Blog | 15 Dec 2020

Looking ahead to 2021: The rollercoaster ride continues

Ben May

Director, Macro Forecasting & Analysis

graph12Predictions of record-breaking growth next year point to huge opportunities after a truly dismal 2020. But while 2021 may well be the best year for the global economy in more than 40 years – we expect global GDP to grow by 5.1% – it won’t seem like boom times, and plenty of challenges remain for both firms and policy-makers. We expect economic developments and the relative winners and losers in 2021 to be dominated by three key themes:

1) The global vaccine rollout

The development of safe and effective vaccines is a critical leap forward to reopen the most devastated parts of the services economy, such as hospitality. We expect that mass vaccinations will foster a grand re-opening starting in March in some advanced economies (AEs). Vaccination progress in emerging markets (EMs) will be slower, and the re-opening gains may be smaller for EMs that imposed less stringent shutdowns, such as Brazil and Turkey. EMs are nonetheless likely to benefit from the stronger overall demand from AEs and favourable market developments, such higher commodity prices and a weaker US dollar.

Travel and tourism will benefit enormously from widespread vaccinations, but don’t bank on a rapid return to pre-pandemic travel norms. Domestic and short-haul travel to places were Covid-19 cases are low will be the near-term winners. Challenging times still lie ahead for tourism in some EMs.

2) Industrial resilience as the service sector reopens

Many industrial firms are now accelerating production to meet pent-up demand, pointing to further near-term strength. As restrictions on hospitality and other services are lifted, households will rebalance their spending between goods and services, but we expect manufacturing’s strength to persevere.

The transition to pre-pandemic spending patterns will be gradual, but the reopening of services will bolster employment, to the benefit of industry. Services firms will also need to spend money servicing equipment and buildings that have stood idle, or purchasing production inputs, which will boost manufacturers, too.

Capital producers may fare better than many expect. There may be stronger investment in sectors that have benefitted from the acceleration in pre-existing structural shifts, such as greater online shopping and greater adoption of labour-saving technologies to limit any future disruption from social distancing.

3) Handing the growth baton from the public to private sector

A key part of the normalisation process will be the phasing out of policy support as conditions in the wider economy normalise and firms and households get back on their feet. This is unlikely to be seamless. Past mistakes in rapidly moving to austerity, as seen a decade or so ago, won’t be repeated, but policy will be uncoordinated globally and the risk of governments doing too little outweighs the risk of them doing too much, potentially leading to a bumpy ride.

Overall, while we expect the recovery will be strong by historical standards, for many it won’t feel that way. Even if the economy grows rapidly next year, Covid will leave lasting scars that will take years to heal.

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