In one word, 2020 was unprecedented. None of us could have even imagined that what seemed as just a regional virus at the beginning would end up becoming a once-in-a-century pandemic that would force many countries into months of lockdown and prompt such global health, economic and social crises.
Looking back on 2020, we see a global economy that was sent into what is likely the deepest and fastest recession since at least World War II.
What is even worse, it is not yet clear when a full recovery could happen.
Indeed, the spread of the coronavirus pandemic, which at last count has sadly infected nearly 83 million people and caused around 1.8 million deaths worldwide, dominated growth, markets and, of course, our daily lives throughout the year.
We now focus on what to expect beyond lockdowns, the virus and the vaccine in 2021.
Recent breakthroughs on the coronavirus vaccine front have brightened the outlook for economic recovery. Yet, at the same time, the recent surge in new virus cases has prompted renewed lockdown restrictions across Europe, the U.S. as well as other parts of the world that could hamper the return of activity to pre-pandemic levels.
The first part of 2021 will continue to be difficult, according to economists. Yet, they say, the second half could see the first synchronized global recovery in a long while.
It is a common view that there will be obvious improvement in the global economy in 2021, mostly because it will not be hard to be better than 2020.
“The horrible and unprecedented year,” is how Carsten Brzeski, global head of macro at ING Research, looks at 2020.
“Needless to say that this was the worst year for most economies since the financial crisis. It was also a year with almost unreal swings of most economies. Minus 15% QoQ (quarter on quarter), plus 15% QoQ. Swings at least developed economies had not seen for a long while,” Brzeski told Daily Sabah.
It was, however, also the year in which particularly in Europe fiscal policy finally took over from monetary policy, he says.
“The human toll has been enormous. In my professional role, I have to focus on the impact for the economy. Huge swings, unprecedented policy actions, but also a return to national reflexes which only in the second half of the year gave room for more European or simply international cooperation.”
For Alvaro Ortiz Vidal, head of Big Data Research and Chief Economist for Turkey at BBVA Research, it is “a year to forget” but “with important lessons too.”
“It has been a challenging and unprecedented year, no doubt,” Vidal told Daily Sabah.
He says the pandemic has demonstrated “how fragile the human being could be especially if we do not pay enough attention to important things such as health conditions and investors or issues such as climate change.”
“The response by global policymakers has been extraordinarily important to limit the immediate damage by supporting ample liquidity and support the vulnerable people,” Vidal noted.
He stressed that policymakers have also learned that “while these policies have so far avoided a full-blown financial crisis, long-term fiscal policies and reform will be necessary to manage a complete exit from the 2020 crisis.”
Damage to be felt for years
The lockdowns in China in the first quarter, followed by Europe, the U.S and much of the rest of the world in the spring halted cross-border travel and brought the economy to a standstill, pushing the world into a sharp recession.
Both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) projected a historic collapse in the global economy in 2020.
IMF forecasted the global economy would contract by 4.4% in 2020 and then mount a partial and uneven recovery, with global growth rebounding by 5.2% in 2021.
The damage inflicted by the pandemic will be felt for years, it said in its latest World Economic Outlook in October
In its latest Economic Outlook in early December, the OECD said the global economy would grow 4.2% in 2021, after shrinking 4.2% in 2020.
After the second wave of infections hit Europe and the United States, the Paris-based policy forum trimmed its forecasts from September, when it expected a global contraction of 4.5% before a 5% recovery in 2021.
Both institutions have warned of significant uncertainty amid resurging infection rates in many countries.
They both expect the global gross domestic product (GDP) to somewhat start returning to pre-crisis levels by the end of 2021.
Things to get worse before they get better
On whether the economies will be able to offset the effects of the pandemic and lockdowns anytime soon, Brzeski says it all depends on the individual firepower of governments.
“Some governments in developed economies are able to step up rescue schemes, others, particularly in more developing economies, are not. In general, the newest lockdown measures imply that things will get worse before they can get better,” he said.
Vidal indicated that emerging markets do not have the level of a financial safety net that the developed ones do, “so it is important for these economies to enhance financial stability to cope with large swings in capital flows.”
“This will continue to happen; what it is important is to limit both the collateral effects of inflows and outflows,” Vidal noted.
Debt pushed to all-time high
Governments around the world have revved up spending to escape the worst damage of the pandemic and protect jobs and support local economies.
Governments and central banks have extended a staggering $12 trillion (TL 88 trillion) in fiscal support and unprecedented monetary easing to cushion the blow, IMF said in October.
Coupled with sharp falls in tax revenues, these came at a heavy cost, as the fund said the massive government spending to battle the pandemic will push public debt to a record of nearly 100% of global economic output in 2020.
It still said that governments should not remove support.
“With many workers still unemployed, small businesses struggling, and 80 (billion) to 90 million people likely to fall into extreme poverty in 2020 as a result of the pandemic – even after additional social assistance – it is too early for governments to remove the exceptional support,” the IMF said.
“The crisis is still not over,” according to BBVA’s Vidal. “But looking at the situation we were in March, it could have been much worse.”
The world will have to live with some kind of mobility restrictions until a widespread distribution of vaccines, probably in the second half of the year, he says.
He noted that the second wave of mobility restrictions focused more on households than corporations (except restaurants and tourism), “so the damage will be more limited.”
“What is clear is that they should continue to be applied until cases of infections return to safer levels.”
Still, he said, the cost will be very different than the first wave for several reasons.
First, Vidal underscored that the economies are not imposing full lockdowns as they did in March through May, which significantly limits the economic damage of the supply side.
“Second, according to our daily big data, the deceleration is basically in consumption of services including restaurants, hotels, travel ... the rest of the economy is moderating but not contracting. Third, some of the sectors have adapted very rapidly to the situation thanks to the use of new technologies,” he said.
What about Turkey?
Driven by fiscal stimulus and the lifting of virus-related lockdowns, Turkey’s economy roared to a more-than-expected 6.7% growth rate in the third quarter, after contracting by 9.9% in the previous three months when lockdowns were imposed to curb the initial coronavirus wave.
The burst of growth included a more than 15% jump from the previous quarter.
Ankara projects a growth of 0.3% this year but has said a contraction of 1.5% is possible under a worst-case scenario. It projects a rebound of 5.8% in 2021.
According to Vidal, the supply side of the economy was performing somehow better than expected, which has prompted a V-shape recovery in some economies such as Turkey.
“Some economies such as China, Turkey and to a lesser extent Germany had a much better than initially expected 2020,” he said.
The recent data shows that the U.S. could see a positive growth rate in the last quarter, and the most recent indicators show that Germany could avoid the negative quarterly rates in the fourth quarter, he noted.
Looking at 2021, Vidal said, there will be also extraordinary circumstances in Turkey as the carryover will be very high in Turkey as in other countries.
“That means that even with zero growth in quarterly rates, the Turkish GDP will grow near 4% in 2021 as yearly growth in the second quarter will be extraordinarily high. This is an important floor which makes us expect a growth near 5% in 2021,” he said.
However, Vidal underscored that policymakers should not be obsessed with growth, stressing that “if the economy finally grows by 1 or 2 percentage points lower but this contributes to reduce further the risk premium and restore credibility this should be welcomed.”
“This should make growth in 2022 and beyond high and sustainable,” he said.
Vidal is optimistic for several reasons.
First, he said, economic growth in 2021 will be higher in most parts of the world as the base effect will be really high and capacity utilization rates are still below potential in most countries.
“This will contribute positively to the net external growth in goods. Still, the necessary mobility restrictions will be effective during the first part of the year, but if the vaccines prove to be effective, we will also witness an important boost to the economy, including the tourism sector in the second half of the year.”
In addition, the domestic demand growth will be more balanced after the recent and necessary changes in policies, he added.
He noted that monetary policy will be tighter and activities more sensitive to interest rates and credit which will adjust to the new financial conditions.
Vidal underscored that the decrease in the risk premium will improve the investment climate, and the recent appreciation of the Turkish lira will also ease the financial conditions of the exchange rate corporate debt.
“I think that a rebalancing of the policies with a tighter monetary policy to restore credibility and fiscal policy targeting the more vulnerable households and corporations would be more optimal and will reduce the financial stability risks,” he said.
1st synchronized global recovery?
ING’s Brzeski said they expect most economies to go through a soft patch, possibly even a recession, in the fourth quarter of 2020 and the first quarter of 2021.
“The rolling out of the vaccine has already started and with it we should see a gradual easing of the lockdown measures in spring. This should also be the moment in which a global recovery could finally take off,” he said.
“The first part of 2021 will still be difficult, but the second half of 2021 could see the first synchronized global recovery in a long while. There is still plenty of monetary and fiscal stimulus. Together with an easing of the lockdown measures and the vaccine, the outlook for at least H2 (second half of) 2021 is not too bad,” Brzeski noted.
According to Vidal, most economies will experience a significant positive base effect during the first part of the year.
It will start with a dramatic rise in the first quarter in China and will move to Europe in the second quarter, he said.
“The 2021 economic outlook should be supportive,” he said, stressing that the vaccines will be operative this year and the world could reach a significant vaccination ratio by summer.
Vidal also stressed economic policies would be very supportive in the biggest economies with zero interest rates in the U.S. and Europe and that the implementation of the fiscal packages could start to accelerate in the second part of the year.
“Economic growth in 2021 will be higher in most parts of the world as the base effect will be really huge in 2021, especially in the second quarter,” he said, suggesting that the carryover would become apparent in the second quarter, marked by “extraordinary positive yearly growth rates.”
“Thus while very loose monetary policy and base effect will play an important role in the first part of the year, the fiscal impulses and increases in the vaccination ratios will maintain growth in the second part of the year,” Vidal said.
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