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Global Economic Outlook - 2021: A V-Shaped Recovery Is Unlikely. Long And Difficult Ascent Ahead

Reversing the broad-based economic downturn in several sectors and tackling effectively the substantial financial distress in the MSE sectors - might pose a formidable challenge for emerging economies.

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My base case scenario is that the global economy is likely to witness a sluggish and uneven recovery in 2021, rather than a V-shaped one, after it emerges from a deep recession this year and a quagmire of uncertainty. According to the IMF, the global economy is expected to contract by 4.4% in 2020 before growing by 5.2% in 2021. Further, given that a global economic collapse was averted this year, due to emergency financial measures and stimulus packages (particularly sizable in developed economies such as Japan, the US, the UK, Germany, France, Spain and Italy), and the depth and extent of the economic downturn, global GDP is unlikely to recover to pre-pandemic levels in 2021.

My assumption of subdued and uneven global economic recovery (not a V-shaped one) in 2021 is predicated on what I have stated above and on the possibility of covid-vaccines being made widely available only by the end of the first half of 2021 or by Q3 2021(resulting in herd immunity). Consequently, consumer and business confidence is unlikely to rise significantly from the current depressed or low levels before the latter half of 2021. Until then, the services sector, which has been disproportionately impacted by the pandemic globally compared to the manufacturing sector, and global economy are unlikely to witness any meaningful recovery.

While, China, Japan, South Korea, Vietnam and South-East Asia more broadly have contained the virus rather well, the US and Europe (France, the UK, Germany, Spain, Italy among others) in particular are battling the second wave of the pandemic (which is having a chilling effect on business activity and consumer spending) in Q4 2020. Major emerging economies such as Brazil, Russia and India are confronted with elevated corona infections that is significantly undermining business and consumer confidence at a time when lack of adequate fiscal space is substantially inhibiting economic activity in these economies.

Having stated the above and before returning back to global economic prospects in 2021, I would like to emphasize that this pandemic is going to do lasting damage to productivity and potential output. Further, both developed and emerging economies are confronted with unprecedented levels of public and corporate debt, plunge in investment activity, marked rise in budget deficits and parlous state of the medium and small scale (MSE) sector that provides employment to millions. In such a milieu, global economic growth is likely to languish over the medium term.I expect global growth to range between low to mid-3% between 2022-2024.

Chinese Economy - will be key driver of the global economy in 2021

China will be the key driver of the global economy next year. This year, China’s economic rebound from the pandemic has been rather strong - predicated on upturn in exports, manufacturing and infrastructure and real estate investment - and its industrial resilience has been impressive.

China’s economic activity extended its strong growth in November on the back of broad-based improvement in both manufacturing and services sectors, after it grew by 4.9% y/y in Q3 2020 - boosted by investments and exports. Growth is likely to be higher in Q4 2020, as this economy will gain additional impetus from household consumption, which is on the mend amid animproving job market. Recent strong data on imports suggests that domestic consumption is on the recovery path (though quite subdued compared to last year).

In 2021, growth is expected to gather further momentum, as household consumption slowly ramps up over the coming quarters of 2021 and provides this economy just the boost it requires. However, growth momentum in 2021 is likely to be restrained by tighter financial conditions, reflecting policymakers cautious approach towards financial risks, possibility of appreciation of the yuan and subdued global economic recovery, slower credit growth resulting in softening of real estate and infrastructure investment momentum, and fiscal consolidation and monetary tightening as growth establishes itself on firmer ground. My projection of Chinese GDP growth for 2020 and 2021 is 2.1% and 6.8% respectively.

US Economy - meaningful, yet gradual recovery likely from second half of 2021

With reference to the US economy, it is actually in a deep hole, despite a strong rebound in Q3 2020. Such a mechanistic post-lockdown economic rebound can’t really be viewed as an economy that is back on track. Further, after the strong rebound in Q3 2020, the lack of another fiscal stimulus (as I write, there is a new US$ 908 billion bipartisan stimulus proposal announced in the US - which is yet to be passed.) and the second wave of the pandemic are adversely impacting the US labour market and consumer spending (which accounts for around two-thirds of US GDP) in Q4 2020. As a result, it seems most likely that the US economy is going to contract in this quarter. Moreover, there is serious possibility that the US economy may now witness a double dip recession in Q1 2021.

The US$ 2.2 trillion CARES Act benefits are set to expire later this month and nearly all federal unemployment benefits will be cutoff by the end of 2020, which could result in millions of people in the US entering 2021 with hardly any support. Consequently, renewed weakness in the labour market seems very possible over the next couple of months, after the unemployment rate fell to 6.9% in October, from 14.7% in April. As a result, I don’t expect consumer spending to recover substantially until the second half of 2021.

Regarding near-term fiscal stimulus, which is likely to be Biden's top priority on the economic policy front, the possibility of a Republican controlled senate in the US makes me rather skeptical of the passing of another sweeping fiscal stimulus in February 2021 (in fact, given the politics involved with reference to fiscal policy in the US and monetary policy already ultra-loose, Biden is unlikely to be able to really expedite the economic recovery). Such a fiscal stimulus is an imperative to alleviate the financial pressure of households’ and firms’ and usher in a strong economic rebound in the US.

Even if a sweeping fiscal stimulus is not possible, a stimulus package of around US$ 1 trillion may be feasible. A stimulus of this size should support gradual economic recovery over the subsequent quarters, though unlikely to result in a strong economic rebound. Given the ballooning deficit, Republicans are likely to support a smaller stimulus and focus on lowering government debt after the pandemic is over.

Next, if a successful vaccine is widely available in the US by the end of the first half of 2021, it is likely to gradually lift consumer and business confidence over the second half of 2021. Further,

Biden’s multilateral approach to trade and possibility of toning down of rhetoric vis-a-vis China is likely to bolster business confidence and result in businesses investment and hiring picking up gradually from the latter half of 2021 onwards. Under the assumption that a sweeping fiscal stimulus will not be passed, a meaningful, yet gradual, pick up in economic activity in the US (due to the aforesaid factors) is likely from the second half of 2021 - with economic activity likely to gain further momentum in 2022. Further, given that the US economy is service sector dominated, it is unlikely that there will be a strong economic rebound in 2021.

It seems unlikely to me that economic activity in the US will reach pre-covid levels next year. Moreover, given the extent of the economic damage, as a result of the pandemic and the scale of domestic political and economic challenges that Biden is likely to be confronted with, I don’t think that economic recovery in the US will be firmly entrenched before the end of 2022. I expect the US economy to contract by 4.4% annualized rate in 2020 and thereafter grow by 3.5% in 2021.

Having stated the above, a republican controlled senate should constrain Biden from implementing higher taxes and more financial regulation, which in turn should be a positive for the US stock markets.

Eurozone and the UK - both likely to witness double dip recession before recovering

With reference to the eurozone, after it witnessed strong quarterly GDP growth (12.7% q/q) in Q3 2020 - which was supported by countercyclical fiscal policy, ultra loose monetary policy and resumption of economic activity by households and firms after stringent pandemic related measures were lifted - this economy is likely to witness a double-dip recession in the winter given the lockdowns and widespread restrictions accompanying the second wave of the pandemic (the German economy is of course demonstrating resilience in the face of new virus related restrictions). The latest business survey with respect to eurozone’s services sector, which accounts for more than 70% of this region’s GDP, seems to suggest that economic recovery from this pandemic is likely to be muted. With lockdown measures likely to remain in place over the next few months, I expect services sector activity in this region to remain highly subdued in Q4 2020 to the first half of 2021.

Given the massive fiscal support in place for the labour market (particularly in Germany and France), continued ultra loose monetary policy support (in addition, the ECB has a 1.35 trillion euro bond purchase program, in order to enable credit to flow at cheap rates from banks to businesses) and possibility of more spending in 2021 (loans and grants worth 750 billion euros might be dispensed in 2021 to aid recovery), I expect a tentative economic recovery from around the latter half of 2021 - assuming covid vaccine is made widely available for herd immunity by the end of the first half of 2021. On an annual basis, the European Commission expects the eurozone economy to contract by 7.4% in 2020, before growing by 4.1% in 2021.

With reference to Germany (eurozone’s largest economy), it has handled the pandemic far better than Italy, the UK or France. Given the onset of the second wave of the pandemic and renewed containment measures coupled with the same taken earlier to counter the same, economic activity will contract by much less in 2020 than the UK, Italy and France. Economic recovery should be propped up in 2021, due to strong fiscal policy response and gradual improvement in domestic and external demand. However, consumer spending will be constrained by the containment measures and a weaker labour market will possibly amplify it in 2021. But marked fall in consumer demand is unlikely to happen, due to strong fiscal support and relatively low household indebtedness.

With reference to France (eurozone’s second largest economy), economic activity will contract sharply in Q4 2020, as the government has reimposed a nationwide lockdown through December, in order to contain the pandemic. As a result, France, which already has high unemployment, estimated at 10.4% in 2020, risks unemployment now rising higher until around mid-2021. Further, I expect a double-digit recession in 2020 but less severe compared to Italy. The economic rebound in 2021 now will be more subdued, as a result of weaker expansion of private consumption and investment activity. Economic activity is unlikely to reach pre-pandemic levels in France until at least mid-2022.

With respect to the UK economy, briefly, it should return to growth in 2021 given the recent positive covid-vaccine related developments. Yet recovery is likely to be shallow and the UK economy is unlikely to return to pre-covid levels in 2021. This is because there might be a turbulent Brexit without a UK-EU trade deal, which is likely to have significant downside implications for the UK economy and substantially delay full recovery from the pandemic. Even if there is a trade deal between the UK and the EU, there will probably be some adverse trade related implications for the UK economy. Further, there is considerable uncertainty about how government support for the UK labour market and businesses is unwound in the future. In such a milieu, consumer spending and business investment is likely to remain muted.

Singapore, South Korea and Japan - weakness in domestic consumption to continue in 2021

With reference to Singapore, its economy contracted by 5.8% y/y in Q3 2020, which was much less than expected. Going forward, this highly export reliant economy is facing headwinds in this quarter, due to resurgence of the pandemic in key trading partner countries and weakness in private consumption. However, growth is likely to recover gradually over 2021 and is largely dependent on the trajectory of the global economy. According to the Ministry of Trade and Industry, Singapore’s economy is expected to contract between 6% and 6.5% in 2020 and thereafter grow between 4% - 6% in 2021.

After an unprecedented fiscal stimulus and substantial widening of the fiscal deficit in 2020, Singapore’s economic recovery in 2021 should be duly supported by its solid fiscal position, possibility of more fiscal stimulus in next year’s Budget (February 2021), likelihood of monetary policy remaining accommodative next year, strong import demand from China (as its economy is expected to gain further momentum in 2021), continued expansion of trade and manufacturing amid improved growth outlook of its key trading economies, as well as possibility of further easing of international travel restrictions. However, Singapore’s growth rebound in 2021 will be constrained by weakness in domestic consumption, elevated household debt and developments related to the covid-vaccine.

Turning to South Korea (whose exports and manufacturing rose in November), its economy is rebounding from the covid induced slump. As exports and investments recover, this economy is likely to contract less than expected this year. With reference to 2021, the South Korean economy should return to growth, due to likelihood of macroeconomic policies - fiscal, monetary and financial policies - remaining accommodative - and probability of exports and investments continuing their recovery momentum amid promising prospects of a covid-vaccine. However, growth is likely to be tepid in 2021, due to the possibility of continued weakness in domestic consumption and mounting private and government sector debt.

Regarding Japan’s economy, which grew strongly in Q3 2020 due to rebound in exports and surge in consumption, the recovery momentum will be difficult to maintain as the virus spreads in the winter. After it is expected to contract in FY2020, Japan is likely recover gradually in the next fiscal as a result of ample government support and another stimulus package on the anvil, expectations of China growing more strongly next year and gradual recovery in global demand - with upside implications for Japan’s exports. However, recovery in FY 2021 is likely to be weak, given that tepid domestic demand, excess capacity and profitability concerns will weigh on business investment, and domestic consumption is likely to remain subdued given Japan’s weak consumer confidence and muted wage growth prospects (real wages have been falling in Japan).

Emerging Markets - emerging Asia likely to be the bright spot (relatively speaking)

Turning to emerging markets, the road to economic recovery in 2021 is fraught with significant challenges, though Asia, particularly the export-oriented economies of Asia, should benefit from stronger Chinese growth next year, Biden’s possibly less truculent approach towards China and emphasis on multilateralism vis-a-vis trade, and the signing of the RCEP trade pact.

Several large emerging economies will struggle to stimulate their economies enough or provide adequate stimulus in 2021, given that they are saddled with higher government debt burdens (example - India, Brazil, Chile, Mexico among others) - due to plunge in tax revenues and marked rise in budget deficits.

Major emerging economies such as Chile, Brazil, India, Russia, South Africa and Indonesia have to also contend with large or rising outbreaks of the pandemic and marked economic contraction this year that has significantly undermined business and consumer confidence, and private investment (India being a glaring example). Except for China, all major emerging economies are set to witness significant economic contraction in 2020 or in fiscal 2020-2021. Further, all these economies and ASEAN economies too are expected to contract in Q4 2020.

The problem with emerging markets (baring China, Thailand and the UAE), unlike developed economies, is their lack of fiscal space or position to adequately stimulate economic activity or undertake massive public investment. Further, several emerging economies have to contend with the fact that their debt servicing costs as a proportion of GDP had already risen to its highest levels even before the pandemic struck in early 2020.

Consequently, reversing the broad-based economic downturn in several sectors and tackling effectively the substantial financial distress in the medium and small scale (MSE) sectors - might pose a formidable challenge for emerging economies (even if a successful covid-vaccine is made widely available during 2021). As a result, non-performing assets are likely to burgeon over the next one or two years, which in turn could saddle several EM banks with bad debts - leading to subdued economic recovery in these economies in 2021 and beyond.

Having stated the above, among emerging economies, I expect economies in Asia to be the bright spot (relatively speaking) in 2021. Notable among them are likely to be India, Thailand (where fiscal policy is likely to be the only growth driver in 2021), Indonesia, Malaysia and Vietnam who are likely to return to growth in 2021 or in fiscal 2021-2022. However, political instability in Thailand and Malaysia risk undermining their economic recovery in 2021.

With reference to India, even though its economy contracted by 7.5% y/y in Q3 2020, it is showing tentative signs of recovery as reflected in high frequency data such as business surveys, after the economy plummeted by an unprecedented 23.9% y/y in Q2 2020. According to the IMF, the Indian economy is likely to contract by 10.3% in the current fiscal (2020-21) and thereafter grow by 8.8% in fiscal 2021-2022. Forward looking consumption and business sentiment indicators seem to bode well for economic recovery over the next year. However, given the state of public finances, stressed banking and corporate sector balance sheets, and marked slump in investment activity, I am rather skeptical about the strength and durability of India’s economic recovery in the current and the next fiscal year.

UAE and Saudi Arabia - low oil prices likely to weigh on economic recovery in 2021

With reference to the UAE economy, I expect it to gradually get back on the growth path in 2021, if the pandemic is contained and a covid vaccine is widely available in the first half of next year. Regarding 2020, I expect the UAE economy to contract markedly, due to low oil prices, subdued domestic demand and this economy’s significant dependence on travel and tourism sectors.

Despite significant fiscal support in 2020, UAE’s central bank extending its stimulus scheme (to stem COVID-19 impact) to June 2021 and passing of the UAE's US$15.8 billion federal budget for 2021 (smaller that federal budget 2020), which will continue to support the UAE economy, I expect economic recovery in 2021 to be tepid. This is because of strong possibility of subdued global economic recovery next year - which is likely to weigh on demand for oil, amid a possible supply glut, and on UAE's non-oil economy which is highly integrated with the global economy. In addition, given the significant dependence of the UAE on travel and tourism sectors, which accounts for a substantial percentage of UAE GDP, economic activity is unlikely to reach pre-covid levels in 2021.

Turning to Saudi Arabia, its economy is likely to contract this year, driven by substantial disruption of domestic demand, cuts in oil production and ongoing restrictions on trade and tourism. In 2021, this economy should get back on the growth path, as domestic demand is likely to recover gradually. However, prospects of tepid global oil demand and possibility of deeper government spending cuts are likely to result in muted economic recovery - even as public debt is expected to rise further next year.

Lastly, oil prices are currently hovering at around US$ 45-46 per barrel. I doubt if oil prices will reach anywhere near Saudi Arabia or the UAE’s fiscal break-even oil price next year. As a result, lower oil prices will continue to weigh on Saudi Arabia and the UAE’s public finances in 2021. 

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Sher Mehta

The author is Director of Macroeconomic Research and Econometrics, Virtuoso Economics

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