Against all hope that COVID would fade in 2020, the virus will continue to steer the global economy in 2021. Global economic recovery was vastly uneven in 2020. Given the current surge in virus cases we expect that to remain the case in 2021. For countries still battling the virus and waiting for a broadly available vaccine, economic recovery will be much stronger in the second half of the year than in the first. Our confidence in Gross Domestic Product forecasts has increased since mid-2020, but uncertainties related to the dissemination and uptake of vaccines mean timing the recovery is still very difficult.
Collectively the pandemic has had a smaller impact on the Gross Domestic Products of emerging economies than advanced economies. That economic growth varies considerably though; Asia has significantly outpaced Latin America, Africa and developing Europe. That will give Asia a demonstrable advantage in 2021.
Of all major economies China recovered the fastest from the pandemic and will finish 2020 in remarkably good economic shape. China returned to growth in 2020 through state-funded infrastructure projects while its citizens remained cautious and significantly increased savings. That will change in 2021 as consumer confidence increases and restrictions ease. China is expected to account for a full one-third of global growth in 2021, furthering its ambitions to expand its economic power and influence. The longer the Western world takes to recover, the greater the advantage China will seize. We project 8 percent growth for China in 2021.
Among the major economies Europe has suffered the most during the pandemic. The ongoing Asian recovery has supported manufacturing and trade in Europe, but persistent weakness in other European sectors will continue to be a drag into 2021. COVID cases have been declining from their peak since early November, but the economic damage persists. November was the fourth-consecutive month of deflation in the Eurozone. The 19-country bloc economy will shrink in fourth-quarter 2020 before limping back into the black in first-quarter 2021.
The rollout of vaccines also poses a challenge for the region. Europe’s implementation plan allocates vaccines to each country, but each country will choose how to deliver the vaccines to its populace. The open borders and lack of a uniform approach will slow the recovery. We estimate 4 percent growth for Europe in 2021, but that will not be enough to take the economy back to its pre-pandemic level.
Perhaps one of the longest-lingering impacts from COVID will be the mountains of debt absorbed by most governments around the world. Most major economies dipped into deficit spending in 2020 at a level never seen during peace time. While widely viewed by economists as necessary and prudent, that debt could become a serious burden years into the future. Interest rates are much reduced now but won’t be forever, and thus the risk is deferred to the future. For 2021 deficits as a share of Gross Domestic Product are expected to remain sizable, but will shrink to a greater extent in the United States than elsewhere.
U.S. economy slow to improve
A post-COVID bounce is coming in 2021 to the United States – but it will likely be a while until it arrives. The current wave of cases may have peaked before the new year, but the health and economic impacts will last well into 2021. And while stay-at-home orders will be less severe than in spring 2020, consumers will choose to limit their time and spending in public until it feels safer.
Much of the year’s economic trajectory will depend on fiscal-policy decisions made during the next couple of months. About 10 million Americans who lost their jobs early in the pandemic have yet to find work, and many of them are receiving some form of public support. If and how Congress chooses to fund further relief will impact the speed of the recovery.
But the real speed limit for the economy is the arrival and reach of a vaccine. Most scientists now agree that most Americans will have access to a vaccine by the end of second-quarter 2021. If proven true, questions remain.
- How many Americans will choose to have the vaccine?
- How soon after will Americans feel safe enough to resume pre-pandemic activities?
Regardless of the answers that timeline pushes the expected burst of pent-up consumer demand into the latter half of 2021. In the first half the economy must recover from a very slow fourth-quarter 2020 and many businesses will be just trying to hang on.
But optimism should spur investment and capex decisions in the first half of the year. Opportunistic firms will attempt to time the comeback with new investments into the leisure and broader services sectors. Not all things will return to the way they were, though. Some industries may never fully recover. Many workers will be forced to find their way to new occupations, similar to the structural employment shakeup that followed the global financial crisis.
There will be fortunate differences this time around, however. The type of long-term scarring that was so damaging to the U.S. financial and real-estate sectors post-global financial crisis should not develop in the wake of the pandemic. So while the services sector will have a lot to recover from, the sector can point to sometime later in 2021, anticipating the financial system and much of the consumer demand will be there.
The Biden administration will likely need to work with a split Congress, which will limit fiscal spending. President-elect Joe Biden has made it clear that he will focus on the domestic economy first by attempting to create equitable opportunities and shoring up domestic industries. And he will bring a new approach to trade with China. Current tariffs will remain in place to start but we expect Biden will use them to negotiate for new terms and will entice U.S. allies to apply multilateral pressure.
The coming year will be a recovery year for most Americans and the businesses that comprise the economy. The early part of the year should look very different than the latter, but in total the economy is estimated to grow about 4 percent after a retreat of about 4 percent in 2020.
Central bank policy critical
If there is an economic hero amidst the pandemic, it’s most certainly the central banks. The Federal Reserve in particular stabilized the global financial system within weeks of the pandemic taking hold and it continues to provide massive amounts of economic support. The role of central bank policy in 2021 should be less dramatic but no less important.
With short-term interest rates firmly at zero, the Federal Reserve will manage a few levers in the coming year.
- It will keep a close watch on longer-term rates. The Fed has expanded its balance sheet from about $4 trillion pre-pandemic to about $7 trillion in December 2020 by purchasing mostly short tenor assets. As the longer end of the yield increases, the Fed will consider shifting some purchases to longer-dated assets to tamp down a steepening yield curve.
- Chair Jerome Powell and the Federal Open Market Committee went big early in 2020 by putting trillions of dollars to work to create lending programs and increase asset purchases. Several of those lending programs were to expire at the end of 2020. Asset purchases have been steady and relatively moderate since mid-summer. If the economy stumbles in the first and second quarters of 2021, Powell will advocate for lending programs to be reinstated. Congressional approval will be needed to reinstate the programs. But the Federal Open Market Committee will not need Congress to okay a change in asset purchases. If the economy turns for the worse and looks like it will contract, Powell will increase purchases and make reassurances that the Federal Open Market Committee will do all that’s necessary to keep the recovery on track.
- The Fed will continue to advocate for more fiscal policy. Powell broke historical norms during the past few months by openly advocating for Congress to increase fiscal spending. He recognizes that any monetary action is significantly enhanced when coordinated with fiscal support. So his warnings and pleas will continue as long as the Federal Open Market Committee believes further spending is needed.
Inflation will be a hot topic in 2021 as well, especially as Congress agrees to substantive relief spending. If the economy recovers as expected in 2021, we should see an increase in inflation, but not to the extent that the Fed will consider taking action. The Fed has signaled that it will delay any rate increases until at least late 2023 or perhaps longer, so it’s prepared to look past intermittent inflation readings of more than 2 percent. If inflation begins to consistently surpass 2.5 percent, the financial markets will become nervous. While some investment banks are calling for a real bump in inflation in 2021, that scenario is well outside our base case.
Fed policy will have an impact on the U.S. dollar as well, but to a lesser extent than several other factors. We’ve seen the dollar weaken as investors look ahead to the end of the pandemic and have increased their risk appetite. The dollar safe haven should be even less attractive as we go further into 2021. We believe a steadier trade policy under President-elect Joe Biden will dampen the dollar as Asian and emerging-market assets improve. The U.S. economic recovery should lag that of many Asian countries, and perhaps some in Europe, which would also drag on the dollar. The rapid increase in the U.S. current account deficit will also weigh on the dollar. All in all we don’t expect a collapse of the dollar, but we do expect persistent weakness through the coming year and a further devaluation in the range of 5 percent to 8 percent.
CoBank is a $158 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. It’s a member of the Farm Credit System.