20 January 2021

Ten Economic Predictions for 2021

2020 was without a doubt one of the most traumatic years for the global economy in recent memory. With global economic output falling by its largest amount since the Second World War, and with nearly all of the world’s leading economies suffered severe losses last year. Overall, it is estimated that the global economy contracted by around 4% last year, with some major economies (Spain, France, Italy, India and the United Kingdom) contracting by over twice as much as the global average. For some sectors of the economy, such as the travel industry, 2020 was an unmitigated disaster, resulting in huge financial and job losses that will take years to recover from. In fact, many vulnerabilities associated with the modern economy were exposed by the crises of the past year.

It appears increasingly likely that 2021 will be a year of recovery for the global economy. However, this recovery will almost certainly be anything but immediate and steady. For one, disruptions associated with the Covid-19 pandemic will continue around the world in the first half of this year, while for those countries that fail to provide vaccines for large segments of their populations, these disruptions could linger well into 2022. As a result, some countries and some sectors of the economy will recover quicker than others, adding to the disparities that were widened over the past year. Gradually, long-term factors such as demographics, competitiveness and productivity will return as the leading determinants of performance for economies and industries as the year progresses. For some, this will be good news. However, for others, the weaknesses that have led to slower growth over the past 12 years will remain in place, prolonging their struggles.

As we look ahead to the remainder of 2021, here are ten economic issues to watch this year, each of which will have a major impact on the direction of the global economy this year and in the years that follow:

  • Weak Economies Suffer Long-Term Losses: When we look back at the Global Financial Crisis of 2008 and 2009, we can see that this crisis exposed weaknesses such as a lack of competitiveness, or an over-dependence upon a single industry or market, that existed in many economies around the world. In fact, economies such as Italy and Argentina had yet to recover from the impact of this crisis more than a decade ago when the Covid-19 pandemic hit. Now, the dislocations caused by this pandemic have exposed additional weaknesses in a number of economies, and these weaknesses indicate that these vulnerable economies will see their competitiveness further eroded in the coming years, making them ever-more dependent upon a small number of industries or markets to generate growth.
  • A Stronger Recovery for the United States Economy: While the US economy suffered severe dislocations in the first few months of the pandemic, it managed to stage a stronger recovery than most other developed economies in the following months. Look for the US economy to continue to beat expectations in 2021, driven forward by its strong position in many of the world’s leading high-tech and high-growth industries. For more competitive regions of the US, or for more dynamic sectors of the US economy, growth will be robust in 2021. However, some less competitive regions and industries will struggle to offset some of the losses incurred in 2020 and will face an uphill battle to return to strong growth.
  • A Backlash Against China: Even with United States President Donald Trump leaving the White House, popular opinion towards China will worsen in many parts of the world, as that country is blamed for the Covid-19 pandemic, and as its economy has recovered much faster than any other in recent months. This backlash against China will have an impact on elections in many parts of the world in 2021 and will force some governments to take a harder line towards China and their countries’ trade relationship with the world’s second-largest economy. This trend has already had a major impact on US politics, and will play a greater role in the politics of other countries this year and in the following years.
  • An Uneven European Economy: Most European economies have been battered by the Covid-19 pandemic, highlighting the fact that they remain overly dependent upon exports and foreign investment to generate growth, while too many European countries lack a meaningful presence in many high-growth and high-tech industries. In 2021, those European countries that can provide Covid-19 vaccines to their populations at an accelerated rate will be in a better position to generate growth in the year ahead. However, most European countries face daunting challenges in the form of demographic changes and low levels of productivity, limiting their capacity to generate the growth needed to offset the losses their economies suffered in 2020.
  • Major Public Spending Cuts: Governments around the world dramatically increased their spending levels in 2020 in a bid to offset some of the economic losses incurred in the wake of the pandemic. With many governments facing severe constraints on their ability to generate revenues in the coming months and years, they will be forced instead to enact major public spending cuts, as was the case for those countries that suffered the greatest losses in the wake of the Global Financial Crisis. This will put pressure on those areas of public spending that do not have a major impact on the opinions of voters, such as infrastructure and education.
  • Productivity Problems Persist: For the past few decades, gradually declining levels of productivity growth have been one of the leading factors for the overall lower levels of economic growth generated by developed economies, as well as by some emerging markets. In 2020, one of the few positive economic developments to emerge was the increase in productivity growth recorded in many countries. However, these gains are likely to prove temporary as many of the factors that resulted in the downturn in productivity growth (low levels of business investment, disappointing returns on technological developments, etc.) remain in place. This will hold back the longer-term recovery from the impact of the pandemic for many countries and industries.
  • Stock Markets Lose Steam: Another one of the few positive economic developments to emerge from 2020 was the fact that, not only did stock markets quickly recover from their dramatic losses in the early part of the year, but they exceeded all expectations over the remainder of the year. However, as the impact of the pandemic lingers and as the global economic recovery is quite uneven, more pressure will mount on share prices, particularly for firms in countries or industries that continue to suffer pandemic-related losses well into 2021. As a result, a significant downwards market correction remains a distinct possibility over the course of this year.
  • Inflation for Some, Deflation for Others: Inflation will be a major topic this year as many economists are warning that the United States and a host of other major economies will face severe inflationary pressures in the coming months due to pent-up demand and the surge of money put into the economy by governments seeking a response to the Covid-19 pandemic. However, for some economies, particularly many European and Asian economies, deflation is likely to remain the bigger threat in 2021, due to long-term weakness in demand, shifts in exchange rates and low energy prices. These diverging inflationary trends will make it harder to coordinate global monetary policy, adding to the threat posed by inflation and deflation.
  • More Investment in Asia: Just as was the case in the years following the Global Financial Crisis, the Covid-19 crisis will result in an even greater share of global investment flowing into Asia as that region’s economies recover more quickly from the pandemic and as their prospects for long-term growth are significantly higher than those of any other region in the world. China will continue to lead the way in terms of investment, but Southeast Asia and, to a lesser degree, India, will also see foreign investment inflows rise in the coming year. This will further shift the center of global economic power towards Asia and the Pacific in 2021, a trend that will continue for the foreseeable future.
  • A Larger Environmental Focus: Mounting evidence of climate change and its impact on the global economy will result in an even larger focus on the connection between the global economy and the environment. A change in government in the United States and a stronger focus on environmental issues in China will add to the higher level of attention paid to the environment by governments and businesses, leading to a greater consideration of environmental issues when business and economic policies are being constructed. At the same time, the mounting costs of natural disasters is likely to continue in 2021, following the large number of major natural disasters in 2020.

Despite the turmoil of the past year, there are many reasons for cautious optimism regarding the global economy in 2021. Over the course of this year, an increasing number of people will be vaccinated against Covid-19, particularly in the world’s leading economic centers. Meanwhile, there were many valuable lessons learned during the pandemic, from the ability of businesses to continue to operate remotely to the proof that we can alter our environmental footprint, and these lessons could help improve the outlook for the global economy in the months and years ahead.

Still, the pandemic is not over, and there are many difficult months ahead, with disruptions to the economy continuing around the world. Worse, the pandemic could still spring some surprises, such as the highly-contagious variants of Covid-19 that recently emerged from the United Kingdom and South Africa. Add to this the fact that long-term constraints on the global economy such as demographic decline and low productivity growth remain in place, and it is clear that 2021, while a year of recovery, is also a year that will prove challenging for much of the global economy.