2021 Annual Economic Outlook

Look back on our 2020 Economic Outlook to see how the pandemic and ensuing recession affected the economy over the last year.

Just as 2020 was a year marked by loss and disruption due to COVID-19, 2021 is defined by a cautious sense of hopefulness — hope that effective distribution of the new vaccine to the global population and proficient steps taken by governments across the planet will help restore world order gradually.

Following the economic downturn and significant decline in 2020, we agree with OECD’s forecast assumptions and expect world GDP to bounce back into positive territory and reach a 4.2% annual growth rate in 2021. Along with various forms of fiscal stimulus, confidence in future growth and sustained progress towards the old “normal” will encourage households and businesses around the world to use accumulated savings and contribute to increased levels of economic activity. Furthermore, global cooperation is of utmost importance as countries of varied economic and technological prowess work towards a full recovery to life beyond the harsh realities of the pandemic.

Macro World Views

  • Global growth is expected to recover in 2021 after plunging in 2020. However, this growth will vary for each country based on pre-pandemic baselines, as well as infrastructural capabilities to contain ongoing public health threats.
  • After taking an initial hit, China witnessed a commendable rebound in economic activity and it is projected to lead the global recovery in 2021, while European economies are expected to lag at least in the first half of the year.
  • After successfully containing the spread of the virus initially, many countries especially in Europe are witnessing a new surge of coronavirus cases. Governments will once again look to balance lockdowns and other public health management techniques against associated economic risks.
  • Rising levels of inequality will fuel new demands for increased government spending and robust social safety nets. With expect this increased economic aid to play an essential role in mitigating further economic harm, though a complete return to normalcy will only occur following reliable containment of the public health threat posed by the coronavirus.
  • We expect a disjointed economic recovery among economic sectors, but less disparate progress among demographics, as government spending will be targeted to those who need it the most.
  • The role of governments in tackling major healthcare disasters has come into the spotlight. In the future it will be essential for these governments to have comprehensive plans to improve general preparedness and resiliency in face of global crises.

OECD (2021), Real GDP forecast (indicator)

United States

  • Following negative GDP growth in 2020, as per OECD forecasts, the United States economy is expected to grow at 3.2% – higher than the pre-pandemic growth rate of 2.2% in 2019.
  • The unemployment rate in the country rose dramatically as social distancing guidelines were put into effect and businesses were forced to shut down. But it is expected to fall as lockdowns and other public health management strategies decline with the availability of vaccines in 2021, while a full return to pre-pandemic levels will take much longer.
  • The Federal Reserve responded to recessionary pressures in early 2020 by reducing its key policy rate to near 0, increasing Treasury purchases, and activating its emergency lending powers via multiple credit facilities. All this was done with an intention to keep the economy churning as the country grappled with significant economic hardships. The Federal Reserve will likely maintain its dovish monetary policy posture until at least 2023, while gradually assuming a supportive role to recovery efforts as conditions improve.
  • Massive fiscal stimulus has also helped households and businesses to sustain themselves a little longer. An incoming Biden Administration, empowered by slim majorities in both the Senate and House of Representatives, will place a premium on continued fiscal policies targeting those most affected by the economic and health-related consequences of the pandemic.
  • Despite mask mandates and social distancing rules, COVID-19 cases are still on the rise which is causing severe operational distress to hospitals and other healthcare establishments.
  • Low mortgage rates and high demand have created fresh demand felt in both urban and rural markets. Construction is expected to improve as international supply chains resume. A reinstated evictions moratorium in conjunction with general economic uncertainty could resume pressure in multifamily and commercial real estate lending markets.
  • Increased consumer spending at the end of 2020, albeit not across all broad based categories, is a positive indicator that an economic recovery in the near future is a realistic expectation.
  • Technology companies in the country have contributed to the substantial stock market gains throughout 2020 after the initial setback due to lockdown restrictions and the ensuing uncertainty. Political pressures, including overhauled tax policies and antitrust lawsuits could affect their practices and valuation in the short-term though these scenarios are unlikely.

OECD (2021), Real GDP forecast (indicator).

Eurozone and UK

  • As countries in Europe are facing new rounds of lockdown restrictions, COVID-19 and its resurgence still remains a major roadblock to their economic recovery. However, despite a sluggish start, European economies are expected to rebound in the latter half of 2021.
  • At the beginning of 2020, there was uncertainty regarding the terms of the deal that would effectively transition the United Kingdom out of the European Union. While many UK companies had prepared for a no-deal Brexit, a deal was finally agreed upon in December 2020. However, rules with respect to data sharing and financial services still have not been finalized which leaves room for some uncertainty and risks.
  • The UK and EU are expected to form a memorandum of understanding which will provide more clarity regarding the trajectory of negotiating rules pertaining to the financial services sector in the UK. Of particular concern will be passporting requirements for firms, as well as regulatory uncertainty with particular respect to debt issuance and insolvency laws which are historically more lax in the UK.
  • The trajectories of post-Brexit EU and UK will be worth following as they endure the tail-end (hopefully) of a global healthcare crisis, with the United Kingdom expected to suffer more substantially.

China

  • China was the first country to experience the coronavirus pandemic and its economy suffered for the first half of 2020 but managed to stabilize in the third and fourth quarter and since then the outbreak has seemingly been contained successfully. China is entering 2021 with a much stronger economy compared to the rest of the world.
  • While consumption spending and employment have not returned to pre-pandemic levels, heavy investment in public and private infrastructure has fueled substantial economic recovery.
  • Overall the country’s balance sheet may seem healthy, but the rebound has been inequitable across social classes and geography. In 2021, broad-based fiscal stimulus will be required to support a wide range of businesses and households across the country to ensure a sustainable and lasting recovery.
  • The US-China trade war of the past few years will likely calm down under the new Biden administration and better US-China relations should help both economies.

Monetary Policy

  • Fed: Rates held at or near 0 for the foreseeable future.
  • ECB: Interest rates on hold until inflation target is met. Continued support through its various programs as long as the pandemic subsides.
  • BoJ: After easing monetary policy twice in 2020, it may implement further easing measures based on the continued impact of COVID-19.
  • BoE: Expected to keep rates on hold during the pandemic recovery phase.
  • PBoC: Following three cuts in the required reserve ratio (RRR) in 2020, it aims to meet the demand for high-quality economic development in a flexible and targeted manner.

Key Downside Risks

  • Public health: The growth expectations in 2021 are reliant upon the effectiveness the COVID-19 vaccine and its rollout. A shortage of vaccines or lower efficacy could send the global economy on a much deeper retrenchment from its ongoing recovery that would significantly fracture the global order. As the world has recognized from this pandemic experience, our current public health infrastructure is not equipped to handle such a healthcare crisis and much progress and investment needs to be made to build resiliency for the future.
  • Public/Private debt: While fiscal stimulus is the primary need, many countries were precariously close to accumulating unsustainable amounts of debt even prior to the pandemic. Thus, near term policies need to be made with a clear understanding of long-term consequences so as to prevent deep economic worries after the pandemic subsides. This pandemic has also forced many companies to take on significant levels of debt which may hamper earnings and activity in the near-term creating new risks for banks already wary of a looming corporate debt bubble.

Key Themes

  • COVID-19 recovery: All eyes will be on the effectiveness of various measures to make COVID-19 a thing of the past throughout the world and rebuild economies and societies that were impacted by its ubiquity.
  • Federal policy: Throughout 2021 and beyond, the onus will be upon governments to strengthen public health policies, support businesses in need, and tackle deep-rooted inequality that was worsened due to the pandemic.
  • Climate change: Even prior to the pandemic, the issue of climate change was garnering much needed attention in mainstream media as well as private and public markets. Sustainability will be a major focus for businesses and countries as they shift away from dealing with the issues associated with COVID-19.

Markets

Oil

  • Lower demand for oil due to the pandemic combined with a supply gut due to OPEC actions and geopolitical conflicts caused oil prices to plummet in 2020.
  • An expected increase in demand in 2021 due to recovering economic conditions and a bounce back in travel will likely lead to higher oil prices.

Market Sentiment

  • Households around the world limited spending and increased savings as a preventative measure in the event of a severe economic downturn. Spending primarily driven by households most affected by the financial pressures of the pandemic which supported recovery efforts however; they will require the most amount of economic assistance long-term.
  • Fiscal stimulus from governments, monetary policy easing, and a possible end to the coronavirus pandemic due to the widespread deployment of vaccine may lead individuals and businesses to reaffirm their trust in the markets and start spending again. Recovery will be on a sector-level basis, dependent on public health regulations and changes in market/economic conditions.

Tourism and Hospitality

  • Airlines, hotels, and supplementary industries were the most hard hit by the pandemic travel restrictions. Millions of people lost their livelihoods and found it difficult to make ends meet.
  • Moreover, many smaller economies rely heavily on tourism and hospitality and have struggled significantly due to the pandemic.
  • The recovery of these industries and those smaller countries hinges entirely on the success of the COVID-19 vaccine and rebuilding the confidence among the general public to travel freely once again.

Equities

  • While the stock market rally after the initial downside impact of the pandemic was focused on technology and high-growth stocks, the introduction of vaccines developed by various pharmaceutical companies has made investors turn towards more value-oriented stocks.
  • Regardless, equities are expected to outperform bonds in the near term.

Rates

  • Yield curves across different currencies are expected to be steeper and consequently bond prices are expected to be cheaper — the gap between short-term bonds yields and long-term bonds yields is expected to increase.

Foreign Exchange

  • Given its countercyclical nature, the US dollar is expected to weaken as the global economy recovers, while the Euro is expected to appreciate.
  • The Japanese yen and Chinese renminbi will strengthen. Currency volatility is expected in emerging markets.

Credit

  • An improving economic environment and yield-suppressing policies by most central banks might lead to tighter credit spreads in 2021.

References

2021 Annual Economic Outlook. Wells Fargo Securities. December 10, 2020.

2021 Global Market Outlook. Russell Investments. December 2020.

Credit Spreads Could Get Tighter This Year. What You Need to Know. Barron’s. January 2, 2021.

OECD Economic Outlook. Volume 2020 Issue 2.

OECD Real GDP Forecasts, USA. OECD. December 2020.

OECD Real GDP Forecasts, World. OECD. December 2020

Top 10 Economic Predictions for 2021. IHS Markit. December 16, 2020.

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