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COVID-19 will again dominate in the second quarter of 2021.  With new viral variants and staggered or stalled vaccine rollouts, the global economic rebound will be uneven around the world.

Quarterly

Global Trends

<p>Increasing vaccine production and distribution as well as new stimulus in the United States indicate brighter prospects for a faster, though uneven, recovery of the global economy in H2-2021 than we initially anticipated in our annual forecast. The major new concern for Q2 is divergence among economies like the United States and China that are achieving stronger short-term growth, and those such as European countries that have had <a href="/article/road-global-covid-19-vaccination-will-be-rife-risks-and-setbacks">renewed COVID-19 outbreaks</a> and extended lockdown measures, where the rebound might be slower. <a href="/article/has-china-s-economy-hit-speed-bump">Even the Chinese</a> and <a href="/article/where-us-economy-going">U.S. economies</a>, however, are propped up by state actions, and such support may not be conducive to sustainable growth. Activity remains driven mainly by manufacturing and trade, with services that involve close personal contact continuing to suffer.&nbsp;</p><p>Progress in Q2 depends on keeping infections under control, despite new virus variants, in tandem with continued government support. Many countries are struggling to acquire and administer vaccines, and a third outbreak and lockdowns in Europe are limiting a rebound there. A gap is opening between some advanced economies and China that have access to vaccines, other advanced economies where vaccine rollouts continue to struggle, and many emerging markets and developing countries that will not have widespread access to vaccinations this year. In this environment, continued government fiscal support and monetary policy accommodation are necessary to underwrite aggregate demand. G-20 fiscal support was $12.5 trillion as of mid-February 2021; together with accommodative monetary policies, this allowed many businesses to survive lockdowns. Faster progress on vaccine distribution could return global growth to a sustainable path more quickly than envisioned; downside risks include increased spread of the virus, vaccine-resistant variants and renewed outbreaks. The pandemic also leaves a legacy of rising public and private debt against the prospect of returns to slow long-term growth.</p><p>Emerging pressures for the quarter include:</p><ul><li>A distinct upward trend in prices with the potential for renewed inflation globally. Industrial metals prices are rising, with copper prices at a decade high and oil prices at a yearlong high. Meanwhile, the U.N. Food and Agriculture Organization&#39;s food price index has been rising for nine straight months, with prices for cereals, food oils and sugar at the highest levels since 2013. Supply bottlenecks remain, most prominently in silicon memory chips and a shortage of shipping containers. Finally, yields on U.S. government bonds have increased and inflation expectations are at a seven-year high, although the U.S. Federal Reserve&#39;s priority is job creation and it will tolerate inflation greater than 2% for a time.</li><li>Financial vulnerabilities are increasing with global debt at an all-time high, constraining the ability of many countries to respond to downturns or address structural needs. Low-interest rates and the prospect of more bad loans will erode banking capital buffers. Defaults may also increase as government income-support programs end in the face of fiscal constraints and higher household and non-bank debt.</li></ul>

Coronavirus Still Dominates the Global Economy

<p>The Biden administration will make tangible offers to the European Union and other Western countries to reduce tensions lingering from measures taken by the Trump administration regarding matters such as trade. This will create room for agreements on <a href="/article/eu-moves-ahead-corporate-tax-transparency-plan">issues like digital taxes</a>, state subsidies and WTO reform, though progress will be slow and may extend beyond the second quarter. While we expected the Biden administration to make such offers to the European Union, it has done so faster than we anticipated in our annual forecast. The United States will face pressure to make concessions at the World Trade Organization to unblock appointments to the Appellate Body, but the White House will probably want a clear, agreed-on roadmap on WTO reform before offering such concessions. The United States could also remove steel and aluminum tariffs, but this would carry domestic political consequences among steel and aluminum workers. Concessions on WTO reform and the removal of steel and aluminum tariffs are less likely than concessions on the other issues.&nbsp;</p>

The U.S. Diminishes Tensions With European, Other Western Countries

<p>Government and public pressure on technology and social media companies will continue to expand globally. The United States, Europe and China will take steps to rein in the power of tech companies, with impacts felt far beyond the quarter. The <a href="/article/democrats-power-us-push-against-big-tech-grows">Biden administration has appointed</a> several figures skeptical of big tech to key antitrust positions at the White House and the Justice Department. This signals that the administration will take a strong, progressive stance toward Big Tech, a policy that could start to go into effect in the second quarter. Outside the United States, Australia and Facebook&#39;s dispute over content licensing will push other governments to take more aggressive action against media companies; countries including Canada and New Zealand already are looking to adopt rules similar to Canberra&#39;s. Pressure on social media companies beyond antitrust concerns will also expand globally, particularly as governments seek to broaden takedown requests and/or block social media sites from spreading information they deem harmful. Russia, India and Turkey have all upped pressure against social media companies in recent months, and over the rest of the year will implement further restrictions.&nbsp;</p><p>China&#39;s attempt to limit the independence of national technology and fintech firms will continue in Q2. The intensity of the crackdown could, however, slow down now that Jack Ma and Ant Group have been used to set an example and now that new rules governing large media platforms and internet finance are being implemented. With China&#39;s 14th Five-Year Plan having been adopted, Beijing will focus on aligning the tech sector&#39;s overall development with its indigenization priorities &mdash; something made particularly urgent amid the intensifying U.S.-China tech war &mdash; and attempting to force China&#39;s large technology firms to use domestic suppliers more frequently to bolster the industry.<br />&nbsp;</p>

Public, Government Pressure on Tech Companies Grows

<p>OPEC+ will increase oil production as demand rises on the back of global vaccine rollouts, but high demand growth and OPEC+&#39;s desire to leave supplies tight will continue to bolster oil prices over the quarter. <a href="/article/opec-stays-course-driving-oil-price-inflation-expectations">OPEC+&#39;s March 4 decision</a> not to raise oil production in April and Saudi Arabia&#39;s continuation of a voluntary cut of 1 million b/d is a sign that OPEC+ will try to keep supplies tight. Nevertheless, Saudi Arabia will no longer try to fend off Russia&#39;s push for increasing oil production and will back measured production increases over the summer. Higher oil and gas revenue will alleviate some of the short-term financial pain that oil-producing countries face globally. But the price recovery will still pale in comparison to the crisis they have been dealing with since the pandemic began, and it will take months if not years of higher prices to significantly improve their finances. Higher oil prices will also make things more difficult for central bank governors around the world as they add another contributor to inflation and undermine economic recoveries in developed countries dependent on energy resources to fuel their economies.&nbsp;<br />&nbsp;</p>

OPEC+ Increase Production as Prices, Demand Rise

<p>The United States and Iran will struggle to initiate direct <a href="/article/iaea-deal-buys-iran-more-time-pursue-sanctions-relief">talks over U.S. sanctions</a> and Iran&#39;s nuclear program before June 18 Iranian presidential elections. The talks could pave the way for a deal where Iran would receive some sanctions relief in exchange for freezing or reducing its nuclear activities. The timetable calling for talks ahead of elections is getting less realistic, however, as initial talks drag on due to Iran&#39;s demand that the United States offer some level of sanctions relief as a condition for beginning talks and due to the U.S. unwillingness to do so. This will likely push any possible agreement to the second half of the year at the earliest. Tehran&#39;s moves with its nuclear program will increasingly alienate it from the United States and the E3 (France, Germany and the United Kingdom). Despite this, they will continue to offer confidence-building measures short of significant sanctions relief in order to get talks started. Nevertheless, Iran will continue expanding its nuclear activities until it gets some sanctions relief, and the situation will increasingly become an international crisis. Iran is unlikely to fully reduce cooperation with the International Atomic Energy Agency this quarter, but could if talks continue to go nowhere and a hard-line figure wins the presidency in June.<br />&nbsp;</p>

The United States and Iran Race Against Time to Get Talks Started

Global Trends 

Asia-Pacific

<h3>U.S.-China Tensions Endure, Biden Engagement Off to a Slow Start</h3><p>U.S.-China outreach on trade issues will be slow given the continuation of <a href="/article/fate-trump-s-china-tariffs-under-biden">Trump-era tariffs</a>, the still-in-force phase one trade deal and political pressure on the White House to remain tough on China. Some developments due during the quarter could further jeopardize trade outreach. These include a U.S.-China supply chain review initiated by the Biden administration that could see strategic measures against the Chinese tech sector standing in the way of later compromises on less thorny trade issues. The deteriorating post-coup <a href="/article/myanmar-washington-moves-cautiously-avoid-losing-more-ground-china">situation in Myanmar</a> and Chinese electoral <a href="/article/china-makes-its-hong-kong-electoral-overhaul-official-what-s-next">reforms in Hong Kong</a>&nbsp;will also serve as points of U.S.-China tension that could compel the Biden administration to increase pressure on China in the form of sanctions, and trigger U.S. domestic political backlash against any compromise with China on trade or other matters.</p><h3>Potential Shifts in Middle Powers</h3><p>U.S. policies to enlist greater cooperation from countries in the Indo-Pacific to counter China will take greater shape within the quarter as various potential partners weigh their options, taking into account domestic and strategic priorities. Taiwan will emerge more fully as the greatest potential U.S.-China flashpoint as China steps up efforts to target the island through economic and military means to pressure Taipei against a more pro-independence tilt and to test the U.S. response. The quarter will also bring potential domestic developments in U.S. allies Japan, South Korea and Australia that could complicate U.S. efforts to counter China&#39;s rise.</p><p>&nbsp;</p>

<p>In South Korea, the start of a one-year countdown to a March 2022 presidential transition will see political maneuvering within the incumbent progressive camp and against the conservatives, raising the potential for tensions with the United States over North Korea and <a href="/article/south-korea-biden-ends-trump-s-feud-over-military-cost-sharing">thorny U.S.-South Korea defense issues</a>. South Korea&#39;s politics may also once again spur U.S.-South Korea-Japan alliance issues given the potential for a revival of the hard-line South Korean progressive push on issues related to Japanese conduct <a href="/article/japan-and-south-korea-brace-prolonged-trade-battle-economy-war-asia-pacific">during World War II</a>. In Japan, Prime Minister Yoshihide Suga&#39;s ability to stay in office will be tested by the Olympics, which if canceled could cost him the premiership and usher in a return to weak, short-tenured prime ministers, complicating U.S.-Japan relations. Australia-China tensions will endure, with the potential for Australia&#39;s Liberal-National Coalition to double down on a hard line against China as the window for Australian elections approaches in the third quarter.</p><h3>China&#39;s Recovery Faces Hurdles</h3><p>A more complex and <a href="/article/has-china-s-economy-hit-speed-bump">uneven economic recovery</a> than anticipated&nbsp;will see China resort to supply-driven growth based on public investment and nationwide lending despite Beijing&#39;s goal of promoting domestic consumption, private investment and fiscal responsibility. If China is to shift toward a more sustainable growth model, it will not be until 2022, after the global economic recession ebbs for China&#39;s major trade partners. the Communist Party of China may target particular locales to curtail local government borrowing, the chief driver of China&#39;s debt, but Beijing&#39;s limited capacity to oversee Chinese city governments and the incentives driving local leaders to sustain growth via borrowing and real estate development will prevail. Similarly, the Party will aim to support economically vulnerable populations through gradual reforms to the hukou program, which restricts migrant workers from accessing urban social benefits, and through better financing for small businesses. As with debt control, Beijing will struggle to enforce hukou reforms in 2021 as cash-strapped local governments eschew additional welfare spending; small- and medium-sized enterprises, however, will have easier access to loans.</p>

<h3>The Mainland Focuses on Quelling Hong Kong Dissent</h3><p>The <a href="/article/china-secures-its-hold-hong-kong-sweeping-electoral-reforms">Hong Kong electoral reforms</a>&nbsp;introduced in the first quarter will increase the pace of the mainland&#39;s erosion of Hong Kong autonomy, which raises the risk of protest backlash on the streets amid the easing of the COVID-19 pandemic. While the ramifications of these reforms will play out primarily in the third and fourth quarters around possible Chief Executive Election Commission and <a href="/article/year-long-election-delay-extends-hong-kong-s-political-crisis">delayed Legislative Council elections</a>,&nbsp;the Hong Kong legislative process to enable these mainland-imposed reforms will provide potential rallying points for the opposition in the second quarter. With the pro-democracy camp beleaguered by the <a href="/article/chinas-security-law-ushers-new-and-uncertain-era-hong-kong">national security crackdown</a>, however, widespread support for any such protests will be muted, leaving more radical and less risk-averse demographics like students and youth to drive any such limited actions. The clampdown on Hong Kong politics will likely spur a U.S. response, potentially timed with the imposition of electoral reforms late in the first quarter or in the second. These will include sanctions targeting individuals or institutions directly involved in the erosion of Hong Kong autonomy, but will <a href="/article/biden-s-first-hong-kong-sanctions-maintains-trump-s-approach">remain calibrated</a> to avoid hitting financial institutions with broad international exposure or targeting <a href="/article/hong-kongs-dollar-peg-likely-remains-safe-us-sanctions-now">Hong Kong&#39;s ability to access U.S. dollars</a>.&nbsp;</p><h3>North Korea Digs in</h3><p>North Korea will focus on advancing its <a href="/article/north-korea-kim-jong-un-takes-hard-line-us-ties-weapons">missile capabilities</a> and weathering the economic hardship of sanctions, the impact of which has been compounded by the lingering global COVID-19 pandemic. Pyongyang&#39;s reluctance to compromise meaningfully on its weapons program will mean little to no progress in U.S. outreach given Washington&#39;s similarly hard-line stance on full North Korean denuclearization and focus on more <a href="/article/us-talks-won-t-change-iran-s-proxy-strategy">pressing outreach to Iran</a>. Economic necessity will mean that North Korea will likely escalate opportunistic cyberattacks to generate revenue amid continued sanctions in addition to ongoing illicit trade to circumvent the sanctions. With the highly publicized focus on nuclear development out of the January Party congress, Pyongyang will need to show tangible progress on weapons development, elevating the chances of a submarine-launched <a href="/article/north-koreas-submarine-problem">ballistic missile launch</a>&nbsp;or ground tests of solid-fuel systems. The imperative to avoid steeper sanctions, however, will mean continuing to refrain from nuclear or <a href="/article/north-korea-likely-stay-course-ahead-us-election">intercontinental ballistic missile tests</a>.&nbsp;<br />&nbsp;</p>

Key Trends for the Quarter

<p><strong>April 7:</strong> South Korean mayoral and municipal by-elections<br /><strong>Early June:</strong> 100-day deadline for the Feb. 24 Biden administration review of strategic supply chains&nbsp;<br /><strong>June 16: </strong>Japan&#39;s ordinary Diet session ends<br /><strong>July 1:</strong> The Communist Party of China&#39;s 100th anniversary&nbsp;<br />&nbsp;</p>

Key Dates to Watch 

<h3>European Economies Rebound</h3><p>Economic activity will slowly improve across the European Union because better weather and progress in vaccination campaigns will allow governments to soften social distancing measures. In addition, the disbursement of EU funds and the suspension of EU rules on fiscal deficit and sovereign debt will allow national governments to keep stimulus measures in place or even to introduce new ones. The rebound, however, will be <a href="/article/covid-19-s-uneven-impact-europe-portends-equally-uneven-recovery">slow and uneven</a>.&nbsp;Some sectors, such as tourism and hospitality, will continue to struggle, which will take a particularly heavy toll on <a href="/article/europes-tourism-industry-confronts-unwelcome-visitor-covid-19-coronavirus-italy-spain-france-greece">tourism-dependent countries</a> in Southern Europe.</p>

<p>While the overall economic climate will improve throughout the quarter, many indicators (such as employment and domestic consumption) will probably remain below pre-pandemic levels, especially in Southern Europe. The economic rebound will be fragile because the emergence of new variants of the virus that causes COVID-19 could force governments back into stricter lockdown measures. Persistently high levels of sovereign debt and deep fiscal deficits will create <a href="/article/southern-europe-s-covid-19-crisis-just-beginning-eu-italy-france-spain-greece-portugal-coronavirus-economy-politics">financial risks in the future</a>,&nbsp;though they are unlikely to materialize during the quarter. Finally, the European Union will hold a series of meetings during the quarter to debate its institutional and economic future, but no specific decisions should be expected.&nbsp;</p><h3>Germany in Election Mode</h3><p>The German government will be ready to introduce new rounds of stimulus measures for households and companies as it progressively lifts lockdown measures. This will mark the beginning of an economic rebound in Europe&#39;s largest economy that will gain traction in the second half of the year.&nbsp;Germany will hold a <a href="/article/germanys-next-election-season-will-begin-period-political-turbulence">federal election in September</a>&nbsp;and several regional and municipal elections throughout the year, which means Berlin will consider increasing public spending so that the elections happen in a context of greater optimism about the economy.</p>

<p>Germany&#39;s main political parties will unveil their electoral manifestos and decide on their candidates for chancellor during the quarter, which will shed some light on possible electoral alliances after the vote. The main issues on the agenda will be fiscal policy, environmental policy and the fight against COVID-19. Because this is an electoral year, Germany will refrain from supporting any big changes in EU policy, which means that the policy-making process in the European Union is likely to slow down until Germany appoints a new government.</p><h3>All Eyes on Scottish Separatism</h3><p>Secessionist forces will win legislative elections in Scotland on May 6 by a solid margin, confirming strong support for independence. London will not authorize an independence referendum and Scotland will not take any <a href="/article/understanding-scotland-s-call-legal-independence-referendum">unilateral action towards secession</a> during the quarter, but long-term questions about its future will remain, leading to protracted political risk. In addition, disputes between London and Brussels over the implementation of customs controls in <a href="/article/northern-ireland-tensions-risk-upending-eu-uk-trade-deal">Northern Ireland&nbsp;will continue</a>, while Unionist forces in the region will demand the EU-U.K. Withdrawal Agreement (which keeps Northern Ireland in the EU single market) be scrapped.&nbsp;<br />&nbsp;</p>

<p>London will threaten to selectively enforce the Withdrawal Agreement, while Brussels will threaten legal action. These disputes will jeopardize the continuity of the entire Brexit legal, economic and security framework, including the EU-U.K. free trade agreement. Compromise will remain possible because of London and Brussels&#39; shared interest in preventing a severe disruption to trade and an escalation in sectarian disputes in Northern Ireland.&nbsp;</p><h3>The EU and the U.S. Draw Closer</h3><p>The European Union and the United States will collaborate to solve some of their <a href="/article/what-biden-presidency-means-europe-us-relations">main bilateral disputes</a>&nbsp;during the quarter, though progress will likely be slow. The White House and the European Commission will negotiate over a digital services tax at the <a href="/article/trump-s-war-against-taxing-tech-goes-global">Organization for Economic Cooperation and Development level</a>&nbsp;and negotiate the lifting of tariffs connected to the Airbus-Boeing dispute, though they may not reach a deal in the quarter. Biden will visit Europe in June, giving him the opportunity to send a symbolic message of trans-Atlantic cooperation. Issues like the EU plan to introduce a carbon border tax and German support for the Nord Stream 2 natural gas pipeline will continue to create EU-U.S. political disputes. In the meantime, plans for a free trade deal between the European Union and the United States are unlikely to progress significantly. While the European Union is likely to side with the United States when it comes to criticism of China&#39;s human rights record and growing military assertiveness in the South China Sea, Brussels will also seek to protect its investment and trade ties with Beijing and avoid escalating disputes that could lead to negative economic repercussions for the bloc.<br />&nbsp;</p>

<p><strong>April 4: </strong>Bulgarian parliamentary election<br /><strong>April 11:</strong> Italian region of Calabria holds elections<br /><strong>April 25: </strong>Albanian parliamentary elections<br /><strong>May 4: </strong>Spanish autonomous community of Madrid holds election<br /><strong>May 6:</strong> Elections for the parliaments and assemblies of Scotland, Wales and London, local elections in England<br /><strong>May 9:</strong> The Conference on the Future of Europe begins<br /><strong>May 23: </strong>Cypriot legislative elections<br /><strong>June 6: </strong>The German state of Saxony-Anhalt holds elections<br /><strong>June 13: </strong>Finnish municipal elections<br /><strong>June 21:</strong> EU summit on the economy held in Portugal<br />&nbsp;</p>

Key Dates to Watch

Middle East and North Africa

<h3>Sunni Competition Fuels Regional Instability</h3><p>Regional competition between Sunni states will dynamically play out in <a href="/article/race-between-turkey-and-uae-somalia-wins">Somalia</a> and <a href="/article/libyas-peace-process-reaches-critical-stage-spoilers-line">Libya</a> in the second quarter, complicating each country&rsquo;s ongoing peace processes, even though Turkey and the United Arab Emirates have taken a few steps to at least publicly deescalate competition. Libyan factions participating in the new transitional Government of National Unity &mdash; which only plans to govern until new elections, and is closer to Turkey than to Egypt or the United Arab Emirates &mdash; will try to position themselves <a href="/article/libyas-new-government-national-unity-will-struggle-unify-country">ahead of December elections</a> to ensure their continued influence. Egypt and the United Arab Emirates will funnel resources and support to like-minded Libyan figures in hopes of protecting their respective interests after elections. Turkey meanwhile will funnel resources into Western Libya in hopes of protecting the influence they&#39;ve built up with Prime Minister-designate Abdul Hamid Dbeibeh and with opponents of Khalifa Hifter during the 2019-20 Tripoli conflict. In Somalia, a political crisis has emerged as President Mohamed Abdullahi Mohamed&#39;s term ended in early February without new elections or an obvious path toward a resolution. Turkey and Qatar have deep ties to Mohamed government while the United Arab Emirates has sought to strengthen the power of several federal member states and opposition leaders against him in recent years. It will likely continue to support Mohamed&#39;s opponents and try to build a closer relationship with whoever succeeds him if elections are finally held.&nbsp;</p><h3>Turkey&#39;s Volatile Economy Leads to an Aggressive Foreign Policy</h3><p>Inflationary pressure in Turkey will test the government&#39;s ability to support the economy&#39;s post COVID-19 recovery as Ankara embraces less orthodox monetary policy. Inflation driven by domestic and global factors will intensify in Turkey this quarter, testing the <a href="/article/central-bank-shake-puts-turkey-s-economic-recovery-peril">new central bank leadership</a> that President Recep Tayyip Erdogan installed in March. The government hopes lower rates will stoke domestic consumption and investment that would spur growth. The new team at the helm of Turkish monetary policy is closely allied with Erdogan and his belief that high interest rates cause inflation, and is likely to hold or cut rates even if inflation spikes. This will dampen <a href="/article/contextualizing-turkey-s-surprise-interest-rate-hike">foreign investor sentiment</a> and could harm Turkish purchasing power if it leads to currency depreciation. Turkey&#39;s recent economic growth has been based largely on increased domestic credit, and may not be sustainable. A more expansive monetary policy with potentially higher inflation and a depreciating exchange rate could see Turkey struggling to meet gross financing needs of more than $200 billion in the next 12 months.&nbsp;</p><h3>Iran Looks to Negotiations for Sanctions Relief</h3><p>Factionalism in Iran will intensify leading up to consequential June presidential elections, heaping pressure on the current government and deepening scrutiny around <a href="/article/limits-biden-s-proposed-return-diplomacy-iran">sanctions relief negotiations</a> with the United States. Hard-line and conservative candidates campaigning for June 18 presidential elections will keep intense political pressure on Iranian President Hasan Rouhani and his moderate allies and their efforts to jump-start sanctions relief talks with the United States. They hope that the pressure will improve the chance of a conservative ally winning the presidency, but Iran&#39;s conservatives and hard-liners will continue to face significant internal factionalism when trying to unify behind a candidate.&nbsp;</p>

<p>Because economic recovery is a primary issue for Iranian voters, sanctions relief is a priority across the entire Iranian political spectrum, but the hard-liners and the moderates disagree on how to achieve that goal. Hard-line candidates will work to discredit political moderates&#39; more negotiation-friendly strategy of achieving sanctions relief from the United States. The Guardian Council vetting of candidates in May will provide an important indicator of who among Iran&#39;s feuding politicians and factions has the approval of the unelected political establishment and supreme leader to lead Iran through future sanctions and <a href="/article/new-iranian-law-could-bring-nuclear-issue-crisis-point-under-biden">nuclear negotiations</a> with the United States.</p><h3>The Israeli Right Gains Further Influence Over Regional Policy</h3><p>Even as the March 23 elections failed to end <a href="/article/potential-outcomes-israel-s-march-23-election">Israel&#39;s political problems</a>, they will not significantly change Israel&#39;s expansionist strategy that will see the country continue to build settlements in the West Bank. The country&#39;s increasingly <a href="/article/where-will-israel-s-increasingly-right-wing-youth-take-its-foreign-policy">right-leaning electorate</a> will support coalitions that favor more settlements and future promises to annex territory in the West Bank, though Israel will hold off on formal annexations during the quarter. In a bid to counter this expansionism, the Palestinians are likely to hold legislative elections.<br />&nbsp;</p>

<p>Though this process could draw Hamas and Fatah closer to each other 15 years after their civil war, better political unity is unlikely to reinvigorate the international community&#39;s interest in an independent Palestinian state: Few will show interest in reducing or cutting ties with Israel. Instead, Muslim states will continue to become more likely to consider normalizing ties with Israel in exchange for technological, defense and economic gains rather than continuing to support the Palestinians&#39; diplomatic campaign to isolate Israel in their bid for a state. Finally, Israel will use access to humanitarian aid, including COVID-19 vaccines, as leverage against Hamas and Fatah to prevent either from resorting to <a href="/article/palestinians-move-cut-security-ties-israel-bluff-or-something-bigger">widespread violence</a>.&nbsp;</p><h3>The GCC Faces up to an Uncertain Economic Recovery&nbsp;</h3><p>As vaccination programs allow COVID-19 recovery to begin in the second quarter, Gulf Arab states will deepen their <a href="/article/what-s-driving-saudi-arabia-ease-its-3-year-qatar-blockade">economic competition</a> over labor, investment and a nascent tourism revival. Most Gulf countries are expected to experience a similar recovery as vaccines help tame the pandemic. <a href="/article/opec-stays-course-driving-oil-price-inflation-expectations">Oil prices</a>&nbsp;will also be bolstered by production cuts and higher global demand during the quarter, providing the oil-dependent Gulf Cooperation Council states with a revenue boost. But as the recovery sets in, Saudi Arabia, Qatar and the United Arab Emirates will compete to be most attractive to the most desirable foreign labor, with the United Arab Emirates offering citizenship to limited numbers of expatriates in a bid to lure wealthy or highly skilled workers. Tourism is expected to rebound globally as border restrictions lift and economies recover. The United Arab Emirates, Saudi Arabia and Qatar will compete to lure the still-limited pool of tourists to their respective countries with high-profile events like the World Expo in Dubai and new hotels, entertainment venues and attractions.&nbsp;</p><h3>Iraq Grapples with Economic Chaos</h3><p>Iraq&#39;s fragile security will continue to deteriorate, driven by domestic and external political triggers, compounding the Iraqi government&#39;s already-difficult task of economic stabilization. Violence against Iraqi targets carried out by Iranian-backed militias will intensify in the coming months leading up to elections in the fall as militias intimidate pro-reform activists demanding election reforms.</p>

<p>The militias want to maintain the Iraqi electoral system, in which they enjoy substantial political power, as is. In addition, as preparations for the U.S.-Iran talks materialize over the course of the quarter, Iraq will remain the primary theater for Iran-backed <a href="/article/us-strategy-iraq-could-come-back-bite-iran-sanctions-covid-economy-politics-military-security">militia violence</a> against U.S. military targets as Iran seeks to indirectly build leverage against the U.S. <a href="/article/us-talks-won-t-change-iran-s-proxy-strategy">via its allied militias</a>.&nbsp;<br />&nbsp;</p>

<p><strong>April 15: </strong>Central Bank of Turkey Monetary Policy Committee meeting<br /><strong>May: </strong>Guardian Council vetting of Iranian presidential election candidates<br /><strong>May 6: </strong>Central Bank of Turkey Monetary Policy Committee meeting<br /><strong>May 22:</strong> Palestinian Legislative Elections<br /><strong>June 17:</strong> Central Bank of Turkey Monetary Policy Committee meeting<br /><strong>June 18:</strong> Iranian presidential election&nbsp;<br />&nbsp;</p>

Eurasia

<h3>A Limited Economic Recovery in Russia</h3><p>The Russian economy will get a boost next quarter from an upswing in global energy prices, and will continue to avoid major economic pain that could result from various standoffs with the West. After taking a significant hit during the pandemic, <a href="/article/opec-stays-course-driving-oil-price-inflation-expectations">oil prices have risen</a> above Russia&#39;s approximate $45-$55 per barrel price to balance its budget, which will add billions of dollars in extra income and reduce the government&#39;s need to borrow next quarter. Russian President Vladimir Putin may use extra funds to combat falling disposable incomes and living standards amid rising food prices in advance of parliamentary elections in September. Even so, any fiscal stimulus in the next quarter is likely to be limited, particularly in comparison to the size of <a href="/article/jump-start-us-economy-biden-goes-big">similar measures in Western countries</a>. Russia so far has avoided serious pain from Western sanctions, which have targeted government officials and economically irrelevant commercial entities. <a href="/article/gauging-russia-s-response-potential-new-us-and-uk-sanctions">Other than rumors</a>, the West, and especially Europe, has yet to show a serious intention to target new Russian business elites or their companies &mdash; which could cause more meaningful economic harm &mdash; let alone larger commercial sectors like oil and gas. The completion of the <a href="/article/nord-stream-2-comes-under-fire-germany">controversial Nord Stream 2 pipeline</a> remains uncertain, but Russia will be able to weather its potential cancelation. Although the German government continues to back the project, additional U.S. sanctions may deter companies through at least the next quarter from helping complete it.</p>

<h3>Russian-Western Relations Continue to Worsen</h3><p>Relations between Russia and the West, particularly the United States, will continue to deteriorate in the wake of ongoing disputes and future tensions. <a href="/article/navalny-s-jailing-will-solidify-russia-s-standoff-west">Russia&#39;s jailing of opposition leader Alexei Navalny</a> has been the flashpoint so far in 2021; we expect further tit-for-tat penalties issued from the Kremlin and Western capitals in the next quarter. The West&#39;s sanctions have been <a href="/article/responding-navalny-s-prison-sentence-west-has-limited-options">more symbolic than impactful</a>, but will nonetheless provoke Kremlin responses. Washington is likely to press Brussels to take more aggressive action, but divisions among EU members will put an upper limit on their escalation. Washington is likely to take unilateral steps to hold Moscow accountable for various U.S.-specific grievances by imposing measures that go beyond token sanctions.<br />&nbsp;</p>

<p>We expect U.S. retaliation for the <a href="/article/solarwinds-will-spur-biden-action-state-backed-cyber-threats">SolarWinds cyberattack</a> to involve classified cyber operations and publicly revealed, more impactful, sanctions. Russia can be expected to respond to perceived escalation asymmetrically, ranging from fines on Western companies operating in Russia to disruptive cyber activity against Western businesses abroad. The next quarter could also see rising tensions between Russia and the West over the expected resumption of anti-government protests in Belarus and an uptick in violence in eastern Ukraine.</p><h3>Belarus&#39; Leader Hangs on, at the Cost of Concessions to Moscow</h3><p>Despite renewed pressure next quarter, Belarusian President Alexander Lukashenko will continue to maintain power as he balances the need for Russian support with his portrayal of himself as a strong, independent leader. He will continue to make <a href="/article/belarus-president-lukashenko-seeks-russian-help-bolster-his-position">vague promises of political reform</a>, but put off specifics, which he promised by the end of the year, as long as he can. His forceful rejection of the possibility of formal unification with Russia will provide him political cover to move ahead with the erosion of Belarusian sovereignty in more subtle ways, such as increased integration with Russia in the economic and defense spheres. Meanwhile, mass protests are <a href="/article/charting-path-protests-power-belarus">expected to resume</a> next quarter and opposition leaders will seek more Western support, including additional sanctions. While the West may impose additional penalties on Belarusian leaders and provide rhetorical support to the protesters, the United States and Europe are unlikely to intervene in ways that could loosen Lukashenko&#39;s grip on the country.&nbsp;</p><h3>A Tense Peace in the South Caucasus</h3><p>Peace will continue to hold in Nagorno-Karabakh, even as Armenian domestic politics remain in flux and as domestic turmoil in Georgia adds further political turbulence in the Caucasus. Despite widespread anger over Armenia&#39;s perceived surrender to Azerbaijan after last year&#39;s war, the country&#39;s political and military leaders <a href="/article/despite-violations-azeri-armenian-cease-fire-will-hold-now">have shown no appetite to reengage</a>, and would be restrained by Russia from doing so should they change their minds. Despite promising to hold new parliamentary elections in June, <a href="/article/armenia-anger-over-nagorno-karabakh-comes-head">political turbulence in Armenia</a> will persist in the next quarter so long as Prime Minister Nikol Pashinyan remains in power, although it remains unlikely that the ongoing domestic crisis will spill out into the wider region or invite physical intervention by outside powers. Meanwhile, in Georgia, the ruling Georgian Dream and opposition United National Movement have fundamental disagreements that will persist in the next quarter even if the immediate standoff over the detention of the UNM&#39;s leader is resolved. We expect protest activity to continue in the next quarter as domestic politics remain unsettled.<br />&nbsp;</p>

<p><strong>April:</strong> Mass anti-government protests expected to resume in Belarus<br /><strong>April:</strong> Seventh anniversary of the start of the conflict in eastern Ukraine&nbsp;<br /><strong>April 11: </strong>Referendum on constitutional changes in Kyrgyzstan<br /><strong>June 2-5:</strong> St. Petersburg International Economic Forum held in Russia<br /><strong>June 20:</strong> Early parliamentary elections in Armenia<br />&nbsp;</p>

Americas

<h3>Argentina Postpones an IMF Debt-Restructuring Deal</h3><p>The Argentine government is likely to postpone a deal with the International Monetary Fund to avoid fiscal adjustments in an election year, resulting in a deteriorating fiscal situation and an increasingly poor business climate. While Argentine officials initially stated their intention to have a deal signed in May 2021, Vice President Cristina Fernandez de Kirchner and Peronist members of Congress will push to <a href="/article/argentina-regional-debt-restructuring-efforts-reveal-greater-challenge">postpone a deal</a> until after legislative elections in October to avoid unpopular deficit-reduction measures. The government will have an incentive to maintain the appearance of continued talks with the IMF to appease worried investors, but its electoral strategy means it is unlikely to reach a deal with the international body in the second quarter. Postponing progress in negotiations with the IMF until after the October legislative elections will further damage the country&#39;s fiscal situation and its overall business climate. Argentina may also see decreased foreign direct investment inflows and high public spending and monetary emission, leading to further inflation. The government may implement a wealth tax similar to one implemented in December 2020 to fund increased public spending leading up to the election. While rising soy prices may give the country some financial leeway in the coming months, Argentina is likely to <a href="/article/argentinas-latest-default-doesnt-have-mean-another-economic-collapse">continue to struggle</a> to return to growth.</p><h3>Brazil Likely to Increase Spending as President Banks on Populism</h3><p>The Brazilian government is likely to implement costly populist policies ahead of the country&#39;s October 2022 election at the expense of economic reforms, potentially resulting in high inflation. Implementing a major fiscal adjustment in 2021 is crucial for Brazil&#39;s economy, where the debt-to-GDP ratio stands at 89%. But with former left-wing President Luiz Inacio Lula da Silva as a potential presidential challenger to sitting President Jair Bolsonaro, and with the latter facing declining approval ratings and hoping to boost economic growth amid the COVID-19 pandemic, Bolsonaro is likely to increase fiscal spending on popular welfare programs.<br />&nbsp;</p>

<p>The government recently introduced $7.96 billion in additional emergency aid to low income households, which will see payouts until June 2021 &mdash; <a href="/article/what-bolsonaros-new-spending-push-means-brazil-s-fiscal-future">extra fiscal spending</a> not subject to the country&#39;s constitutionally mandated spending cap. Bolsonaro will also seek to <a href="/article/essential-geopolitics-bolsonaros-populist-plans-petrobras">freeze the domestic price</a> of petroleum in the coming months, shifting the financial burden onto the state. If implemented, these measures will likely result in <a href="/situation-report/brazil-inflation-rose-above-5-february-ahead-potential-interest-rate-hike">higher inflation rates</a> in Brazil, and will make it harder for the government to reduce its fiscal deficit.</p><h3>Venezuela&#39;s Opposition Continues to Splinter</h3><p>The Venezuelan opposition will continue to fragment without a clear leader of the opposition, allowing President Nicolas Maduro to remain in control of the political situation and making it harder for the Biden administration to work with opposition forces. While the United States has maintained its recognition of interim President Juan Guaido, the European Union has withdrawn its support for him because he no longer leads the National Assembly. Members of Guaido&#39;s camp meanwhile have been involved in a recent corruption scandal, raising questions among the opposition regarding Guaido&#39;s leadership. The fragmented opposition, the <a href="/article/legislative-elections-risk-leaving-venezuela-s-opposition-shambles">new National Assembly&#39;s support</a> for Maduro and the start of the vaccination campaign against COVID-19 will weaken the anti-government camp and help the regime keep the political situation under control. This will make it increasingly difficult for the Biden administration to use political dissent within the country to undermine the Maduro regime.</p><h3>Mexico Continues to Push Energy Nationalism</h3><p>Mexican President Andres Manuel Lopez Obrador and his National Regeneration Movement (MORENA) coalition in Congress will aggressively push changes to electricity laws that could undermine the private sector before June legislative elections. Lopez Obrador has successfully put a bill through Congress that would <a href="/article/mexico-new-electricity-law-risks-unplugging-energy-projects">favor state-owned energy company CFE</a> over its private-sector competitors. In the short term, the bill has been held up in court for a determination of its constitutionality. But if Lopez Obrador is able to secure six more seats in the June 11 legislative election, he may push for changes to the Mexican Constitution itself, overturning broader aspects of the pro-business 2013 energy reforms. If these changes are implemented, large power consumers operating in Mexico, including food manufacturing plants, automobile manufacturing and other industrial sectors, may experience increased operating expenses. Changes in the order in which electricity is purchased favoring CFE would see wind and solar projects &mdash; which typically are privately held &mdash; become the last to be sold. This could jeopardize the financial feasibility of private renewable power projects.</p><h3>Vaccine Diplomacy From Russia and China Likely to Increase in Latin America</h3><p>China and Russia will continue to use donations and sales of COVID-19 vaccines as a political tool in Latin America, which may lead to closer trade and diplomatic relations. Almost every country in Latin America has bought the Sinovac and/or Sputnik V vaccines. Major economies such as Argentina, Brazil and Chile all depend on Chinese- and <a href="/article/russia-delays-vaccine-shipments-stalling-latin-america-s-inoculation-efforts">Russian-produced vaccines</a>, and will continue to do so for the next few months. Now, Mexico&#39;s president has announced plans to buy significant quantities of the Sinovac vaccine. Over the next few months, several other countries in the region are likely to announce significant purchases of these vaccines as Russia and China increase production capacity. Both China and Russia have signaled that vaccine sales may be linked to future trade agreements with Latin American countries. China in particular will seek to use them to increase diplomatic ties with the region over issues such as the adoption of Huawei technology and the end of countries&#39; recognition of Taiwan.&nbsp;</p>

<p><strong>April 11: </strong>Second-round presidential vote in Ecuador<br /><strong>April 11:</strong> First-round presidential vote in Peru<br /><strong>April 11:</strong> Election deciding constitutional convention representatives and local governmental leaders in Chile<br /><strong>June 6:</strong> Legislative and gubernatorial elections in Mexico<br />&nbsp;</p>

South Asia

<h3>Afghan Peace Talks Get a Push From the International Community</h3><p>Progress in the peace process in the second quarter in Afghanistan will be slow, and will probably force foreign powers to scale down their plans to reduce their presence in the country by May 1. Washington will try to improve the chances of peace by <a href="/article/end-war-afghanistan-us-reaches-out-its-rivals">enlisting the help of India and China</a> and agreeing to make some concessions to the Taliban regarding their involvement in the postwar order. In preparation for an April 2021 meeting in Ankara, the United States will be more willing to give the Taliban a stake in a transitional government to help accelerate the peace process. To achieve its security goals, the United States and other European nations will provide aid to Afghan security forces to combat terrorism <a href="/article/afghanistans-new-offensive-against-taliban-halts-peace-talks-kabul-us-security-ghani">with promises from the Taliban</a> to assist their efforts. Signs of progress will allow European countries to withdraw troops before summer 2021, creating more room for Pakistani and Iranian involvement in the country&#39;s recovery. Violent attacks will remain a concern for Afghan forces, citizens and other groups who have frequently been the target of the Taliban and the increasingly powerful Islamic State as the peace process inches forward during the quarter.&nbsp;<br />&nbsp;</p>

<h3>Modi Emphasizes Tech&#39;s Role in India&#39;s Economic Recovery</h3><p>As India pursues post-pandemic economic recovery in the second quarter of 2021, the Modi administration will place increased emphasis on the tech industry, which it partially blames for delaying some of its aggressive reforms. To <a href="/article/stake-their-claim-indias-future-foreign-tech-companies-will-play-data-security-rules">achieve greater control</a> over digital and social media and prevent criticism of structural economic reforms, New Delhi will draw on Hindu nationalist sentiment to reduce the footprint of companies with the ability to foment civil unrest of the sort seen in monthslong farmer protests that began in late 2020. The government of Indian Prime Minister Narendra Modi will pass laws and guidelines before mid-2021 governing the types of information and means of communication available to the general public. This tactic could curb mass political and popular resistance in the short term, and runs contrary to India&#39;s ultimate goal of attracting foreign direct investment as international firms find the strict regulatory environment difficult to operate in. Post-pandemic recovery will accelerate in Q2, as India retains one of the highest daily vaccination rates in the world, but <a href="/article/covid-19-throws-wrench-indias-economic-plans-coronavirus-pandemic-fiscal-stimulus">India will still struggle</a> to reach close-to-normal levels of economic output.</p><h3>India-China Border Tensions De-escalate</h3><p>Tensions along the Sino-Indian border will continue to ease as both sides reprioritize their national security agendas, <a href="/article/china-india-ties-status-quo-will-do-xi-modi-bri-pakistan-kashmir">at least temporarily</a>. This will allow for greater economic cooperation between India and China. While spring generally sees an escalation in tensions, shifting priorities for India and China will temporarily divert attention from the possibility of another spring surprise this quarter.&nbsp;<br />&nbsp;</p>

<p>Beijing&#39;s apparent first step in <a href="/article/india-china-rapprochement-only-skin-deep">de-escalating the border standoff</a> indicates its desire to refocus its efforts on the maritime front where India, the United States and other Asia-Pacific countries continue developing strategies to counter Chinese influence. The reduction in border tensions will also decrease economic tensions, allowing renewed Chinese investment in non-sensitive Indian sectors like manufacturing. In order to meet the need for greater naval collaboration, India will likely temporarily shift its attention from Kashmir.</p>

<p><strong>April:</strong> British Prime Minister Boris Johnson visits India<br /><strong>April:</strong> Afghan peace agreement to be signed in Ankara, Turkey<br /><strong>April 6:</strong> Indian state elections in Kerala and Tamil Nadu begin<br /><strong>May 1:</strong> Planned U.S. troop withdrawal from Afghanistan<br /><strong>May 2:</strong> Indian state election results announced<br />&nbsp;</p>

Sub-Saharan Africa

<h3>Sluggish Economic Recoveries From the Pandemic Continue</h3><p>The economies of most African countries will recover only sluggishly in the second quarter as the continent largely lags other regions in the vaccination campaigns against COVID-19. The beneficial economic impact of the vaccines will be limited to external sectors for most African economies. The <a href="/article/opec-stays-course-driving-oil-price-inflation-expectations">rise in commodity prices</a> will reduce short-term financial pressure on exporting countries like Angola, Nigeria and South Africa, but will still fall far short of what is needed for any dramatic improvement to the years of built-up financial pressures. More diversified economies like Ghana and Kenya will be more adversely affected by costlier commodities, as this affects their import prices and exposes their dependence on debt-fueled growth. More African countries could pursue debt relief under the G-20&#39;s Common Framework initiative as Chad, Ethiopia and Zambia have done. Angola, Congo, Gabon and Mozambique are all possible candidates, although the timing of such discussions remains unclear.&nbsp;<br />&nbsp;</p>

<h3>South Africa&#39;s Economic Malaise Continues Despite a Bump in Commodity Prices</h3><p>South Africa&#39;s economy will benefit from rising commodity prices, but the systemic challenges in the labor market and manufacturing sector will continue <a href="/article/south-africa-s-economic-reality-will-dim-any-hopes-quick-recovery">to hobble its recovery</a>, as will its slow rollout of COVID-19 vaccination. The spike in oil prices meanwhile will offset some of the benefits South Africa sees due to higher commodity prices. The South African government will continue to push for structural economic reforms, including austerity measures and privatization efforts, further damaging its relations with unions, particularly over its planned freeze in wages. Reform progress will be slow as the pro-labor wing of the African National Congress blunts their effectiveness. South Africa&#39;s COVID-19 vaccine rollout will be slow as the South African winter approaches, which could see a resurgence in outbreaks as the government tries to open up the economy.&nbsp;</p><h3>Political, Security Risks Rise in Ethiopia Ahead of Election</h3><p>In the lead-up to June 5 elections, Addis Ababa will act aggressively against opposition parties and will not fully withdraw from the Tigray region prior to elections despite international pressure. Doing so would be a tacit admission by Ethiopian Prime Minister Abiy Ahmed that the <a href="/article/what-s-stake-ethiopia-barrels-toward-civil-war">military operation against Tigray</a> failed to achieve its full goals. Concessions to Tigray would also weaken Abiy&#39;s political alliance with the Amhara political elite. Abiy&#39;s Prosperity Party is a heavy favorite in upcoming elections and will likely crack down heavily on opposition groups, some of which &mdash; like several leading Oromo parties &mdash; are planning to boycott the election. Abiy&#39;s focus on elections narrows potential avenues for de-escalation for Ethiopia on international fronts, including ongoing negotiations on the Grand Ethiopian Renaissance Dam and on the build-up in Sudanese and Ethiopian military forces in the disputed Al Fashqa border region. As a result, Ethiopia is likely to proceed with the next stage of filling the reservoir behind the dam after the rainy season begins in June even without deals with downstream countries Egypt and Sudan.&nbsp;</p>

<h3>The Congolese President Seeks to Sideline His Predecessor</h3><p>Congolese President Felix Tshisekedi&#39;s new government will broaden his <a href="/article/political-struggle-congo-intensifies">efforts against former President Joseph Kabila</a>&#39;s economic interests and allies in the military and push through reforms. Tshisekedi and Prime Minister Jean-Michel Sama Lukonde will attempt to jump-start electoral, economic and judicial reforms in the Democratic Republic of the Congo throughout the rest of the year now that Kabila&#39;s dominance in the National Assembly has been stripped. While he will meet with some success, Kabila will retain significant influence in the country&#39;s economy, civil society and military, and his allies will seek to blunt Tshisekedi&#39;s reforms. The push against Kabila could include corruption charges and the scrapping of contracts and business deals associated with him, his family and political allies, particularly in the country&#39;s lucrative mining sector. Tshisekedi&#39;s consolidation drive will lead to continued protests by Kabila&#39;s supporters that could become violent. They will not, however, prevent Tshisekedi from continuing with his plans. The consolidation efforts could expose investors that have closely worked with Kabila-linked companies to potential investigations in the mining industry, but probably will not result in any significant rupture in exports.&nbsp;<br />&nbsp;</p>

<p><strong>April 9: </strong>Djibouti presidential election<br /><strong>April 11:</strong> Benin presidential election<br /><strong>April 11:</strong> Chad presidential election<br /><strong>June: </strong>Kenyan constitutional referendum<br /><strong>June 5:</strong> Gambian constitutional referendum<br /><strong>June 5:</strong> Ethiopian general election</p>

2021 SECOND-QUARTER FORECAST

Europe

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