In 2020, the global economy endured its deepest recession in 74 years, as the COVID-19 virus pandemic upended lives and livelihoods. The recession was unprecedented in its geographic scope, the central role of services, and the scale of policy responses.
While the COVID-19 virus will stay with us throughout 2021, the rapid development and deployment of vaccines will enable a transition to a new post-pandemic economy. Thus, we approach 2021 with a mixture of caution and hope. IHS Markit offers these top-10 economic predictions to help guide your organization’s plans for a momentous new year.
1) While the COVID-19 virus will stay with us, effective treatments and vaccines will be widely available to large populations by mid-2021, facilitating a transition to the post-pandemic economy.
The most ambitious global vaccination campaign ever seen will be undertaken in the first half of 2021 with around half a dozen vaccines. The virus itself is very unlikely to go away in 2021 and there is a risk of periodic, small outbreaks. However, wider availability of antibody and antiviral treatments, as well as improved track-and-trace systems will ensure that blunt 2020-style lockdowns will no longer be needed.
2) The global economy will enter 2021 at a subdued growth rate and accelerate to a brisk pace in the second half.
Headwinds to robust near-term growth include COVID-19-related lockdowns in early 2021, lingering consumer and business caution, diminishing fiscal support, and the strains of rising public and private debt. Yet, the reopening of economies and the availability of vaccines will gradually unleash a new wave of spending on travel and services. After a 4.2% decline in 2020, global world GDP is projected to increase about 4.6% in 2021.
3) In 2021, the focus of investors and policymakers will shift from COVID-19 to the environment.
An important trend in private and public debt markets is the rise in ESG (Environmental, Social, and Corporate Governance) issuance, often at slightly lower yields than conventional equivalents. Another trend is greater use of sustainability-linked issuance, linking coupons to the achievement of ESG goals. Emphasis on ESG will exacerbate the financing difficulties of energy and commodity producers, as new investments are scrutinized for their ESG contributions.
4) Monetary policies will remain accommodative and more central banks will lean toward the US Federal Reserve’s flexible average inflation targeting (FAIT) policy.
The Fed’s new approach reinforces that its 2% inflation objective is an average, not a ceiling. The European Central Bank (ECB) will likely follow the Fed’s lead on FAIT when it concludes its strategy review in mid-2021. Policy rates in the United States, eurozone, United Kingdom, and Japan will remain near zero well beyond 2021. In emerging markets, where inflation is a more immediate concern, monetary easing is ending but policy rate increases will be rare in 2021.
5) The global financial sector should avoid major crises in 2021—at least in advanced economies—but banking risks will rise.
Regulatory reforms that followed the global financial crisis have yielded substantially larger capital buffers and improved liquidity conditions across global banks. The lack of widespread credit booms ahead of the pandemic suggests banks are better prepared to meet the challenge of rising bankruptcies and high unemployment rates.
6) Finished goods prices will accelerate in 2021.
Commodity prices rose sharply in the second half of 2020 as global economy rebounded; these cost increases will be pushed downstream in supply chains for the next six to nine months, pressuring margins and leading to higher prices for finished goods in 2021. Supply-chain disruptions should slowly be resolved. Goods industries could then see conditions soften even as aggregate demand strengthens. Iron ore is a notable exception.
7) The US economy will start 2021 slowly and accelerate in the second half.
The US economy has partially recovered from its worst downturn since the Great Depression. However, a new wave of COVID-19 infections, the possible re-imposition of lockdowns to contain the virus, and waning stimulus from pandemic relief measures enacted in 2020 threaten to undermine growth through early 2021. Unexpectedly rapid progress on vaccines should promote an acceleration in GDP over the second half of the year.
8) Europe’s 2021 annual growth rates will fall short of market consensus expectations.
After a very weak final quarter of 2020, the COVID-19 virus’ prevalence and related containment measures will continue to hinder the recovery early in 2021. Lagged increases in business failures and unemployment will also restrain growth as policy support diminishes, though we expect a pronounced vaccine-driven pick-up in eurozone growth rates from mid-year. After an estimated 7.5% contraction in 2020, eurozone real GDP is projected to rise by about 3.5% in 2021, with the return to pre-pandemic levels not expected until late 2022.
9) Mainland China’s economy will accelerate to the strongest growth rate in recent years, but the rebound will wane.
The expected launch of effective COVID-19 vaccines, pent-up demand, and a low base effect will help the Chinese economy to grow 7.5% in 2021, its highest rate since 2013. After the cyclical rebound, the economy will return to the deceleration path that began in 2012, as productivity growth slowed in response to stalled economic reforms.
10) The US dollar is expected to weaken in 2021 in a lagged response to the Fed’s sharp pivot to monetary accommodation in early 2020, an increase in investor risk tolerance, and a widening trade deficit.
ECB policy accommodation should lean against substantial further euro appreciation, though expected US dollar weakness and continued high current account surpluses represent upside euro risk. The Japanese yen will benefit from strengthening exports and relatively low inflation. The renminbi will be supported by mainland China’s accelerating economy and comparatively conservative monetary policy and while policy convergence will limit exchange rate movements in the major economies, more currency volatility is expected in emerging markets.
By IHS Markit