{{ __('Skip to content', 'foundations') }}

Economic outlook: looking ahead to 2021

How we get past the Coronavirus pandemic will be a defining moment of 2021. The direction of the United States under its new President, Joe Biden*, will also be watching closely around the world.

Coronavirus pandemic and solutions on offer

The Coronavirus pandemic remains a concern as we see new waves emerge, particularly in Europe and the United States. In Australia, thankfully, the case growth is currently well-contained and the emphasis is now firmly on economic recovery.

Without a vaccine we are likely to see new lockdowns and restrictions on people’s movement as a backdrop of 2021. These remain one of the few options to counteract new surges, but we also expect governments will moderate how far they go to reduce the economic cost.

On the vaccine front, we could see some good news by the end of 2020 with several large-scale trials expected to be finalised. The belief, based on promising initial results, is that one or more of these options will meet the US Federal Drug Administration (FDA) approval, setting the stage for a broader roll out in 2021.

How might the world be shifting politically in 2021?

The victory of Democrat challenger Joe Biden over President Trump in the in recent Presidential election is likely to see a range of changes in how the US is led going forward.

Domestically, it is likely he will push for a more coordinated response against the pandemic. He is also likely to push for additional US Government stimulus to offset a new surge in Coronavirus cases. He cannot implement his more radical campaign promises, such as higher corporate taxes, without a Democrat Senate. This may still happen if the Democrat party wins runoff elections next January. Although we will see vote recounts in some states, given Biden’s lead at the time of writing, this is unlikely to change the outcome. Likewise, we expect legal challenges to ultimately falter given the limited legal grounds to contest the result.

Internationally, we believe a Biden Administration will focus on rebuilding relations following years of unilateral action under the Trump Administration. This could see a softer approach on China relations although, given the China concerns within the US, we think a return to a pre-Trump era is unlikely. Elsewhere we expect to see more attention pivot towards China as the country celebrates the centenary of the founding of the Communist Party. The country’s efforts to climb up the technology value chain will be a source of further tension given the long US dominance. The rise of China has implications for Australia, with diplomatic relations strained following Australian support for an inquiry into the Coronavirus pandemic and inflammatory rhetoric by Coalition MPs. It is an area that has had investment impacts already with Penfolds producer Treasury Wine Estates one of the latest companies targeted. This behaviour by Chinese authorities may continue as they look to prioritise their interests in the broader world.

Global economic outlook

March 2020 likely marked the short-term bottom in terms of the market impacts of the recession. It will take economies some time to recover. We expect the recovery to continue in 2021 as countries recover from Coronavirus at their own pace. Risks loom, including surges of new infections that raise the chance of continued lockdown restrictions. Another is the expiration of temporary mortgage payment deferrals and bankruptcy proceeding suspensions. In 2021 we could see a surge in business closures (and potentially rising job losses) with temporary Government stimulus set to taper off. Importantly, across most major economies the growth momentum is strong with the JP Morgan Global Composite PMI (a good proxy for global economic health) at a 28-month high in October, even with weakness in Europe.

The Chinese economy looks set to continue growing at a solid pace with an emphasis on investment spending benefitting Australian exports – particularly iron ore. In Europe the new wave of the pandemic will take time to overcome and could see negative growth during the December quarter. Unlike the global financial crisis, we believe European authorities have learned from their mistakes and will maintain Government spending, lowering the risk of cutting it off before the economy has sufficiently recovered. The European Recovery Fund (a giant fundraising exercise across the continent) will also support spending next year, offering some cause for eventual optimism.

Australian economic outlook

We will have confirmation that the recession is over with the economy moving back into growth from the September quarter. However, it will not feel like a recovery until all the jobs lost are clawed back. The Government’s 2021 Budget is attempting to promote a “business-led” recovery with investment spending and hiring incentives. However, that must be balanced against its removal of sizeable direct injections into the economy such as JobKeeper while limited immigration will be a headwind (fewer customers for businesses and less spending in the economy in general).

The gradual lifting of Victoria’s restrictions, and the resumption of trans-Tasman travel with New Zealand, will be notable tailwinds over the next year. We expect further Government support will be forthcoming, if required by another emergency.

On balance, 2021 will be a year of improvement and recovery.

*At the time of publishing this article Joe Biden is the President-elect and there are continuing discussions that President Trump may contest the outcome.

Source: IOOF Research

Previous
2020 US Elections update
Next
Which are you – a saver or investor?