With ANZ Research forecast at 5.5%, 2021 is expected to be the strongest year for global growth since 2007. Economies that have not returned to pre-COVID-19 activity levels last year are expected to do so in 2021.
“The fundamental economic implication of vaccine developments in the COVID-19 crisis is largely resolved during 2021.”
The speed and strength of the resumption of growth is supported by four main factors: the extent of the political stimulus, the relative absence of structural damage, the development of vaccines and the from the US Federal Reserve commitment not to increase rates until inflation is above 2%.
The year 2020 has seen the biggest global slowdown in a century and there is no precedent for the policy response. The nature of the stimulus and less indiscriminate use of blockages as the pandemic progressed caused much less structural damage than what might normally occur during a recession.
Rather than sharply increasing bankruptcies during this crisis, in many economies they actually decreased. While unemployment rose sharply in 2020, it fell unusually fast in many economies, with underemployment also declining in some cases.
As a result, banks have generally not ended this crisis with an influx of non-performing loans that could normally dampen the appetite for credit and encourage caution. In reality, there is an excess of capital in some parts because the provisions made in 2020 have been found to be in excess of the needs. Credit should therefore be fairly responsive to any strengthening in demand for credit.
In this context, vaccine developments since November are very positive. There is of course a risk that a variant of COVID-19 will emerge that is not amenable to treatment. According to ANZ Research, this should be treated as a risk scenario rather than being assessed as part of the central case outlook.
Evidence suggests that not only do the most important vaccines protect the recipient against COVID-19, but they also appear, in large part, to prevent the recipient from infecting others. The main economic implication of vaccine developments is that the COVID-19 crisis largely resolves itself during 2021.
In this context, the stated intention of the US Fed is to delay the tightening of interest rates. If the Fed’s tightening is later than usual, then probably once it starts to increase, it will need to act quickly. Other central banks, notably the Reserve Bank of Australia, have taken a similar stance.
This creates a particularly difficult cocktail for the financial markets which has been reflected in an acceleration of the volatility of the bond markets and the interconnection of the prices of risky assets. The change in the behavior of asset prices is indeed one of the characteristics of the shift from recovery to expansion.
There are others: much of the future increase in bond yields is likely to occur through the real component rather than the inflation component, risky assets are likely to be less correlated than they were. during the second half of 2020 and the US dollar is expected to be less linearly weak.
Fiscal policy is likely to move further and further away from income support – appropriate in times of crisis – to tackle longer-term issues, such as infrastructure needs and climate change.
Businesses should also hopefully start to experience capacity constraints as 2021 progresses and we may start to see a return on a larger business investment. This would be consistent with a generalized and lasting economic recovery.
Rather unusually, Asia is likely to lead the monetary tightening of this cycle. China began tightening liquidity in 2020. ANZ Research predicts interest rate hikes in 2022 for South Korea, Indonesia, Malaysia, the Philippines and Thailand. Asia at the forefront of rising rates is quite different from the post-GFC experience.
Along with improving current account dynamics, this should give the region substantial resistance to a possible Fed shift towards tightening, albeit in a while. As such, it is the advanced economies that seem most exposed to a possible “taper tantrum”.
During 2021, two particular issues are expected to attract increased attention. The first is to calibrate the likely rise in inflation and the second is whether growth can stay stronger than what we were used to before COVID-19.
ANZ Research has argued for some time that the inflation dynamics emerging from the COVID-19 crisis are quite different from those emerging from the GFC. Market prices now largely reflect this point of view. This makes analyzing the inflation outlook a more nuanced challenge.
The resumption of inflation seems to be obvious. Base effects, supply chain constraints, tighter shipments and strength in commodities suggest that most economies will experience significantly higher inflation this year.
For inflationary pressures to persist beyond the 2021 timeline, labor markets will likely need to continue to tighten at a significant rate. At this point, that’s the expectation of ANZ Research, but it will need to be watched.
ANZ Research does not expect advanced economies to hike rates during the forecast period until the end of 2022. But inflation forecasts for the US, UK, Australia and New Zealand suggest that market speculation around rate hikes in 2023 should remain fairly active.
The recovery in global economic activity that we anticipate for 2021 is unlikely to deter markets from this course of action. This recovery is expected to be as strong as any seen over the past 15 years.
Additionally, consumption appears to be on a more solid footing than we’ve seen in some time, so the cycle is likely to be more sustainable than post-GFC growth spurts.
Housework Debt service in a range of economies, including the United States, Australia and New Zealand, has been at the most favorable levels in decades. In fact, sustaining consumer demand will be crucial to tightening capacity utilization and triggering increased business investment, which will need to happen if this cycle is to break the secular stagnation chains of economic recovery. GFC.
Richard Yetsenga is Chief Economist at ANZ