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Will 2021 put us on the path to an economic recovery?
Vaccine hopes
2020 was overshadowed by the pandemic. So what do we see for 2021? In short, the vaccine will take centre stage, according to our Chief Economist, Samy Chaar. Thanks to new technology, we see a new generation of vaccines that are more efficient than their peers. For example, the flu vaccine has a 50% efficiency but according to recent studies we see that the new COVID-19 vaccine is over 90% effective. We believe that the vaccine will be largely distributed in 2021, which will put us well on the path to recovery.
The growth outlook
Growth wise, we expect 2021 to be the year of economic catch-up. 2020 saw the Euro area down 7% in terms of economic output but we expect growth levels of 4.8% in 2021 and believe that the zone will reach pre-COVID economic output levels by 2022. Over in the US, we expect 4.6% growth in 2021 and believe it is well on its way to reaching pre-COVID levels by Q3 2022.
Samy Chaar declares, “led by the vaccine, this catch- up will not be even…some sectors will lag whilst others will lead.” The tourism and hospitality industries have, and may continue to suffer, due to the consequences of the pandemic. Yet other sectors are doing well despite the current economic constraints such as the real estate market. It has remained robust and has seen a significant uptick in 2020, largely due to low interest rates. Discover more on our 10 investment convictions here.
Inflation fears?
Where we will have growth, we will see inflation but it’s likely to remain below target. Our Chief Economist Samy Chaar expects “moderate inflation” as economic activity will help lift prices. He goes on to explain that “some segments should improve such as airline fares” as we begin to re-open up our economies. This year did see some sectors increasing their pricing such as food delivery services but those should slow down in the near future. Inflation has been low across the US, EU and Switzerland and we believe it will normalise to moderate levels.
Recovering trade and employment levels
A vaccine led recovery and a return to normalcy in US policy should allow trade flows to expand. This will help boost the manufacturing and production of goods, which will lead to economic performance in those economies that are trade sensitive such as China or Switzerland. Trade went through a lot in the last five years due to plummeting oil prices, COVID-19 and Trump’s trade war with China. The “new US Administration is pro-trade” says Samy Chaar so trade recovery will “not only normalise in 2021 but likely go back into expansion”. Exiting this contraction is a significant game changer as it is unlikely that Mr Biden will, for example, threaten German automakers with tariffs and it is much more likely he will wish to trade further afield.
It’s not only trade relations and activity that will be affected. The pandemic hit many people hard and created a temporary surge in unemployment. However, Samy Chaar clarifies that, “many who lost their jobs are slowly, and surely, being brought back into the labour market.” Consumer spending has kept up momentum largely due to online sales and the huge amount of stimulus that was pumped into economies thanks to government intervention. This acted as an economic shield and we shall likely need continued safety nets, such as fiscal support and monetary policy, in order to secure a full recovery.
The question of debt
Evidently seeing mounting debt begs the question…how can this be repaid? Yet we should not be concerned with “debt backlash”, says Samy Chaar. Interest rates are low and will “remain flat until 2023”, he states.
And the interest payment on current debt levels is at historic lows. Before, debt sustainability rate thresholds were set around 4% yet today we are closer to 0%, or even below. Take Japan for example. Its government debt ratio to GDP ratio has been over 200% for years, but Japan has had no issue financing it and is perfectly solvent. We must accept this new paradigm shift concerning debt. The question really lies in how we use the debt not the size of it. We must focus on “using the debt wisely” and sustainably by innovating, tackling inequalities and investing in infrastructure.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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