After a year dominated by the pandemic, the lockdowns and the enormous government and central bank programmes to overcome the effects of the economic downturns, 2021 is likely to be dominated by the speed with which effective vaccines can be deployed and the transmission effects of the huge stimulus policies, Invesco Chief Economist John Greenwood writes in his Global Economic Outlook for 2021.
With major European economies such as Germany, France, Italy, Spain and the UK all embarking on new nationwide lockdowns, and the US experiencing new records in daily infections, Greenwood believes that the fourth quarter of 2020 may well see declines in real GDP, to be followed by an uncertain trajectory in 2021. The year ahead could include a weak first quarter in the northern hemisphere while the virus persists, to be followed by relative strong bounce-backs, boosted by the huge monetary and fiscal stimulus policies adopted by central banks and governments across the developed world, especially if a vaccine becomes available, according to Greenwood.
COVID-19 VACCINE AS THE IMPETUS FOR RECOVERY
As the deployment of adequate numbers of vaccine doses will probably take most of the first half of 2021, a return to some sort of normality is expected only by the second half of the year. “Once the return to normality is widely perceived to be under way, with consumers and service businesses regaining confidence, we expect a significant transformation of the economic environment – in striking contrast to the aftermath of the global financial crisis when recovery was sub-par and anaemic for a long period,” Greenwood says. The main reason why the outlook is so different this time is the record-breaking amount of stimulus that has been administered in the form of fiscal spending and monetary expansion.
ANTICIPATED INCREASE IN CONSUMPTION AND SPENDING
While the only signs of this have so far been in the huge resurgence in global stock markets, Greenwood expects the next stage of the transmission process to unfold in the second half of 2021, with households and businesses starting to spend the excess money balances accumulated in 2020. “This means that consumption, investment and employment are all likely to recover at a much more rapid pace than after a typical recession, generating a surprisingly strong bounce-back,” Greenwood says, cautioning, however, that this will only happen once the uncertainties and social distancing associated with the virus are largely overcome.
He expects the theoretical third stage in the transmission process – higher consumer price inflation – to materialise in 2022 at the earliest, and possibly later if consumers and businesses remain cautious and prefer to maintain higher precautionary money balances due to continuing recurrences of the pandemic, or because the central banks and policy-makers operate in such a way as to limit or reverse the impact of the 2020 stimulus.
In contrast to developed economies, Invesco’s chief economist sees China and other East Asian economies on a steady but unspectacular recovery path, aided by modest interest rate reductions and reserve requirement cuts. While Asia has unquestionably performed better in suppressing the virus, Greenwood expects the region to continue to face the problem of generating an economic upswing in which the demand for its exports is less buoyant than in a typical export-led recovery. In his view, economies like China and Japan will see good domestic demand growth, but exports, their traditional area of strength, will be slower to recover.
THE UNITED STATES RECOVERY HANGS IN THE BALANCE
According to Invesco’s chief economist, the outlook for the United States will be determined by the balance between two opposing forces: the scale of the combined monetary and fiscal support, on the one hand, and the failure of the outgoing Trump administration to craft a coherent national response to the pandemic, on the other, with the latter still causing widespread dislocations of key industries such as airlines, hotels and hospitality. Overall, Greenwood expects US real GDP growth of 3.8% in 2021, with inflation likely to remain subdued at just 2.2% on account of earlier falls in oil prices and the ongoing setbacks to spending on services.
EURO AREA TO BE SUPPORTED BY FAVOURABLE MONETARY CONDITIONS, UK WILL CONTINUE TO FEEL THE EFFECT OF BREXIT UNCERTAINTY
In the euro area, the fact that the European Central Bank (ECB) has continued to rely on banks to make loans, has meant that money growth is much less than it would have been if the ECB had purchased securities from non-bank institutional investors under its Pandemic Emergency Purchase Programme (PEPP). Nonetheless, Greenwood believes that the euro area economy will continue to be supported by favourable monetary conditions and a pro-growth stance by the ECB and regulatory authorities. He projects 4.5% real GDP growth in 2021, with inflation at just 1%.
In the UK, Invesco’s chief economist expects business to continue to feel the effect of the regime uncertainty associated with the ongoing Brexit talks between the UK and the European Union, and real GDP growth to remain below trend until a fully fleshed out trading arrangement with the EU materialises. He forecasts real GDP growth of 6% for the UK in 2021 and inflation at 1.2%, albeit with a high margin of error.
TEMPERED BUT STEADY RECOVERY IN CHINA, ASIA
In Japan, based on a temporary boost to money growth since March, and a massive fiscal boost to the economy, Invesco’s chief economist projects 2.5% growth of real GDP in 2021, with inflation expected to remain at a sub-par 0.2%.
Meanwhile, growth across emerging market (EM) economies fell less than in advanced economies at the peak of the Covid-19 pandemic, and recovery has been relatively robust. The largest contractions of activity were recorded in the EMEA region, whereas Asia (led by China) experienced the smallest fall in the growth rate in economic activity. In China, growth has started to return to trend of around 5-6% per annum. As money and credit growth has increased only slightly in 2020, Greenwood does not expect China to experience a cyclical credit-driven boom akin to 2016-17, but to rather slowly return to trend growth, most likely in 2021 H2.
