What’s new in 2021?
Very little, let’s hope, now that a year chockablock with ugly surprises—a list starting with the coronavirus pandemic—passes behind us. The next 12 months promise a chance at a global recovery thanks to vaccines now being manufactured and distributed around the world. But it’s too early to let our guard down: The path forward for investors, policymakers, and everyone else is lined with pitfalls. That’s just counting what we can predict.
Forecasting the macroeconomic environment is not simple, but we can say that two things will affect global production above all else: The first is how quickly and where the pandemic is contained, and the second is how well policymakers around the world are able to repair the economic damage left in its wake. The latter is especially dependent on how American policymakers steer the world’s largest economy—its attempts at recovery will cascade across the rest of the globe, with consequences for every market.
The good news is that there’s every reason to believe a broad-based recovery is possible. Other recent recessions have left behind financial systems crippled by toxic assets, or permanently broken industries that forced economy-wide restructuring. In contrast, while the suffering and dislocation of the pandemic have been staggering, societies have the tools to provide relief and a speedy recovery.
However, even when the Covid recession recedes, the global economy will still be facing the myriad of problems it did before 2020, from trade wars to inequality to weak investment.
Table of contents
How quickly vaccines are distributed | The US recession hang-over | Lessons from the last recovery | What about the emerging markets? | What’s the “new normal?” | The central post-pandemic challenge | The glut that unbalanced the world | Searching for a new equilibrium
How quickly vaccines are distributed
The sight of at-risk patients and healthcare workers being inoculated against Covid-19 is a welcome one. But the road ahead is still many months long. The speed of economic recovery around the world will depend on the number of available doses of a vaccine, the ability to procure and distribute it, and the public’s willingness to be vaccinated.
The level of vaccination required to fully resume normal activity could take longer than many expect. While it is too difficult to say with any precision right now, epidemiologists estimate 60% to 70% of the population must be vaccinated before herd immunity takes effect; in the US that threshold may not be reached until the fall.
The best case scenario is that the all US adults who want a vaccine can get one by the mid to late summer, according to Dr. Vivek Murthy, who incoming president Joe Biden has tapped to be US surgeon general. Right now, the US has secured 400 million doses of the two most effective vaccines from Pfizer and Moderna, which could inoculate about 200 million Americans, but about half of those won’t be available until August. And beyond simply manufacturing enough vaccines, the challenge of distributing the doses is not straightforward, requiring the vaccines be kept cold throughout transportation and potentially facing shortages of specialized vials, hypodermic needles, and other critical supplies in the “vaccine chain.”
If there are not sufficient doses of those more effective vaccines, the US might need to distribute less powerful versions. The Pfizer and Moderna vaccines also require two doses for maximum efficacy, which could lead to challenges in fully inoculating people. (Depending on what we learn in the next couple of months, it might be wiser to simply give as many people as possible just one dose.)
The complex medical and ethical questions about who receives the vaccine first will also affect the path back to normal life—prioritizing the elderly and care workers will lower death counts, but if doses are diverted to the black market or otherwise given to people with lower risk, it could mean a longer wait for immunity throughout the population. While at least one major vaccine, the one developed by AstraZeneca, is intended to be sold at cost to increase access throughout poor nations, analysts already foresee shortages and inequities as countries around the world attempt to secure as much of the most powerful coronavirus inoculations as they can.
Rapid testing and precautions like social distancing and mask-wearing will still be necessary for much of 2020, and neglecting these measures could delay recovery. Beyond questions of availability, inoculation could also be slowed by reluctance to be vaccinated, particularly if driven by political polarization. Even significant shares of healthcare workers in some US states are reporting a reluctance to take the vaccine. Besides slowing the path to immunity where they live, they will also create a viral reservoir that could lead to reinfections in areas that have moved closer to controlling the virus.
How the US handles the recession hang-over
The unique impact of the coronavirus recession—an economic shock delivered by the fear of in-person gathering—makes a fast recovery possible. Unlike the case of trade disjunctures that can brush aside industries, there is no need to retrain large numbers of workers. Compared to past financial crises, banks remain solvent and willing to lend. And many households have done well, even saved more money than usual, thanks to their ability to work remotely during the recession.
The bankruptcies among restaurants, nail salons, bars, and small shops have real economic costs and painful personal consequences, but once people can congregate again, the resumption of business activity is likely to bring back growth. We saw as much earlier this year in many countries where the premature loosening of public health restrictions led to economic growth, until a wave of new deaths led to reimposed restrictions. The vaccine should prevent that dynamic from recurring, though experts warn that we are likely to see mini-outbreaks again as immunity gradually spreads throughout the population.
Yet there is still economic scar tissue that will need to heal, and it is not equally distributed throughout the economy. Many working-class Americans left unemployed will face eviction, debt, and the need to pay back-rent. Unlike the housing crisis, where the complexity of mortgage debt made relief more difficult to provide, this is a case where cash relief can solve the problem, much as the CARES Act in April allowed the US economy to coast through summer and early fall. “Ensuring that household balance sheets are solid, and we’re not going to walk into the recovery with bad student debt or bad housing debt or bad rent is really important,” explains Mike Konczal, a researcher at the Roosevelt Institute.
By year end, unemployment in the US remained high, and the summer’s rebounds in consumer spending, hiring, and industrial production started slow. Real-time measurements of the US poverty rate show that it fell thanks to the CARES Act, but has risen quickly as the effects of the spending diminished. In late December, US lawmakers enacted a second relief act designed to alleviate the pain caused by the pandemic recession, but one too late to prevent an interruption in access to federal aid.
Public support for people still suffering should make for a faster recovery, but lawmakers missed an opportunity to provide sufficient and more targeted aid to address the sectors most affected by Covid-19. The relief act’s extended benefits to unemployed workers expire in March, but it’s likely that joblessness will be elevated well past then. And, while the Paycheck Protection Program and checks mailed to households are an effective fiscal firehouse, a bill to provide grants specifically to independently-owned restaurants and bars, for example, was not included despite widespread appeals from the stricken food service industry.
The Fed learned the right lessons from the last recovery
The climb back from the 2008 slump was arrested in part due to a misguided decision by the US central bank to raise interest rates at the end of 2015. That call slowed growth without adding to the Fed’s ability to fight crises, and in the years that followed it became clear that unemployment could drop below the traditional 5% target without causing a surge of inflation. The unforced error meant millions of people went months or years without returning to work.
In response to the pandemic, the Fed loosened interest rate policy and took extraordinary measures to back credit markets, moves which helped insulate the US economy from the corona shock. Now, the central bank faces the same challenge: How to manage these measures without shaking confidence in the US recovery or swamping smaller economies with a stronger dollar.
This time around, Fed officials appear to be telling the markets that they don’t plan to abandon their support for the economy anytime soon, though some observers fear that the path of the recovery could lead to some strange price patterns and even the appearance of rising inflation that might spook the rate-setting committee. Ultimately, Fed watchers point to remarks like those from Fed governor Lael Brainard in July, when the influential policymaker promised “to avoid the premature withdrawal of necessary support.”
The Fed is not going to make loans directly to restaurants, hotels, and other businesses most directly affected by the pandemic—in part because Republicans lawmakers made a second relief bill contingent on forbidding the central bank from reopening most of the targeted lending facilities approved earlier in 2020. But actions to accommodate the recovery can still help. The sooner the Fed can get the US back to full employment, the easier it will be for affected workers to find new jobs and see wages increase.
What about the emerging markets?
The wealthiest countries have been able to use financial resources to ease the burden of the global recession, but less developed economies don’t have access to the same fiscal firepower.
The ability of these countries to manage the pandemic has varied considerably. Vietnam has proven a global outlier in controlling the coronavirus; its economy won’t shrink this year and it is expected to grow gangbusters in 2021. India, on the other hand, has seen a haphazard response lead to some of the highest infection levels in the world, with the IMF forecasting a more than 10% plunge in production this year. The uneven pace of vaccine deployment in these states will also be a key factor in the global recovery. One concern is whether wealthy economies will buy up the most effective vaccines, leaving poor nations in a bidding war for weaker medicines.
Still, China’s economic recovery, followed by that in the US and European Union, will provide precious demand for smaller, export-oriented markets. A big fear earlier in the pandemic was whether a global slow-down might lead to debt crises in countries that borrowed abroad or lack control of their own currency. So far, that hasn’t materialized, but the International Monetary Fund is still warning that ongoing weakness will continue to exacerbate the financial position of countries in south Asia, Latin America, and Africa. The pandemic’s specific effects on international tourism and trade, and on the exports of raw materials and particularly oil, also spell trouble for many of these markets.
Demand for oil has been dramatically affected by the pandemic; falling rates of air travel and activity in general have led to a glut in the oil markets and falling prices. The International Energy Association is not bullish on 2021: The organization forecasts demand for oil and gas will just barely reach 2019 levels.
What’s the “new normal?”
The current recession is much more bifurcated than usual. All recessions exacerbate inequality, but this one seems particularly designed to do so, thanks to the ability of many professionals to carry on working remotely, while lower-wage, in-person service workers have lost their jobs. The willingness of policymakers to support the arbitrary victims of the pandemic will be a deciding factor in how much of that inequality is permanent, especially if the vaccine is deployed at a slower rate than many anticipate today. In the US, the political environment—with control of legislation narrowly split between the parties—will not be conducive to ambitious relief measures.
Still, the good news, such as it is, is that those professionals have plenty of money to put back into the economy as immunity spreads. We’ve seen what this looks like in the US housing market, as home sales have risen as wealthier Americans seek homes outside of urban centers whose amenities they could no longer use. This has driven a rebound in contracting work and homegoods purchases.
No doubt some of this trend results from millennials who delayed home purchases being pushed into the market by the coronavirus shock, but some researchers suspect this may be an opportunity to break the trend of increasingly unaffordable urban housing that remains a key drag on US prosperity. Combined with the need to repopulate many downtown business districts and address massive financing shortfalls in underutilized public transit systems, one expectation might be a rethink of the urban cores of American metropolises.
The nature of the pandemic recession is that there are few villains: There are no bankers or irresponsible speculators at the heart of the problem to scapegoat and punish. In 2020, this made the politics of pandemic relief surprisingly bipartisan and unusually effective—at least for a moment—with household incomes rising even as production plunged. The same may not be true in 2021.
The global economy’s central post-pandemic challenge
Travel back in time with me to January 2020. US unemployment is at a record low, global production is growing, the stock market is high. Was the economy perfect? Of course not. The US and China were locked in a brutal trade war, driven by broader imbalances in the global economy. Developed economies faced sagging investment and deep-seated inequality. Emerging markets faced questions about slowing growth, falling oil prices, and growing debt loads.
That’s all waiting for us on the other side of the pandemic.
In 2021, the world’s supply chains will face a reckoning. The US and China remain locked in a trade war that is costing both nations, and it remains unclear how either the Biden administration or Beijing will extricate themselves from the situation. It’s clear from the results that the so-called “Phase 1 agreement” is an empty letter that China can’t make good on.
This year, China has moved to join a new southeast Asian regional trade bloc, the Regional Comprehensive Economic Partnership, a move that could shift investment. The US had been in talks about the creation of a competing agreement, called the TransPacific Partnership, but it’s not clear if or how it will reengage with the 11-state organization that emerged from these talks.
For incoming president Joe Biden, the political difficulty of ending the trade war will be avoiding accusations from political rivals and allies alike that he is being too soft on China. The tea leaves suggest that rather than focusing on tit-for-tat exchanges in a misguided attempt to control the trade disparity between the two markets, Biden’s team will instead try to reduce import taxes by cajoling China into policy changes on areas of US concern, such as the transfer of intellectual property—sometimes coercive—from the US to Chinese competitors.
Fundamentally, though, neither tariffs nor regulatory harmonization will solve the macroeconomic problem at the heart of US-China dysfunction; indeed, it’s not limited to this bilateral relationship. The trade tensions that have defined the 21st century—from the hollowing of the US manufacturing base, China’s growth as an export powerhouse, and the European Union’s internal divides—can be traced to how domestic policies in major economies interact with the global movement of capital and goods.
Focusing on this nexus isn’t new: Economic commentators have been urging China to shift its economy towards consumption for a decade or more. But the Trump administration’s rhetoric and policies, which were widely seen as unlikely to succeed since their inception, show that this framework still lacks the influence it deserves. The 2020 book Trade Wars are Class Wars, by Michael Pettis and Matthew Klein, puts a finer point on this argument: The visible signs of trade conflict—particularly the global low interest rates, a savings glut, and the yawning US current account deficit—actually result from domestic policies that pit the wealthy against the working class across national borders.
The glut that unbalanced the world
Their logic goes like this: Major exporters like China and Germany consume less than they otherwise might, due to policies put in place to keep wages low in order to improve the competitiveness of exports. There is nothing natural about this arrangement; it’s the result of class politics in which exporters and their allies in government prioritize export-driven growth over the well-being of the average citizen—often combined with and justified by a particular moral lens on debt and lending. This leaves these countries with budget surpluses, and limits the consumption of their people.
The result is a glut of global savings that needs somewhere to go—and most often, that is the US and assets denominated in its vital currency, the dollar. Cheap imports have lowered the prices of consumer goods and undermined manufacturing industries, but the larger effect is found in foreign purchases of US assets, from government debt to stock to real estate. Rising asset prices and deindustrialization have benefitted the US elite, while leaving working class Americans increasingly reliant on borrowing to maintain their standard of living. This bifurcation helps explain the backlash against trade in the US—it’s class politics all the way down.
In China, this plays out in the form of a limited safety net, mobility restrictions, and a state-driven investment policy that keeps wages low, attracting foreign investment, often from the US and Europe. This succeeded in growing the economy, but not necessarily in spreading prosperity widely.
Germany, the fourth largest economy, has adopted a similar economic strategy—holding down internal demand with tight government spending and limits on wage increases in order to drive up a surplus of exports and purchase assets abroad. Incredibly, consumption did not rise in Germany between 2001 and 2005.
These choices don’t take place in isolation: They require a foreign source for demand. For Germany, at first, these were the peripheral EU economies such as Greece, Ireland, and Spain, which saw asset bubbles fueled by German investors expand and then collapse amid the global financial crisis. Even the recovery from that episode was painfully slow, as the Bundesbank refused to allow the European Central Bank ease monetary policy for a fast recovery—a move that might have allowed its troubled neighbors to recover more quickly but might have reduced Germany’s surplus.
But the primary source of global demand is the US, and its massive current account deficit caused by its imports of foreign goods and the sale of assets like Treasury bonds, real estate, and equities—all of which is mediated by the Federal Reserve, increasingly not just the American but the world’s central bank. This has been exacerbated by economic inequality.
The Americans who earn the most are increasingly likely to save that money rather than spend it—consider that the 10 richest individual Americans alone own one percent of US assets. We saw this global savings glut in the bubbles in technology stocks and US mortgages, and we see it today in historically high stock prices and ultra-low interest rates for US borrowing. This pattern is only exacerbated during global crises like the pandemic, when investors look for the “safest” assets and tend to converge on US markets.
The consequences of these capital flows are stark: low wages, unrealized opportunity, missing jobs, political and social disruption. The developing economies that seek to ape China’s growth by feeding into the global supply chains that lead to the major export powers remain caught up in economic forces largely beyond their control.
Searching for a new equilibrium
Unwinding this imbalance will not be simple. Germany could invest more in its own country to spur demand and take steps to increase wages. Chinese leaders appear to be focused on running up a credit bubble and maintaining surpluses in exports and income earned abroad by continuing to purchase foreign assets. But Beijing could shift money from elites to workers, through progressive taxation, higher wages, and more economic mobility. It’s easy to see why both of these shifts might be unpalatable to decision makers, and how hard it might be to put external pressure on them to adopt them. Tariffs, as we have seen, are unlikely to get the job done.
Pettis has argued that one step towards redressing this imbalance would be taxing purchases of US financial assets. Such a policy would act directly on the current account deficit, reducing American borrowing, redirecting global savings back to its home countries, and perhaps improving financial stability as well. That policy may be a long shot, since its opponents include the US financial sector—which benefits from the status quo as the chief marketer of US assets to the world. And it runs contrary to the conventional wisdom that the US still benefits more from foreign investment than imbalances cost it.
For the US, policies that boost domestic demand and fight inequality could help address the global glut. Effectively, the US economic model is selling its assets abroad and giving most of the returns to the wealthiest people through tax cuts and a bull market; much of that money is not spent productively.
One way to change course would be to reinvest some of the cash earned by selling government debt at home—in transportation systems, energy infrastructure, and new housing. Raising minimum wages, reducing personal debt, and attacking business concentration that limit the opportunities for new firms to compete for both workers and customers would also help reduce that imbalance. That will be even more important after a recession that pummeled small businesses while increasing the power of large conglomerates. Overall, the US has suffered from a dearth of business investment, and returning money to the hands of people who will spend it here could lead corporations to start spending in the US again, too.
Ending the pandemic will mean a burst of growth and a return to normalcy. But the old global economy we are accustomed to was already on an unsustainable trend. Absent a rebalancing that pushes back on the extremes—or a utopian vision of a universal trading currency—the whole thing could spin out of control: The tensions in the world economy will eventually force the system to evolve—or dismantle itself. The macroeconomic story of 2021 is whether policymakers even notice this, much less take action.