Stuart’s Breakfast Orange; 2021 Economic Outlook; Born to Die, Lucky to Live

21 is lucky; it is the number of dots on a dice; it is the winning hand in Pontoon; the final act in a famous university drinking game and the traditional age of majority. 2021 is going to be lucky; the return to normality and remembered as the end of the coronavirus pandemic, at least as an economic event for the major industrialised economies. 

The health crisis will not be over; restrictions will continue, but the major industrialised economies will move on encouraged by the hope of immunity and faith in their exceptionalism. The rebound after the first lockdown demonstrated that the bigger the fall, the bigger the bounce. The free world will once again ignore mortality and focus on the base levels of Maslow's Hierarchy.

The demands of publishing schedules ensured that most 2021 outlooks were written and published in late October and early November before the outcomes of three crucial known unknowns were revealed. These were the Presidential elections and the special Senate elections in Georgia, the winter wave of the coronavirus pandemic and the Brexit negotiations; "The Good, the Bad and the Ugly" and they have an important bearing on the economic outlook for 2021.

The Ugly: Brexit is specific to the UK, and a lesser extent Europe, and was never going to produce a good outcome. The British Government in acceding to Europe's wishes was choosing the lesser of two evils, but the narrow trade deal materially increases trade frictions that will act as a persistent drag on growth. The good news is that this will be largely lost in the noise of the boom and bust of the post-pandemic economy. The bad news is that politically the ugly is forever and the political ramifications of the poor decision will persist indefinitely.

The Bad: As the Federal Reserve has repeatedly made clear, the dominant force remains the coronavirus pandemic. The pandemic will have four distinct economic episodes; we are now through three of them: (1) The initial lockdown, (2) the sharp rebound and then, with the realisation that growth will be constrained by continuing restrictions, social distancing etc., (3) the new abnormal economy. A sharp slowdown in the rate of growth. The default assumption was that this "new abnormal" would continue until vaccination achieved herd immunity and that (4) "normal" would then return. I demurred that the fourth phase would be better than normal; a "New Hope" where only the winter wave of infections would temper and delay the joy of vaccine discovery. The known, unknown was how bad this winter wave would be. The spate of viral mutations has ensured that the winter wave is worse than expected, requiring a return to lockdown in the US and Europe and international travel restrictions. The return to lockdown signals recessions in these economies. However, the first quarter's downturn will be significantly smaller than the initial lockdown, when global GDP dropped by 20%. Companies have adapted to the new abnormal, manufacturing, in particular, has continued. Consumers have better support with targeted government spending and hope that the nightmare will soon be over. 

The Good: The economic strength will be helped by the positive outcome of the third known, unknown, the results of the Presidential election and the special Senate elections in Georgia. The latter evened up the Senate at 50 seats apiece, giving the casting vote to Vice President Harris. The Georgia seats give President Biden a clean sweep by the narrowest of margins. In addition, the Democrats have a majority of ten seats in the House. Finance bills are filibuster free and can be passed through reconciliation. The new President has emphasised the need for reconciliation and bipartisanship, and I believe that he will seek compromises with moderate Republicans. This suggests that the new fiscal package, which currently consists of $1.9tr spending, will be watered down and although I have seen suggestions that the Administration would be willing to accept as low as $1tr, I don't think the President will settle for less than $1.5tr. A boost worth 0.75% of GDP will come on top of the $900bn packages agreed upon during the transition period. The US economy, fuelled by this record fiscal tailwind, will lead the Western recoveries.

While unemployment will remain high, and vaccines will not end all restrictions, economies will recover, and recover strongly. They will recover because governments and their voters want them to, and both have plenty of money to ensure that they do. The double-dip over the turn of the year will constrain 2021 forecasts; consensus expectations prediction that the major economies will grow by around 5% during 2021. Investors have already discounted this, but they are still under-estimating the recoveries' strength in the second and third quarters. Indeed, I expect the major industrial economies will recover to pre-pandemic levels by late summer.

Stuart Thomson is an independent economic and strategist. His writings reflect his personal views and are intended for the entertainment of the reader and to elicit debate and are not intended to constitute investment advice