Will the vaccine determine the success of 2021?
Kaushik Rudra Global Head, Fixed Income Research & Head, Asia Research
16 Dec 2020
The outlook for 2021 has become significantly more positive following the recent successful trials of vaccines from multiple companies, providing a much-needed boost to market sentiment. While the vaccine will address many of the pandemic-driven economic fears, we must be mindful of the constraints on capacity and logistics, which make it likely that distribution will be uneven across countries.
Countries that already have agreements in place with vaccine manufacturers are likely to be positioned to recover sooner. In contrast, some Emerging Market (EM) countries are likely to be further down the vaccine distribution chain; while public-private partnerships should help some of them receive affordable vaccines as quickly as possible, distribution is still likely to be delayed. This may require social-distancing measures to stay in place for longer, slowing the pace of economic recovery.
COVAX – a public-private partnership co-led by the World Health Organisation that aims to develop and distribute vaccines to lower- and middle-income countries globally – is a potential solution for EM. For India, hard-hit by the virus, the development of the AstraZeneca-Oxford vaccine is a crucial breakthrough.
The vaccine’s benefits to the global economy are unlikely to be visible until H2 2021. With regulatory approvals on the cards over the next few weeks, vaccines should start being rolled out early 2021. We expect a sizeable share of the US and Europe – the hardest hit regions- to have access to vaccines by Q3.
Global growth will rebound to 4.8% in 2021, following a 3.8% contraction in 2020, according to our forecasts. The vaccine will, in particular, drive the recovery of travel and tourism, supporting the economic recovery. While our 4.8% growth forecast is well above global average growth of 3.7% over the past 10 years, the expected recovery next year will not fully close the output gap created by the COVID crisis. For instance, given their particularly deep recessions in 2020, the euro area and India are unlikely to return to 2019 GDP levels until 2022. Our growth outlook assumes that vaccines will be rolled out from early 2021 and available to large parts of the population by H2 2021.
Risks to this projection include supply-side inflation: supply-chain disruptions and logistics bottlenecks could cause raw-material and transportation prices to rise, potentially complicating the policy path for central banks. The sizeable policy response in 2020 has also left the policy cupboard relatively bare going into 2021; this would leave policy makers with less room for manoeuvre in case of another shock.
As investment picks up, the recovery is likely to strengthen in H2 2021. Earlier in the year, particularly in Q1, lockdowns and social-distancing measures are likely to continue to constrain activity. The economic impact of the current second waves in many countries is likely to be felt in early 2021. For instance, as of early-mid December 2020, the US and parts of Europe were still seeing elevated case counts.
Asia will drive the global recovery
Asia – particularly China and India – will lead the global economic rebound. China is likely to continue its strong recovery – we believe it will grow 8.0% in 2021, having already exceeded end-2019 GDP levels in 2020. Among Asian economies, India has faced the sharpest negative shock, with an expected GDP contraction of around 8.0% in FY21 (year ending in March 2021) so the expected pick-up in FY22 is largely due to the base effect. While growth is expected to improve further in 2022, this will still be largely a function of closing the output gap from 2020.
Central banks around the world are likely to maintain an accommodative policy stance until growth recovers on a more sustained basis.
We also expect growth in Sub-Saharan Africa (SSA) at 3.6%, MENAP at 2.0% and Latin America at 3.9% in 2021. The Middle East North Africa and Pakistan (MENAP) and SSA regions experienced less severe growth shocks this year, so their recovery is likely to be muted.
In Latam, we expect a healthy pick-up following a fairly sharp decline in 2020 and a few years of soft growth prior to that. We expect global growth to normalise to 4.0% in 2022. This is roughly in line with the average c.3.7% growth rate of the past 10 years, an improvement from 2.9% in 2019. This year, COVID exacerbated our already muted expectations of sub-par global growth at 3.3%.
Targeted policy response must continue
The outcome of the US elections is positive for the world economy. A Biden administration is likely to take a more multilateral approach, supporting global trade and cross-border commerce, which will aid the global recovery. While it may seem that policy makers threw the kitchen sink at the pandemic, lower interest rates, expanded balance sheets and large fiscal stimulus packages were all necessary given the need of the hour. However, these measures have depleted the policy cupboard and in case there are setbacks to the economic recovery next year, few options will be available on the policy front.
For more on our team’s thoughts on the outlook for 2021, watch the replay of our webinar.
Outlook 2021 – The road to redemption
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