Eco Perspectives

After a most difficult year, cautiously hopeful for 2021

12/16/2020
PDF

Until the very end, 2020 has been a difficult year, to say the least. However, there are reasons to be cautiously hopeful about the economy in 2021. Vaccination should reduce the uncertainty about the economic outlook. Ongoing fiscal and monetary support is also important. However, more than ever, caution is necessary in making forecasts. Reaching herd immunity may take longer than expected and some of the economic consequences of the pandemic may only manifest themselves over time.

RETAIL AND RECREATION MOBILITY

Until the very end, 2020 has been a difficult year, to say the least. However, there are reasons to be cautiously hopeful about the economy in 2021. Vaccination should reduce the uncertainty about the economic outlook. Ongoing fiscal and monetary support is also important. However, more than ever, caution is necessary in making forecasts. Reaching herd immunity may take longer than expected and some of the economic consequences of the pandemic may only manifest themselves over time.

2020 has been a difficult year, to say the least. The Covid-19 recession was completely unexpected, abrupt and deep. It has triggered a huge effort from monetary and in particular fiscal policy to cushion the impact on the financial situation of households and companies. 2020 was difficult until the very end with another wave of infections in the US and several European countries, causing new restrictions.

High frequency indicators such as the Google Mobility data – which are closely correlated with household spending - show that the rebound after the drop in November has come to a halt. This means that the new year will start on a softer note than previously expected.

Cautiously hopeful

Nevertheless, there are reasons to be cautiously hopeful about the economy in 2021. Vaccination has already started in some countries and will gradually be extended to others. This should lower the risk of disruptions due to waves of new infections and hence reduce the uncertainty about the economic outlook. Consequently, the support coming from fiscal and monetary policy should make itself felt more clearly. However, more than ever, caution is necessary in making forecasts. Reaching herd immunity may take longer than expected, which would imply that infections-related uncertainty might linger on. In addition, we should be mindful that the links between final demand and its drivers -e.g. interest rates, income, company earnings- are not rigid.

Psychology plays a key role. For households, unemployment expectations are an essential indicator to monitor. After declining during the economic rebound in the third quarter, the assessment by European households of the labour market outlook has deteriorated again as of late. In the near term, this may act as a drag on spending and boost precautionary savings. In addition, savings have been increased as consumer choices were restricted by the lockdown measures.

Subsequently, as the outlook improves, this should go in reverse and households may very well tap into the savings accumulated during lockdown. For companies, what matters more than anything is visibility stretching far enough into the future. It will drive their decisions in terms of investments and recruitment. The latest European Commission survey on investment intentions shows only a small increase is planned for next year. The aggregate picture masks a high degree of heterogeneity. Business sentiment in the manufacturing sector has been holding up well in the euro area whereas services are suffering from the restrictions introduced in recent weeks. Companies that have seen a big increase in their debt load due to a drop in turnover during lockdown may prioritise deleveraging over investing. On the other hand, profitable businesses with a good balance sheet and an improving demand outlook may step up their investments, which would have favourable spillover effects on other sectors.

Unease about the ‘known unknowns’

Assessing the pace of growth in 2021 and beyond is challenging because some of the consequences of the pandemic may only manifest themselves over time. This would mean that the economy could still face headwinds even when the health situation would be considered under control.

A key unkown is the impact of ending income and liquidity support measures to households and businesses. There is concern that this could cause an increase in unemployment, as companies which are financially fragile try to lower their cost base or close their activities altogether. This implies that the pick-up in activity will need to be sufficiently strong, in particular in sectors such as leisure and hospitality which have been under huge stress due to social distancing and administrative closures.

Another important unknown is the reaction of financial markets should central banks gradually shift their guidance in reaction to a sustained increase in GDP. Finally, there is the important question to which extent changes in behaviour observed this year could become permanent. This unknown is particularly relevant at the sector level. One can think of how working from home will influence the need for office space, how online shopping will impact the demand for retail shopping space, how video streaming will weigh on visits to cinemas, theatres or stadiums and how video conferencing can have repercussions on business travel.

THE ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

United States
Change of scenery

Change of scenery

The 46th president of the United States, Joe Biden, will face a difficult mandate [...]

Read the article
China
The tightening in credit conditions is a delicate exercise

The tightening in credit conditions is a delicate exercise

Economic activity has rebounded rapidly since March and has gradually spread from industry to services [...]

Read the article
Japan
A very gradual normalisation process

A very gradual normalisation process

As in other economies across the globe, Japan will report a record-breaking recession in 2020. The path to a full economic recovery will be probably longer because growth would remain very subdued [...]

Read the article
Eurozone
Cautious but hopeful

Cautious but hopeful

The resurgence of the Covid-19 pandemic halted the Eurozone’s economic recovery. It looks like year-end 2020 will be harder than expected due to new social distancing measures and lockdown restrictions set up in most of the member states [...]

Read the article
Germany
Income uncertainty boosts precautionary savings

Income uncertainty boosts precautionary savings

The second lockdown interrupted an already stalling recovery. However, the business climate is likely to improve soon on the expectation that several vaccines might soon be available [...]

Read the article
France
Light at the end of the tunnel

Light at the end of the tunnel

The huge recessionary shock in H1 was followed by an equally spectacular rebound of economic activity in Q3, with an 18.7% jump in real GDP, although it will remain short-lived [...]

Read the article
Italy
Coping with the second wave

Coping with the second wave

Following an impressive decline in the first half of 2020, the Italian economy rebounded over the summer. Value added rose strongly in construction and manufacturing, while the recovery in the services sector was less substantial [...]

Read the article
Spain
A fiscal stimulus monitored closely by Brussels

A fiscal stimulus monitored closely by Brussels

Forecasts made at the start of the year will probably turn out to be accurate. Spain is set to be the Eurozone’s economy hardest hit by the Covid-19 epidemic. We forecast GDP to shrink by 11.8% in 2020 before rebounding by 7.0% in 2021 [...]

Read the article
Belgium
Structural impact limited so far, but eventually bill comes due

Structural impact limited so far, but eventually bill comes due

We expect the Belgian economy to lose 7.2% of its size this year, followed by a 3.8% increase next year [...]

Read the article
Austria
Corporate sector severely weakened by Covid-19 crisis

Corporate sector severely weakened by Covid-19 crisis

The government decreed a second lockdown in November due to the rapid rise in Covid-19 infections. Business indicators point to a fall in activity. Thanks to the short-time work scheme, unemployment has only risen moderately [...]

Read the article
Finland
A resilient, but not very dynamic, economy

A resilient, but not very dynamic, economy

In Q2 2020, Finland stood out from the rest of Europe as the country that reported the smallest decline in GDP – “only” –4.4% [...]

Read the article
Greece
A slower recovery than other countries in 2021?

A slower recovery than other countries in 2021?

Greece’s economic recovery will be fraught with uncertainty in 2021. The Covid-19 hit to activity could last longer in the tourism industry – a key sector for the country – than in other sectors [...]

Read the article
United Kingdom
Another contraction in Q4, before a definitive recovery?

Another contraction in Q4, before a definitive recovery?

The record fall in UK GDP in the second quarter gave way to unprecedented growth in the third, and the news that an effective vaccine against Covid-19 will soon be widely available suggests that the economy could start its definitive recovery in 2021. However, the UK is not out of the woods yet. Given that a second national lockdown was introduced in England in November, there is little doubt that economic activity will drop again in the fourth quarter. Moreover, the strength of the recovery is, because of Brexit, more uncertain than elsewhere. This not only because of the UK’s decision to leave the EU’s single market and customs union, but also due to continued uncertainty over whether a free-trade agreement will be found.  [...]

Read the article
Sweden
A hard-hit economy

A hard-hit economy

Since March 2020, Sweden has adopted a more relaxed approach to the COVID19 outbreak as no lockdown has been imposed to the population. However, the recent pick up in new infections could slow the recovery down in Q4 2020 [...]

Read the article
Norway
One of the least affected developed economies

One of the least affected developed economies

Norway was not hit as hard by the Covid-19 pandemic as most its European neighbours. Moreover, the economy has been able to count on considerable support from the fiscal and monetary authorities [...]

Read the article
Denmark
Uncertainty remains

Uncertainty remains

The Danish economy has quickly rebounded after the reopening of the borders but a complete catch-up will take time since the resurgence of the Coronavirus epidemic keeps the country’s economic situation uncertain [...]

Read the article