IHS Markit financial and economic experts gave their annual Top 10 economic predictions on Wednesday.
With the underlying theme for 2021 of “overcoming the pandemic and charting new paths for the global economy,” IHS executive director for global economics Sara Johnson, vice president of life sciences Gustav Ando, chief U.S. economist Joel Prakken, chief European economist Ken Wattret and financial consultant Brian Lawson gave their insights and forecast on a webinar.
Here are their Top 10 economic predictions for the year ahead
1. While the Covid-19 virus will stay with us, effective treatments and vaccines will be widely available to large segments of populations by mid-2021, facilitating a transition to the post-pandemic economy.
“The rapid deployment of effective vaccines and reopening of economies should gradually unleash a new wave of spending on travel and services, driving robust growth in the later part of 2021,” Johnson said.
While the unanimous initial vaccination focus centers on health workers and patients in nursing and long-term care facilities, the commercial impact is widespread. However, the vaccination effort faces logistical barriers including sourcing raw materials and cold-chain distribution.
Despite third-quarter rebounds across Europe, real gross domestic product (GDP) is still well down from fourth-quarter 2019 levels, except for Ireland. Given the scale of GDP losses, a growth “spurt” is likely from a mid-2021 post-vaccination rollout, although fiscal problems and low potential growth rates pose longer-term hindrances.
2. The global economy will enter 2021 at a subdued growth rate and accelerate to a brisk pace in the second half.
The global economy will recover in 2021, led by Asia and North America, with all regions returning to economic expansion in 2021.
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“After a 4.0 percent decline in 2020, the global economy is expected to expand 4.5 percent next year, with global output expected to reach a new peak,” Johnson said.
3. In 2021, investors and policymakers will shift their focus from Covid-19 to the environment.
Increasing environmental, social and governance (ESG) concerns will be of growing importance and impact to companies and governments. An increased political focus on ESG will range from European Union (EU) taxonomy to the U.S. Federal Reserve’s application to join the Network for Greening the Financial System.
4. Monetary policies will remain accommodative and more central banks will lean toward the U.S. Federal Reserve’s flexible average inflation targeting (FAIT) policy.
Although now there may be more upside to term yields than downside to the equity premium, the outlook for earnings and dividends remain somewhat guarded. The bottom line is for modest equity price gains over 2021.
5. The global financial sector should avoid major crises in 2021, at least in advanced economies, but banking risks will rise.
Multiple adverse fundamentals will extend into 2021, even if the Covid-19 virus is contained, although many of these are gradual rather than shock events. These include the inevitability of lasting economic damage from Covid-19 causing corporate failures to increase over time and many jobs to disappear.
Underlying asset quality and credit deterioration is delayed and masked by state measures to mitigate the pandemic. Globally, higher debt burdens for sovereigns and corporates are seen, but state support is likely where feasible to preserve systemic stability. Weaker and troubled countries remain vulnerable to localized financial stress.
6. Finished good prices will accelerate in 2021.
Industrial materials prices have rallied strongly since early May, reaching their highest levels since September 2014. These cost increases will be pushed downstream over the next six to nine months. Going forward, IHS Markit sees industrial materials prices rising relatively slowly through 2021.
The rebound in commodity prices will spark an acceleration in finished goods prices during the next six to nine months. As Covid-19 vaccines become widely available, consumer demand and price pressures will begin to shift from goods to services.
7. The U.S. economy will start 2021 slowly and accelerate in the second half.
If another modest stimulus bill is implemented and a highly successful Covid-19 inoculation program is well underway by summer, full year real GDP growth is expected to exceed 4 percent next year, with a reasonably good probability of growth reaching above 5 percent in the second half of 2021.
IHS said President-elect Joe Biden’s fiscal agenda is ambitious, but is unlikely to be implemented in 2021.
8. Europe’s 2021 annual growth rates will fall short of market consensus expectations.
The COVID-19 virus’ prevalence and related containment measures will continue to hinder the recovery early in 2021. Lagged increases in business failures and unemployment is forecast to restrain growth as policy support diminishes, though IHS expects a pronounced vaccine-driven pick-up in Eurozone growth rates from mid-year. Eurozone real GDP is projected to rise about 3.5 percent in 2021, with the return to pre-pandemic levels not expected until late 2022.
9. Mainland China’s economy will accelerate to the strongest growth rate in recent years, but the rebound will wane.
Mainland China is enjoying an economic resurgence, but it won’t last, IHS said. With economic reforms stalling, productivity growth is slowing. In response to the 2020 surge in corporate debt, the government will tighten liquidity as the economic expansion firms. Foreign companies will continue to diversify sourcing away from mainland China.
10. The dollar should weaken in 2021 in a lagged response to the Fed’s sharp pivot to monetary accommodation in early 2020 and an increase in investor risk tolerance.
The dollar’s real trade-weighted exchange rate index is projected to decline through mid-2023 in response to the expectation that U.S. interest rates will remain low for an extended period, an increase in investor risk tolerance will lead to recovery in currencies of some emerging markets, and the persistence of large U.S. current-account deficits.
“The bottom line for global economic growth in 2021 is for a slow start and fast finish,” Johnson said. “Despite an acceleration in finished goods prices, overall inflation will remain mild in 2021 as global output and employment remain below potential.”