OVER the recent holidays. I met up with many friends, most wearing a protective face mask in a rather relaxed observance of social-distancing guidelines.
The mood: one of cautious optimism. Not as grim as my Boston friends, who are going through a Covid winter: with job growth stalling; new restrictions on business, consumer spending being set-back’ and worse, with a new fast-spreading virus strain raising the prospect of further lockdowns! Yet, there are some good reasons to consider that for the world economy, 2021 will turn-out to be, perhaps, much better than you think.
(i) Global economic activity is rebounding-there was already a partial V-shaped US recovery in 3Q’20, and if the vaccines prove effective (despite a slow-start in distribution), growth in 2021 could reach 5% (the best since 1984) as the US$900bil fiscal package begins to roll-out. This could ultimately bring total US stimulus since February’ 20 to US$3.5 trillion (more than its share of GDP than in the 2007-09 recession) doing so in two years instead of five.
(ii) Interest rates (now near zero) will stay there for at least two to three years; the Fed remains unconcerned about inflation. But once pandemic restrictions are lifted, continuing low, low rates could turbocharge asset prices, as well as consumer spending & capital investment.
(iii) While producing and distributing vaccines on such a large scale won’t be a walk in the park, continuing strong fiscal & monetary support will keep activity going. The stage may well be set for a great reflation. The no-inflation investor mindset will undoubtedly affect asset allocations.
(iv) Most important is sentiment - the optimistic sentiment brought about by the minimum of “corporate scarring”; and despite still more dark days to come, new businesses will soon rise from the ashes of the old. Confidence is set to return soon with President Biden, to jump-start investment spending.
The political situation in Malaysia, however, remains more uncertain than most of us would like. I worry it will adversely affect our economic performance.
Triumph of science
The year witnessed extraordinary scientific endeavours. The global health emergency brought about unprecedented collaboration in the form of data sharing and mobilisation of resources between academia, governments, philanthropic organisations and private enterprises.
These initiatives enabled the development of Covid vaccines that are already being distributed to millions. Researchers managed to complete a process that on average takes 10 years, in just 10 months – without cutting corners on normal standards of design, testing and manufacture. Technology has helped economies through the crisis.
There have been other scientific breakthroughs: new cures for eradication of wild poliovirus in Africa; and determination of protein’s 3D shape from its amino-acid sequence, an advance that could accelerate dramatically the discovery of new drugs for polio.
However, challenges remain: from the safe and equitable delivery of the vaccines to dealing with the social inequalities that the pandemic has both exposed and exacerbated. The successful inoculation of the world’s population will also help governments to overcome the rise of the anti-vaxxer movement.
For policymakers, the response to Covid-19 holds a lesson for what is possible when faced with a lethal challenge. As I see it, governments should apply this to the looming emergency of climate change: Indeed, a crucial source of solace.
The global economy in 2020 appeared to have started on a solid footing, coming off 2.3% growth in 2019. Business and academic forecasters expected GDP to increase on average 1.9% in 4Q’20, from the year before.
That held steady in Q1’20, even as the US began to register its first coronavirus death. By March, they lowered expected growth modestly, to 1.2%. Past experience had suggested a short, sharp shock to GDP, followed by a quick rebound being feasible. But Covid-19 spread asymptomatically, stymying containment efforts.
Countries responded with measures never used before: closing all nonessential businesses and schools, and ordering people to stay home. As economic activity came to a screeching halt, markets cratered and economists revised 2020 US growth to -4.9% in April; then to -6.6% in May, the worst since the Great Depression.
But economic activity bounced back much more than expected; and by December, economists thought US GDP will fall 2.7% in 2020. The twists and turns of private forecasts were echoed by official bodies.
The Fed said in June GDP would contract 6.5% in 2020; by September, revised that up to a 3.7% contraction and towards the end 2020, revised it up further to a 2.4% drop.
The smaller-than-expected fall in 2020 has led them to expect a smaller bounce back in 2021; the Fed’s estimate placed growth at 4.2%. The IMF now expects the US economy to shrink 8.2% in 2020 and grow 5.4% in 2021: a difficult climb that will be “long, uneven, and uncertain.” Still, many remain worried.
Policy makers who “prematurely declared victory and stopped fiscal stimulus” in the wake of the Great Depression in 1937-1938 (and in 2011, after the 2007-09 recession) ended up slowing the economic recoveries, now talk about a possible double-dip recession.
Where’s the office?
Headed into 2021, US and Europe continue to face a surge in coronavirus cases, new restrictions on business, cautious holiday shopping and slowing economic growth.
Forecasters now expect labor markets to remain weak. As the Covid-19 pandemic drags into another year, however, economists see several signs for optimism.
First, the recently enacted pandemic-relief legislative package will significantly stimulate the economy in coming months.
Second, with much of the services sector hobbled by the pandemic, US in particular has been saving an unusually high share of their income since spring, when the pandemic first prompted widespread restrictions on business activities.
Personal saving rate averaged nearly 13% in November, well above the 7.5% rate a year earlier. Many households will be able to draw on these reserves to boost spending once coronavirus-related restrictions ease, and vaccinations embolden people to venture out more.
These two factors together could fuel a resurgence in spending that will boost the economy in 2Q’21.
Third, borrowing costs are low, and most Federal Reserve officials expect the central bank will hold short-term rates near zero for at least three more years. US GDP is now expected to grow up to 5.8% in 2021 after contracting 2.5-3.0% in 2020.
2021 will be a critical transition year for the US economy. But the recovery’s shape would depend on consumers’ psychology, particularly whether and when they feel comfortable going back to spending as they did before the pandemic.
I would caution that the economy is likely to look different as it emerges from the pandemic, with some crisis-driven shifts proving permanent.
Companies are rethinking whether to bring workers back to offices and how much employees need to travel now that teleconferencing is a bigger part of daily work life.
US consumers have accelerated their embrace of digital shopping, telehealth consultations and online fitness classes while shunning malls, doctors’ offices and gyms.
No question, businesses will face a tough few month in 1Q’21. Bear in mind, US shoppers did spend less than in the previous year over a five-day stretch in November’20, including Black Friday and Cyber Monday. Retail sales dropped a seasonally adjusted 1.1% from the prior month.
For many businesses, the concern about 2021: “There’s literally no one on the streets” transcends to the bottom line.
What then are we to do?
As I see it, we now appear to be at a turning point in the pandemic! Many people, myself included, have since been working much more from home. For months, it has been hard to shake the feeling that this will last forever.
Today, we are contemplating a vaccine-fuelled return to normality-maybe not today, maybe not even tomorrow, but soon. Temporary disruptions can have permanent effects.
Sometimes they leave scars that do not completely heal; sometimes, a crisis teaches us lessons we can use, even when it has passed.
Both workers and employers have since sunk considerable time and effort (including much expense) in acquiring some equipment and skills necessary to support the change.
Such investments will make working from home (WFH) cheaper and more tempting in future. I suspect, however, that the crucial step is not investment but information. I for one has learnt that WFH is more productive than we had guessed.
Studies on remote work I have read suggest that when people switched to remote work, overall productivity increased. For sure, office space cost will fall.
All this suggests that the pandemic will be the jolt that pushes us into doing the remote working we should have been doing all along.
But I am not so sure. True, sitting in an open-plan office allows a team to muddle through without realising quite how much time they waste on busywork, chatting, and co-ordination. Yet, face-to-face contact is essential.
For sure, the crises teaches us how to do productive and fulfilling WFH. But it seems that most of us, most of the time, are destined to return to the office in due course. It has become habitual. If so, I hope the crisis teaches us how to do productive and fulfilling work, wherever we may be.
Former banker, Harvard-educated economist and British Chartered Scientist Prof Lin of Sunway University is the author of “Trying Troubled Times Amid Trauma & Tumult, 2017-2019” (Pearson, 2019). Feedback is most welcome. The views expressed here are the writer’s own.
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