From the great lockdown to the great rebound.
Projecting what the future holds is an important exercise for business and governments looking to plan ahead. In our first edition of 2021, we look ahead to the trends we expect to come to the fore in the global economy in the year to come.
In our main scenario we expect the global economy to expand by around 5% in market exchange rates, which is the fastest rate recorded in the 21st century. Our projection is conditional on a successful deployment and spread of effective COVID-19 vaccines and continued accommodative fiscal, financial and monetary conditions. Nevertheless, the next three to six months will continue to be challenging, particularly for the Northern Hemisphere countries going through the winter months as they could be forced to further localised or full economy-wide lockdowns (as recently displayed in the UK). Output in some advanced economies, for example, could contract in Q1 of the year. We think that economic growth is more likely to pick up in the second half of the year, which is also when we expect large advanced economies to have vaccinated a substantial share of their population.
By the end of 2021 or early 2022, we expect the global economy to revert to its pre-pandemic level of output. However, this picture masks an uneven pattern. At one end of the spectrum is the Chinese economy, which is already bigger compared to its pre-pandemic size. On the other end are mostly advanced economies which are either service-based (UK, France, Spain) or more focused on exporting capital goods (Germany, Japan) and are unlikely to recover to their pre-crisis levels by the end of the year. In these economies, growing but lower levels of output is projected to lead to push up unemployment rates. In its December 2020 economic outlook, the Organisation for Economic Co-operation and Development (OECD) projects an unemployment rate of around 7% in its member states compared to pre-pandemic levels of around 5.5%. Most of the jobs affected are likely to be those at the bottom end of the earnings distribution which is likely to exacerbate income inequalities. We therefore expect governments’ focus to gradually shift from fighting the COVID-19 virus to dealing with higher unemployment rates by upskilling their workforce and creating jobs in newly emerging labour-intensive sectors.
2021 will be the first year where the three main economies or trading blocs of the world — the US, the European Union (EU) and China — will refocus their efforts to fighting climate change. The US is expected to re-join the Paris Accord and host an international climate summit early in the year. EU member states are expected to finalise their plans to accelerate the transition towards a greener (and more digital) economy by the end of April. The EU Commission is then expected to release the first tranche of grants and loans worth around 0.5% of Eurozone GDP (or 5% over five years) to speed up the process. Finally, China’s 14th Five Year Plan is expected to be put to action — part of which includes increasing energy efficiency. This and other issues are also expected to be discussed at the United Nations Climate Change Conference (COP26) in Glasgow later this year.
Source: PwC UK