Following a year when lockdown measures caused a global recession, how will the recovery shape up in 2021? We’re cautiously optimistic about the year ahead but divergence will remain a defining theme in 2021.
While 2020 brought an unprecedented economic shock, 2021 will bring vaccines and a marked turnaround in economic performance – though that performance is unlikely to be even.
The resurgence of coronavirus has weighed on activity in Q4, particularly in Europe. To be sure, the economic impact is less severe than in early 2020 – factories have remained open this time, so Purchasing Manufacturing Index readings have been more resilient than in the spring – but we now expect the global economy to contract by 0.2% in Q4. At the end of September, we’d expected it to grow by 1.5%.
We now forecast the global economy will contract by 4.1% in 2020 overall, but we’re more confident about the outlook for 2021 and beyond, with economic momentum set to build. In fact, our forecast is for 5.0% growth both next year and in 2022. Global growth should really start to power ahead from the second half of next year as vaccines become widely available and demand begins to normalise.
As the latest downturn was largely consumer-led, household consumption rather than investment should drive the acceleration in growth. But while the economy will heal, the “scarring” resulting from business insolvencies and persistently high unemployment will linger. Indeed, we’re expecting unemployment rates in the UK, euro area and Japan to rise in 2021 and to remain above pre-crisis levels across the world well into 2022.
As the crisis subsides, we expect the countries and regions that are the economic winners and losers of the post-coronavirus world to become apparent. While global activity may reach its pre-crisis level in mid-2021, some major economies are unlikely to see a return to their pre-coronavirus trend levels until well after 2022.
Inflation: a mixed picture
Both headline and core inflation measures in advanced economies came in higher than expected over the summer, but the temporary post-lockdown bounce has since faded. As consumer confidence returns and demand recovers in 2021, a renewed firming – particularly in coronavirus-affected sectors – is likely. But for any upturn in inflation to be truly meaningful, there will have to be an uptick in components that haven’t displayed high volatility due to coronavirus.
While inflation may be restrained initially next year by the persistence of the coronavirus demand shock and by the global output gap, we then expect base effects and a fading of the demand shock to push inflation rates up. In the US, UK, euro area, Japan and China, both headline and core Consumer Price Inflation may remain below 2%, although upside risks exist. The US is in our eyes likely to be the first major developed market in which the long-awaited rise in inflation becomes evident. See our macro market outlook for more on inflation in 2021.
Monetary and fiscal policy: lower for longer, larger for longer
In the aftermath of the Global Financial Crisis, policymakers looked to reverse emergency actions as soon as circumstances permitted, but in doing so they learned some important lessons about the consequences of being too beholden to conventional thinking. So, in the post-coronavirus world, we expect both monetary and fiscal policy to remain in place and to continue to work in concert – even if inflation were to accelerate sooner and faster than our forecasts suggest (a risk we don’t discount).
On the fiscal side, the floodgates have been opened and we see no political will for a return to budgetary restraint. Central banks, meanwhile, are shifting towards policy frameworks that maintain zero-interest-rate settings and are accepting – even targeting – periods of higher inflation. In any case, we expect lower-for-longer policy rates combined with larger-for-longer fiscal deficits until the consequences of maintaining excessive accommodation make themselves clear. See our macro market outlook for more on fiscal policy dominance in 2021.
- Asia is the relative “winner” in the post-coronavirus period due to successful case management and limited economic scarring in the region.
- For the euro area, the pandemic proved to be a long-awaited catalyst for government spending and a movement toward fiscal union. This should ultimately strengthen (rather than weaken, as many had initially feared) the region’s growth prospects.
- The UK has struggled to manage the coronavirus crisis. But even more importantly, the UK must find a new growth engine in the wake of Brexit as it no longer represents an attractive base for companies seeking access to the European single market. In the face of these challenges, we don’t expect the UK economy to return to pre-crisis levels before late 2021, with spare capacity likely to persist for years. See our macro market outlook for more on life after Brexit.
- In the US, poor virus management combined with reduced likelihood of another massive dose of fiscal stimulus (due to the prospects of a divided government after the election) is suggestive of relatively low growth in 2021. Just like the UK, the US economy looks unlikely to return to its pre-crisis level before late next year.