2021 economic outlook

As we head into a new year, many wonder what is in store for markets.

2020 brought a major market pullback in the spring, but then an equally strong and quick recovery followed by sustained growth into year end.

Most major indices (Canada excluded yet again) finished the year quite strong and the U.S. technology stocks posted some remarkable gains.

But with all of this growth already taken place, can the bull market continue?

The year ahead is shaping up to possibly be an extraordinary year for investors, as a uniquely bullish environment takes form.

Driven by the promise of successful vaccines, the global economy looks set to experience a broad, synchronized recovery in 2021.

As vaccine deployments drive economic re-openings worldwide, activity will be boosted by pent-up demand.

Corporate earnings, already back to pre-COVID levels in many countries, will push to new highs.

Economies will feel the lagged impact of massive global monetary stimulus and, in many cases, additional fiscal stimulus.

With central banks anchoring benchmark interest rates near zero, risky assets like stocks and bonds will continue to find valuation support.

Higher demand will lift prices of commodities tied to economic growth (for example, oil and copper) and likely weaken the U.S. dollar.

Sure, there are risks of speed bumps along the way - most notably a surprise delay in vaccine deployment - but 2020’s unprecedented global economic shutdown has set the stage for what may be an unprecedented recovery.

As a wave of hopeful vaccine news emerged in the closing months of 2020, the Organization for Economic Co-operation and Development (OECD) said the global economy was turning a corner and would improve in 2021.

The OECD now sees global growth of 4.2% for the coming year. Even without the availability of vaccines, many countries are already seeing improved economic momentum.

China, the first major country to impose and then lift restrictions, was early in returning to strong growth that has lifted others in its supply chain (for example, Taiwan and South Korea) and export-oriented countries around the world (such as Japan and Germany).

In a synchronous recovery, all regions are expected to see solid gains, especially some of those that were hit hardest by the pandemic.

Investor optimism had already stepped higher in early November with the declaration of Joe Biden as president-elect in the U.S., which removed much of the political uncertainty that weighed on markets in 2020.

Less than a week later, markets began receiving steady doses of good news on vaccine progress. The wave of hopeful news sent several stock benchmarks to all-time highs, which were broken again just last week.

The prospect of a faster “return-to-normal” is the confidence-booster that will encourage increased labour force participation, unlock pent up demand in areas such as travel and entertainment, and lift growth worldwide.

The year may get off to a slow start because of surging COVID cases and renewed restrictions. Gains in employment and other measures were coming at a slower pace as 2020 ended. Europe may even see a double-dip recession.

However, effective vaccines are expected to accelerate growth by the second quarter.

Already, the expectation of better growth has caused the U.S. dollar to collapse to a 2-½ year low versus other major currencies.

Copper has climbed to its best level in seven years and West Texas Intermediate oil (WTI) to its highest price since last February.

Oil will likely continue to see a gradual rise, moderated by the measured easing of output cuts that the Organization of the Petroleum Exporting Countries implemented last year in the wake of the COVID related collapse in demand.

As growth accelerates, most major central banks have indicated they will remain on hold for the foreseeable future. Officials at the U.S. Federal Reserve were early in suggesting they are willing to let inflation run a “little hot” for a while to ensure the recovery doesn’t falter.

Rising inflation expectations (if not actual inflation) will lead to some upward pressure on longer-term bond yields, steepening yield curves.

By early December, the yields on 10-year Government of Canada bonds and U.S. treasuries rose to their highest levels since last March.

However, most observers think the upside to yields is limited, and that, considering the massive amount of debt that was issued in stimulus efforts, central banks would step in to stop rates from rising so high that they “blow up” federal budgets.

As always, there could be some new and yet-unknown event or crises that appears this year that alter the above predictions.

But the way global economic affairs sit today, it looks like 2021 could be a great year of growth and hopefully, better health for all too!

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.