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After a torrid 2020, what can we expect from 2021?

Markets today are confident that 2021 will be a year of substantial recovery. But economic events will be largely determined by the roll-out of vaccines – and the gradual fall off in cases and deaths.

Markets today are confident that 2021 will be a year of substantial recovery. But economic events will be largely determined by the roll-out of vaccines – and the gradual fall off in cases and deaths.

by
Charles Stanley

in Features

14.12.2020

It seems an era ago that we were writing and talking about modest 2020 growth in January this year. At that time, the big issues were the state of international trade – and whether the leading countries and central banks would offer a bit more stimulus to speed things up. Instead, it was all swept aside by the pandemic.

The policies to combat a new and unknown virus plunged economies into the sharpest and deepest recession any of us have ever witnessed. We tore up our forecasts early and went over to planning scenarios based around the progress of the disease and magnitude of the policy response to the damage.

So, how is 2021 going to differ from 2020?

Markets today are confident that 2021 will be the year of a substantial recovery. Economic events will be largely determined by the roll-out of vaccines and the gradual fall off in cases and deaths.

Many think that the second half of 2021 will see a more normal environment, with a resumption of leisure travel, events and hospitality. Asia will recover lost output sooner, as they have generally done a better job taming the virus – or have better immune defences from past Asian flu attacks or other causes. This generally optimistic view is underwritten by extreme monetary looseness by the authorities and by the sense that central banks and governments will go on doing whatever it takes to prop things up and to promote growth.

There are two scenarios that point to a worse outcome. The first is based around a premature removal of some of the stimulus. If governments panic about the magnitude of their deficits and put up taxes – or withdraw spending support from people and industries too soon – they could trigger another downturn.

If central banks wish to normalise their approach, or even start to cut the size of their bloated balance sheets, that too could easily end the equity party. They might be pushed into doing so were goods and services inflation to rise above targets. The present shortage of empty containers for exports from Asia is causing some immediate interruptions to goods supply and upwards pressure on prices. Central banks will have to look through any such twist.

The virus proves stubborn

The second negative case would flow from the virus proving more persistent, which would require longer and more draconian lockdowns. This could push many more businesses that depend on social contact into bankruptcy and it would stretch the banks that had made the loans, which tend to lead to mass redundancies and high unemployment. Both the US and the EU are currently facing a winter upsurge in virus cases which, in turn, is prolonging and intensifying the lockdown damage.

Last week, the European Central Bank announced more generous terms for longer-term loans to the EU banking system – as long as they increased their advances to customers. The Bank also divulged that there were still be substantial problem debts in the system that need managing.

The US Fed is winding down its lending programmes direct to US business on the grounds that the conventional system can now cope. The ECB, Bank of Japan and the Bank of England are all engaged in additional bond buying and money creation to keep markets liquid and asset prices up. As we go into 2021, we can expect high levels of continuing support, which is needed given the elevated levels of many shares and sectors. Our base case assumes central banks will not withdraw support early and will succeed in keeping rates lower for longer.

Governments are more complex. They will wish to promote recovery, but the US, the EU and others also wish to trigger a green revolution. They proclaim the cause of building back better. It is true they will use large sums to promote new forms of transport, heating and general power for factories, spawning new jobs in everything from wind farms to batteries and from digital substitutes to new machinery.

Some industries will be scarred

However, it will also mean substantial shake out and disruption of the widely spread carbon economy, with more mine and well closures, factory closures and large capital write-offs. This could be compounded by lingering virus effects, from the maintenance of social distancing and other measures which damage certain services and products more.

This points to a patchy recovery, with favoured sectors and areas continuing to grow fast, with some areas like leisure recovering strongly once the ‘all-clear’ is given. Other areas will remain scarred, with more than their fair share of sackings, closures and losses.

Traditional retail, plenty of commercial property, oil and gas companies and substantial engineering linked to fossil fuels remains at risk, even after an economy has got back to the pre-pandemic level. The sum total means it takes time to get economies generally back to 2019 levels, with European economies, in particular, likely to struggle in 2021 to get fully up to pre-disease levels.

Returns next year on bonds will be limited because their prices are so high, and the yield is tiny or non-existent. Returns on equities should be positive on the base case, but there is less scope for advances overall given the mixed outlook and the high valuations at the start.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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