While COVID-19 is still present, global economies continue to improve. Read more about business economic recovery.
While we are not officially yet out of the COVID-19 recession, global economic activity continues to improve giving investors and business owners signs that the global economy is entering into the very early stages of a new economic expansion. These periods of expansion typically last for many quarters and many years, bringing some economic and societal optimism both domestically and internationally.
Here are some major positive trends, as well as some potential concerns, we have been watching and will continue to monitor.
COVID-19 Vaccine Approval and Distribution
Positive trial results from multiple pharmaceutical companies in late 2020 led to emergency use authorization and vaccine distribution around the globe. Then in February 2021, Johnson & Johnson also received authorization for its single-dose vaccination. With expanded approvals and production, there are expectations that developed nations will have enough doses to inoculate most of their citizens by late second quarter 2021—potentially leading to a full economic global re-opening shortly thereafter.
While much of the world may soon see a return to economic growth, risks continue as virus case counts remain elevated in Europe, the U.S., and South America. Economic output will continue to return gradually, and perhaps unevenly, as nations continue to relax restrictions, populations are inoculated, and pent up demand is met by consumers with restored confidence and resources. And with a return to overbearing or severe economic restrictions being unlikely, we expect 2021 to be a year of global economic growth that may positively surprise.
Pandemic disruptions will act as trend superchargers accelerating growth in learn from home, spend from home, and work from home industries. We expect post-pandemic changes in transportation, real estate (both residential and commercial), labor markets, migratory patterns (for businesses and individuals), and a reshoring of manufacturing supply chains. We recommend that investors and advisors begin to take advantage of these supercharged trends today.
Governments around the world have implemented various fiscal stimulus packages, with many still considering additional efforts for 2021. In the U.S., this included separate packages covering direct payments to individuals, the Paycheck Protection Program, increases in unemployment insurance, and specific aid to affected industries.
An additional $1.9 trillion stimulus package was passed, targeting state and local aid, additional unemployment benefits, and mass vaccinations. The fiscal stimulus measures were intended to mitigate the most severe economic and health related outcomes during the depths of the pandemic.
In the immediate future, these measures will provide a massive economic tailwind as the U.S. exits the recession, propelling growth, and acting as a tailwind for risk assets. However, these packages have been financed through deficit spending, putting significant debt on the balance sheet of the U.S. government. Longer-term, the added government debt brings the risks of higher inflation and slower economic growth, a situation that investors and business owners must closely monitor.
Domestic Politics and Policy
With Joe Biden as President and Democrats retaining control of the House of Representatives and flipping control of the Senate, there may be changes to national tax and fiscal policy. The narrow Senate majority may limit legislative flexibility, but it does allow for greater latitude in executive branch appointments and control of the Senate agenda.
The greatest implications for investors will likely be on taxes, with slight increases to the top tax bracket for individuals and corporations (and potentially some restoration of state and local tax deductibility). From a financial market standpoint, these tax negatives may be offset by greater levels of fiscal stimulus that will likely remain a priority.
The U.S. Fed has said it will continue its dovish approach—announcing in August 2020 that it will target inflation that averages 2% over time, reflecting a willingness to allow inflation to run higher and labor markets to run hotter by keeping interest rates lower for longer. The Fed reiterated its pledge to use all available tools to support the economy during the COVID-19 pandemic and cited a moderating U.S. economic recovery, the path of which will depend on progress with vaccinations. This means interest rates may stay near current, historically low, levels in the intermediate term, as accommodative global central bank policies and modest inflation remain in place.
Recent comments by U.S. Fed chair Powell emphasize these themes and the central bank’s commitment to drive unemployment to pre-pandemic levels without mentioning the risk of wage pressures leading to an increase to inflation overall. Powell has stated that the employment situation is “a long way” away from where it has to go and that the Fed will stay focused on its “broad and inclusive” employment goal, giving further credence to the Fed’s current accommodative stance.
Risks to Emerging Economic Growth
While perspectives are generally positive, there continue to be major concerns around the global economy’s ability to emerge from the current recession.
COVID-19 Will Linger: Variants of the virus—despite some indications that approved vaccines are still effective against them—may lead to an increase in infections, hospitalizations, and even fatalities in Europe and the U.S.
Economic Restrictions: While it’s unlikely we will see the more drastic shutdowns we did at the beginning of the pandemic, there may be additional economic restrictions—especially in places that may see rising infection rates—putting economic expansion in question.
General Uncertainty: While the global rollout of vaccinations has help curb some uncertainty, as the economy picks back up, we may see some volatility in earnings reports, uneven business openings, and ongoing political and geopolitical strained relations—including trade relations between the U.S. and China.
Looming Inflation: The high levels of government debt, deficits and spending may lead to higher inflation, higher interest rates, higher taxes, lower economic growth. While the stimulus measures have been positive for U.S. economic growth near-term, the specter of higher inflation and lower prospective growth is a risk.
Global Markets: The Brazilian, Russian, Indian, Japanese and many European economies each saw periods of contraction in 2020 and are slowly emerging from pandemic related recessions. Only China is currently witnessing pre-pandemic levels of economic output.
Once the economic impact of the coronavirus dissipates and the lagged effect of global stimulus measures and postponed consumer spending resumes, we are likely to see solid economic growth in 2021. There are many risk factors that need to continue to be monitored—lingering COVID-19 economic restrictions, vaccine distribution and administration data, government fiscal stimulus measures, central bank policy actions, geopolitical tensions, and inflation measures—but we believe these risks will prove to be transitory.
Overall, shifting trends in work, housing, transportation, and consumption will create long-term growth opportunities—leading to resumed global growth in the months and years ahead. Vaccinations of the most vulnerable will lower mortality rates quickly and allow shuttered industries to re-open. The U.S. economy is entering a new expansionary period, which will likely last for many quarters and many years. Now is the time for investors and advisors to look beyond the pandemic.