2021 hinges on health outcomes: Vanguard
The outlook for the global economy in 2021 hinges on health outcomes, but the recovery’s path is likely to prove uneven and varied across industries and countries even with an effective vaccine in sight, according to Vanguard.
Joseph Davis, Vanguard chief economist, said the unevenness of the firm’s cyclical growth outlook was reflected in the world’s major economies.
“China, where control of the pandemic has been more effective, has swiftly returned to near pre-pandemic trend growth, and we see that extending in 2021 with growth of 9%,” Davis said.
“Similarly, in Australia, 2021 starts from a relatively strong base supported by lower virus incidence and sustained policy support, with growth of around 4% likely to see output return to pre-pandemic levels by Q3 2021.
“Elsewhere, the virus's prevalence has been less well-controlled, implying a sharper rebound in growth from a lower base in 2020 once a vaccine becomes widely available next year.
“We expect growth of 5% in the U.S. and 5% in the euro area, with those economies still falling short of full employment levels in 2021. In emerging markets, we expect a more incomplete recovery, with growth of 6%.”
Risks to baseline growth in the firm’s forecast were biased to the upside, which reflected ongoing breakthroughs in vaccine development.
“Both monetary and fiscal policy will remain supportive in 2021, but the primary risk factor is the pandemic’s fate and path,” Davis said.
2021 Australia growth forecast
Source: Vanguard
The firm also said it did not expect a return to high inflation, but that there would be some reflation.
“In 2021, we anticipate a cyclical bounce in consumer inflation from pandemic lows near 1% to more realistic rates of close to 2% due to base effects and as the recovery continues,” Vanguard said.
“A risk is that markets could confuse this modest reflationary bounce in inflation with the start of a return to a 1970s-type high-inflation era.
“Mounting debt loads, extraordinarily easy monetary policy, and, in the case of the United States, an explicit assurance that policy will remain accommodative longer than it had in the past have all led to concerns about resurgent inflation.”
Davis said the baseline projections showed that such concerns were premature and unlikely to materialise in 2021.
“More profligate fiscal spending has the potential to influence inflation psychology, but any such influence would have to more than counteract high levels of unemployment and technology influences to drive up inflation expectations,” Davis said.
“We maintain our long-held assessment that inflation rates persistently above 3% are difficult to generate across many developed markets.”
Personal consumption expenditure (PCE) forecast
Source: Vanguard, US Federal Reserve, and the Reserve Bank of Australia
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