powerful reminder that the pandemic lingers as a key uncertainty that continues to impact the trajectory of our economy.

Key takeaways

  • Growth may slide back towards pre-pandemic rates in Q4, although there is room to bounce in 2022.
  • Inflation will remain a challenge for policymakers who will need to navigate a variety of price pressures.
  • Markets are on solid footing to navigate a recalibration in growth, despite high valuations.

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Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Lara Rhame

Chief U.S. Economist + Managing Director

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