Wishful thinking, herd behaviour or just swarm intelligence? Professional crystal ball watchers broadly seem to agree that 2021 will be far better than 2020, at least for the economy. Admittedly, it requires a lot of imagination to believe that next year could be worse than this. The UK’s decision to approve a Covid vaccine and expectations that the US will soon follow are clearly the strongest drivers behind this optimism. As illustrated in our Global Macro Outlook, we share this confidence and have, for the first time in a long while, tilted the risks to our growth outlooks to the upside.
Does a broad consensus on economic improvement in 2021 now mean that we can finally lean back, relax and enjoy the Christmas season? Not entirely. We liken it to a football club which invests heavily in promising new players at the start of the season: you know the golden future will come but you’re also prepared for some nail-biting and disappointing matches before the investment really pays off. The eurozone knows all about this.
Most countries are still mired in a second lockdown and while there will be some easing of the restrictions for the Christmas break, this is likely to be followed by new lockdowns in January, suggesting the double-dip will be extended into the first quarter of 2021. The US is holding up relatively well and hopes for fiscal stimulus have improved growth prospects for 2021, while at the same time the Thanksgiving period could still lead to new lockdowns in the coming weeks. Only Asia seems to be going strong.
Europe faces a particularly dramatic period before it can ease down for Christmas. The Brexit negotiations and the complex package of the EU’s multi-annual budget, the rule of law mechanism and the Recovery Fund are still undecided and, to say the least, complex. Our base case is still that there will be two typical European fudges on both but not before several nightlong discussions and not without the risk of failure. Europe also seems to be running behind the US and the UK when it comes to the approval of the vaccine. Here, a first announcement by the European Medicines Agency is only expected at the very end of December, potentially delaying the rollout of the vaccine. So keep a close eye on Europe in the coming days and weeks. This should be the place of pre-Christmas action and excitement.
If swarm intelligence is right and 2021 is the year of the first synchronised global recovery in a long while, more structural economic topics should re-emerge very quickly.
Think of the economic power shift from the West towards Asia, the need to tackle climate change and accelerate sustainability and digitalisation. Discussions on the eurozone’s Japanification and implications for government debt will be very hot topics as well. The only constant next year should be central banks whose only real role will be to accompany and support the economic recovery and fiscal stimulus. More monetary stimulus is hardly possible and would have very little impact on the real economy anyway while premature normalisation would run a high risk of choking off the recovery.
In the end, we think 2021 should clearly be a better year but not necessarily a quieter year. Therefore, let’s enjoy the Christmas break as long as it lasts. Merry Christmas.