September 18, 2020
With favorable low-interest regimes globally and additional fiscal stimulus packages expected, 2021 has the potential to deliver a robust economic recovery, assuming there will be a medical breakthrough in the form of a coronavirus vaccine.

The Uneven Global Economic Recovery

The unprecedented global Covid-19 pandemic, and the related economic hardships it has caused, has been the headline of 2020. The bulk of the deep economic contraction occurred during the second quarter of 2020, and recent financial data suggests that the global economy is in a healthy but uneven recovery. After a double-digit contraction in Gross Domestic Product (GDP), countries are dragging themselves out of the recession with varying levels of success. Fortunately, most of the economic damage was contained in one quarter. Since mid-May, the virus containment measures have been gradually relaxed, and global economic activity has started to recover. Subsequently, the recovery timeline to pre-crisis GDP levels has become clearer for many countries (Figure 1).

Countries with successful containment efforts and a strong fiscal response are expected to recover sooner than those countries with more timid responses. For example, the Chinese economy was hit first and hard, but it is already back above the year-end 2019 GDP figures due to the effectiveness of the government’s response. Germany and the US are recovering sooner than other major developed economies with the help of unprecedented fiscal stimulus packages in terms of both the speed of delivery and the size of the response.

Countries heavily tilted towards retail, hospitality, and tourism, such as Italy, Spain, or Mexico, have been hit much worse, and as a result, recovery may take longer with international travel restrictions still in place.

Social Mobility Is Moving in The Right Direction

In many countries, the recovery in social mobility is surprisingly strong or moving in the right direction. Demand for basic human needs like food and shelter stayed constant or, in some regions, actually increased as residential housing activity spiked. Many disrupted leisure activities have resumed with consumers reducing the infection risk through necessary hygiene measures or wearing a mask. One thing that was underestimated was the adaptability of humans via their collective behavioral changes.

Based on Google mobility data, countries like Germany or Russia are already above pre-virus levels in terms of social mobility, while countries with ongoing restrictions like India are struggling to recover.

Until a readily available medical solution to Covid-19 is widely obtainable, in the form of a vaccine or therapeutic treatment, some forms of social distancing are likely to remain in place. Similarly, increased and speedier virus testing can mimic a vaccine in practical terms by quickly identifying outbreaks and containing infections. As long as the subsequent waves of infections stays localized and does not lead to nationwide lockdowns or mobility restrictions in many countries, the recovery in mobility data should improve further. International travel, however, remains severely restricted globally and will likely remain so until there is proliferation of vaccines or a breakthrough in therapeutics.

The medical community is learning from its past experiences, making the virus less deadly. In countries with adequate healthcare systems, new infections do not result in a high number of fatalities, thus improving consumer sentiment. On the other hand, the longer COVID-19’s threat alters consumer behavior, the shallower the recovery will be.

The Risk of Nationwide Lockdowns or Additional Social Distancing Measures

The current consensus for global economic projections assumes a virus resurgence in the winter months, resulting in localized containment measures. Nationwide restrictions in multiple countries could result in severe dislocations in economic activity, and the current recovery could falter.

Case in point, in Israel, a large number of new infections forced the government to reintroduce a very strict nationwide lockdown for three weeks, starting on September 18. The restriction limits residents to within 500 meters (less than a third of a mile) from their homes, and all non-essential businesses will be closed. The resulting economic damage is expected to be somewhat limited with the upcoming Jewish holidays of Yom Kippur and Rosh Hashanah. Nevertheless, it is expected to have a $2 billion impact.

The UK, which is also dealing with a second wave of infections, reintroduced nationwide restrictions on public gatherings that limits groups to no more than six people. These new restrictions were put in place to avoid a second full-scale nationwide lockdown.

Recovery in Global Trade Underway

During the heights of the virus-driven economic crisis, global trade volumes experienced a significant drop, very similar to the decline we experienced during the global financial crisis. Fortunately, the fall was much shallower than initial estimates. The majority of global production is back online, and inventory buildup is underway. The global manufacturing purchasing manager surveys for new export orders rose in recent months for a fourth consecutive months, indicating a continued rebound in world trade in the third quarter of 2020.

The COVID-19 crisis exposed global supply chains’ vulnerabilities, primarily if a country relied on a single or a very concentrated global supplier list. This so-called “fear of mono-dependence,” may result in unfavorable trade policies that could further restrict international trade. We are not expecting an imminent and forceful shift to re-shoring of all production lines, but the benefits of trade globalization are in serious question. Ultimately, while many countries appear to be rethinking global trade, the benefits of trade are generally decided by consumers and companies. For instance, strong consumer demand for particular products tend to overcome protectionism. Similarly, companies generally decide the placement of their production and supply chain based on their needs rather than the whims of governments.

Stimulus in the Form of Monetary, Fiscal and Pent-up Demand

After the global financial crisis, the Federal Reserve (Fed) was the first major central bank to successfully raise its policy rate, ignoring the failed attempt of the European Central Bank (ECB) in 2010. According to the Fed’s recently published economic projections, the Fed Funds Target Rate is expected to stay at the current 0%-0.25% level for at least three years. At the end of the current economic crisis, we assume that the Fed will again be the first major central bank to lift its policy rates. Interest rates are expected to stay well below expected inflation rates for a prolonged period of time, providing necessary stimulus for recovering economies. We are not suggesting that the Fed will wait another seven years to lift policy rates, but if a shallower economic recovery results in a lower inflation level and a higher unemployment rate, then it is easy to envision a decade-long near-zero policy rates.

Globally, more central bankers have synchronized their monetary stimulus actions (especially asset purchases) with the expected fiscal response. To successfully finance the ever-expanding public debt balances, interest rates well below inflation are necessary to avoid budgetary stresses.

Instead of spending, global consumers are hoarding cash with household bank deposits surging in many developed economies. Eventually, those savings are expected to be channeled to consumption or investment. Like households, corporations are reluctant to invest in new capital expenditure programs, allowing cash to build up in short-term savings. Stronger than expected spending could occur if spending from households and companies coincide.

Bottom Line

It is hard to predict how the pandemic will evolve during the winter months for countries in the northern hemisphere, but if the world’s economies continue with their current path of recovery, the global economy has the potential to exit the economic crisis with a growth rate that is close to -4% in 2020. The assumption that there will be a medical breakthrough in the form of a vaccine for Covid-19, coupled with supportive low-interest-rate regimes, and additional fiscal stimulus packages, 2021 is set to be one of the best economic growth years since the global financial crisis.

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