An extract from Senior Investment Manager; George Lim – Colonial First State Investments shares his outlook for the year ahead.
Needless to say, 2020 was an eventful year. So, what’s next?
After suffering a sharp decline in Gross Domestic Product (GDP) in 2020, we anticipate the global economy will continue to recover in 2021 – particularly in more developed economies. In fact, a number of countries (including Australia) are already out of an official, technical recession after recording positive September quarter GDP growth. This trend should continue over 2021, with both the US and Australia back to their pre-pandemic GDP levels by the end of the year. Conversely, Europe and Japan are expected to lag and will likely not return to their pre-pandemic levels until 2022 (see Figure 1). Importantly, many economies are not expected to recover to their potential GDP output (that is, their pre-pandemic growth trend levels) for the next two years.
SO, WHAT WILL SUPPORT THE GLOBAL ECONOMIC RECOVERY IN 2021?
The first (and perhaps most obvious) driver is the availability of a Coronavirus vaccine. Vaccines developed by Pfizer/BioNTech, Moderna and AstraZeneca/Oxford University have all reported efficacy rates that far exceeded even the most optimistic forecasts. The Pfizer vaccine has already received emergency regulatory approvals from the UK, Canada and the US. The European regulator is expected to follow soon, while the Moderna vaccines are expected to be approved for emergency use by US and European regulators before the end of 2021. The wide availability of a vaccine should allow for the gradual “re-opening” and normalisation of more developed world economies – starting with the US and Europe, followed by other economies including Australia, and East Asian nations such as Singapore, Hong Kong and Taiwan.
The second driver could be the low-interest rate regime of central banks in 2021. Many central banks reacted to the pandemic by reducing policy rates to or close to zero, and conducted large-scale asset purchase programs to help support their economies. Several have also changed their monetary policy frameworks and forward guidance to allow for longer periods of low policy rates. The Reserve Bank of Australia is one example – announcing in November it would target actual inflation rate (instead of the forecast inflation rate) for setting the policy rate, as well as stating it “will not increase the cash rate until actual inflation is sustainably within the 2–3 per cent target range” and that “the Board is not expecting to increase the cash rate for at least three years”. The US Federal Reserve also changed its policy framework from targeting inflation to targeting average inflation – in effect, signalling it will tolerate (at least for a time) inflation higher than the target.
Finally, as the world releases itself from various pandemic constraints, we anticipate a third driver could be expansionary government fiscal policy. While there may be a gradual reduction in the level of support, overall fiscal support should remain in 2021 as the pandemic fades. There will be debates on the need for fiscal repair, but for now the consensus on using aggressive fiscal policy to support economic growth will likely remain intact through to the end of 2022.
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