So said Frank Sinatra, but do our experts agree that 2021 and beyond will be “good years”? In this 2021 outlook we discuss our macroeconomic forecasts for the coming couple of years
Following an unparalleled 12 months, we enter 2021 with some light at the end of the tunnel. The arrival of vaccines will hopefully mean a swift reopening of economies, and a potential broad-based cyclical rally in risk assets. But the economic rebound is unlikely to arrive prior to the second half of the year. Overall, we believe an end to the pandemic and ongoing policy support will contribute to a brighter future. Our 2021 Macroeconomic Outlook assesses what a post-coronavirus, ‘new-normal’ world will look like - and outlines the possible investment implications.
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The virus has left a 10% hole in UK output – and a winter outbreak and Brexit disruption could dampen any rebound over the coming quarters
Good news on the search for a coronavirus vaccine is unlikely to change the macro trajectory before mid-2021.
Uncertainty will persist into 2021, over a winter virus outbreak, policy gridlock after the US election and the roll-out of a vaccine
Normalising virus conditions, official policies and the natural economy will shape the 2021-2022 outlook
Japan hasn’t been as badly exposed to COVID-19 as other countries and significant support from the government and the Bank of Japan make it more resilient
Global trade recovery and vaccine to allow slow policy normalisation
UK - Winter outbreak and Brexit to delay 2021 recovery
- The virus has left a 10% hole in UK output – and a winter outbreak and Brexit disruption could dampen any rebound over the coming quarters
- An easing of restrictions and a vaccine should lift growth by 4.6% in 2021 and 6.5% in 2022
- Policy support will remain important. We expect a fiscal stimulus package next year and more QE from the Bank of England, although on balance we do not expect negative interest rates
Eurozone - It’s not over yet
- Good news on the search for a coronavirus vaccine is unlikely to change the macro trajectory before mid-2021 – we expect a weak end to 2020 and a shallow recovery in the first half of next year
- But by providing a horizon to normal sanitary conditions, it should help governments to opt for more generous stimulus: deficits will remain large.
- The ECB will make sure it does not really matter: implicit yield curve control is on the way. This will require flexibility. Discussions on the limits won’t be easy though and should be seen in the broader context of revamping Brussels fiscal rulebook.
U.S. - A year of rebound, but recovery must wait
- Uncertainty will persist into 2021, over a winter virus outbreak, policy gridlock after the US election and - more positively - the roll-out of a vaccine
- We forecast strong growth of 4.8% in 2021 and 3.7% in 2022, following this year’s expected 3.4% fall
- Yet this would only achieve ‘recovery’ by end-2023
- The Federal Reserve is likely to remain the only reliable source of policy support. Rates should remain on hold until 2024, but quantitative easing tapering could begin early in 2022
China – Back to normal
- Normalising virus conditions, official policies and the natural economy will shape the 2021-2022 outlook
- After effectively containing the virus, any lingering impact of COVID-19 will likely come from offshore
- Reviving natural growth will take over from policy easing to drive the economy further to normality
Japan - Once the pandemic is over, Japan may leverage on some tailwinds
- Japan hasn’t been as badly exposed to COVID-19 as other countries and significant support from the government and the Bank of Japan make it more resilient. Some restrictions may return in the coming weeks, but it should be less strict than in April
- Private consumption is crucial for the outlook, a high saving rate, job market resilience and large demand stimulus should underpin this outlook
- After a -5.5% contraction in 2020, we believe GDP should rebound by +3% in 2021 and +2% in 2021
Emerging Markets – Tomorrow is another day
- The pandemic’s impact on emerging market growth dwarfed that of the global financial crisis. Our forecasts see emerging markets ex-China GDP growth down by 5% this year versus +0.7% back in 2008
- Recovery in China and advanced economies should grant a better external environment for emerging markets. Export recovery should support manufacturing activity while commodity prices should be under less pressure
- Emerging market public debt is expected to reach 65% of GDP by 2021, not overwhelming compared to above-100% debt-to-GDP ratios of several advanced economies. However some developing nations have been propelled towards more dangerous debt levels.
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