Given how prominent the “black swan” factor was in 2020 with the raging Covid pandemic, there is every reason to keep an eye open for possible unexpected events in the year 2021. The good news is that while there may be more “black swans” to watch out for, the awareness and preparedness of the global economy may result in a stronger immune response, writes Yaroslav Lissovolik, Programme Director of the Valdai Discussion Club.
As the world economy comes to its senses after a gruesome year of the Covid pandemic, global markets are eagerly exploring the prospects for the new year in search of drivers of a strong global recovery. Indeed, while it may be still too early to call an end to the adverse effects of the pandemic in 2021, there is a sense that the global community is starting to act more collectively in mustering a coordinated response to the crisis. This was reflected in the G20 summit communique in November 2020, which exhibited a greater determination of the global community to jointly counteract the unprecedented crisis facing the world economy.
There are a host of key themes for the 2021 outlook that to a significant degree emerge as derivatives and after-effects of the preceding year. Nonetheless, the drivers for the recovery of the global economy next year are not circumscribed to the proverbial “low base effects” and include such key locomotives of global growth as China and East Asia more broadly as well as continued support and anti-crisis measures across the largest advanced economies:
Global economic recovery in 2021 — after a 4.4$ decline in 2020 global growth is projected by the IMF to exceed 5% in 2021, with most of the growth coming from India and China — the two giants from the Global South are expected to growth by more than 8%, allowing the global economy to largely compensate for the decline experienced in 2020.
Discontinuation of the trade war between the US and China: the shift away from protectionism to trade liberalization next year is by no means guaranteed. But a change in the presidential administration in the US, the creation of mega-regionals such as the Regional Comprehensive Economic Partnership (RCEP) and a more benign outlook for the global economy provide scope for greater market openness.
Further rise of China and the Asia Pacific as key sources of global demand and as rising global economic powers. In case current growth trends were to persist for the next 3-4 years, China could overtake the US in terms of the absolute level of its GDP (based on market exchange rates) by 2024-2025.
New rounds of stimuli — monetary stimuli will persist in 2021 as the Fed has indicated that it will not raise its key rate earlier than the year 2024. On the fiscal side while most of the largest economies will likely reduce the level of the budget deficits compared to their 2020 peaks, there could well be new rounds of stimuli both in the US as well as in the EU. This is looking increasingly likely given the longer and more severe evolution of the pandemic compared to expectations in 2020.
Waves of the pandemic and the emergence of new vaccines — the developments in the course of 2020 amply demonstrated the strong effect on financial markets of the newsflow regarding the spreading of the pandemic and testing of new effective vaccines. According to RAND’s estimates the creation of a new effective vaccine against Covid-19 can deliver dividends to the world economy equivalent to 3.4 trn dollars, which is more than 4% of global GDP per annum. At the same time the costs of the so-called “vaccine nationalism” are estimated at more than 1 trn dollars per year.
Development of new technologies: the pandemic has given rise to “new demand” that is concentrated in health-care and digital economy/telecommunications. One of the priority areas of anti-crisis measures in China is the development of the 5G network, with allocations for digital infrastructure to reach 0.6 trn dollars.
Russia’s economic performance next year will be affected to a significant degree by global trends, though the effectiveness of its anti-crisis measures as well as capabilities to weather the onslaught of the pandemic may prove to be no less important. On the monetary policy front the stimulus delivered throughout 2020 (a reduction in the key rate of 200 basis points) may be further reinforced through further reduction of the key policy rate. On the fiscal side, however, in line with the budget projections for next year Russia is preparing to reduce the size of budget outlays as a share of GDP by nearly 3 percentage points in 2021.
Russia’s electoral cycle is also likely to lead to a redistribution in fiscal outlays in favour of social spending. In particular, Russia’s legislative elections to the Duma, the lower house of the Federal Assembly, are scheduled to take place no later than 19 September. In the past Russia’s electoral cycles have been typically accompanied by a redistribution of budgetary funds away from capital spending (infrastructure, investment projects) towards current outlays (supporting the social safety net, incomes and social transfers of the wider strata of the population). This has already been reflected in a re-orientation of outlays away from infrastructure towards social outlays within the revised framework of Russia’s National projects.
Last but not the least, given how prominent the “black swan” factor was in 2020 with the raging Covid pandemic, there is every reason to keep an eye open for possible unexpected events in the year 2021. The current economic and political landscape appears to offer a wide range of possible adversities of varying degree of probability. Some of the possible “black swans” for 2021 may include a downturn in US-Russia relations with the coming of the Biden administration, geopolitics in Russia’s “near abroad” as well as the extended continuation of the waves of the Covid pandemic. The good news is that while there may be more “black swans” to watch out for, the awareness and preparedness of the global economy may result in a stronger immune response.