As 2020 draws to close, we can be forgiven for exclaiming ‘good riddance’. Pandemic, illness, death and fear characterized 2020, as did soaring unemployment, bankruptcy and social division.
Yet, in this annus horribilis, the resilience, perseverance, flexibility and innovation demonstrated by individuals, institutions, societies and governments alike in coping with the pandemic and its devastating economic repercussions has been stunning. The worst may not yet be over, but we should pause in this season of giving thanks to recognize humanity’s common resolve, ingenuity and strength that has been on inspiring display over the past nine months.
At the end of this most calamitous year, it is possible to envision a brighter 2021. The arrival of effective vaccines and the restoration of stabilizing political norms in the United States offer needed hope for the year ahead.
So, what are the forces and events that are likely to shape 2021, across economics, politics, and the financial markets?
The pandemic and its economic implications
Let’s begin with the pandemic. We are not scientists, but based on considered opinions, it appears likely that by end-2021, hopefully sooner, widespread and effective vaccination against the Covid-19 virus will be achieved globally. Much depends, of course, on large-scale production, distribution and acceptance of the vaccines nearing approval from various public health authorities.
Vaccination will likely begin with ‘front line’ workers – doctors, nurses, hospital and medical staff – as well as with those most at risk, such as the elderly or people with identified risk factors. Yet according to some estimates, a quarter of the general population of industrialized countries could be vaccinated by mid-2021. Vaccination coverage in rural areas and in many emerging and developing countries may take longer. Nevertheless, vaccinations that confer protection at low risk are likely to gain rapid acceptance in the population. As vaccination rates climb, restrictions on mobility and social distancing will fall, allowing economic activity to resume at higher levels than currently possible.
Accordingly, it is highly probable that 2021 will see a significant global economic recovery accompanied by strong jobs growth. As economic and financial risks fade and as household and business incomes rise, demand for goods and services will expand sharply. Pressures on government finance will abate, as pandemic and recession-related expenditures recede and tax revenues rise.
Given massive fiscal expansion underwritten by unprecedented monetary easing in 2020, some observers might conclude that economic recovery will be accompanied by surging inflation. That’s unlikely, at least for now. Some prices, particularly of supply-constrained commodities, may jump. But a broader acceleration of prices and wages requires both the restoration of full employment, which is unlikely to be achieved in a single year, and rising inflation expectations, which could take much longer.
Therefore, it remains highly probable that as a result of current below-target inflation, central banks will remain accommodative for much of 2021, if not longer. This should be expected for the Federal Reserve, which earlier this year endorsed an overshooting of its 2% inflation target. But it is also likely for the Bank of Japan and the European Central Bank, both of which have been stymied for years in reaching their modest inflation targets.
Nor is accelerating inflation a given beyond 2021. Much depends on how governments address fiscal policy. Past Democratic administrations in the US have put a strong emphasis on deficit reduction. We expect this will not be the case under a Biden Administration, but it is worth noting that the starting point of double-digit budget deficits and triple digit government debt levels as a percentage of GDP must be addressed before too long. Fiscal tightening could brake inflation for much longer.
Beyond economics, the end of 2020 also brings other probable public policy changes. The incoming Biden Administration will aim to restore alliances, renew international institutions and re-engage in the global effort to tackle climate change. Constructive international engagement will replace ‘American First’. Trade rhetoric will be toned down and self-defeating tariffs pared back or removed.
Still, it would be a mistake to believe that the last four years of US foreign policy were a complete aberration. Confronted by deep disillusionment in its electorate associated with globalization, the strategic threat of a rising China, growing cybersecurity challenges and a desire (founded or not) to ensure first-mover advantage across an array of critical new technologies, no US administration aspires fully to the status quo ante.
Tariffs may go by the wayside, but enforcement of patents and intellectual property rights, standards on procurement, enforcement of anti-trust laws internationally and a host of other issues will provide fodder for global disagreement between friend and foe alike.
In 2021 it will become clearer that economic, political, security and even military divisions that have surfaced since the end of the Cold War are not primarily the result of individuals who happen to lead countries. Rather, they are the by-product of longer-term shifts in both military and economic power.
With the demise of the Soviet Union, the threats of a revanchist and expansionist Russia did not go away. Rather, under the Putin dictatorship Russia has become more pernicious and threatening to its immediate neighbors, including former Soviet satellites. Although not a fundamental threat to the US, Russia’s continual testing of European airspace with its strategic bombers and its Ukraine annexation precedent suggest the US may yet face pressure to confront its Cold War foe in some form.
The emergence of China as a superpower, both economically and militarily, has forced fundamental shifts in alliances, resources and political attention globally. The Biden Administration may seek to resurrect a version of the defunct Trans-Pacific Partnership, but China has arguably filled much of that trade leadership opportunity by partnering with fourteen other countries, including Australia, Japan, and South Korea to sign the Regional Comprehensive Economic Partnership free trade agreement. Beyond trade, it would not be surprising to see China test the new US leadership with aggressive moves to bring Taiwan and Hong Kong further into its fold, and through expanding its man-made island territorial claims. It seems clear that China aspires to hegemonic status in its extended geographical footprint, which could bring it into conflict not just with the US, but potentially with Japan, the Philippines and Vietnam, among others.
The US drift away from Europe, including the UK, is a function of mega-trends, not personalities. Joe Biden may be a welcome relief in Berlin or Brussels, but US interest in Europe’s security or Europe’s foreign policy preferences fundamentally changed long ago. Unilateral interest dictated America’s interventions and policies in the Middle East since 1990, for example in two wars against Iraq, both to varying degrees against Europe’s will. Only when America’s interests are reinforced by Europe’s, is a common front likely, for instance in the Iran nuclear deal.
2021 is likely to bring more, not less, evidence that Europe must enlarge and deepen its own economic, security and military capabilities. President-elect Biden may soften the rhetoric, but he cannot change the strategic realities.
Rapid developments in energy technology, as another example, will continue to undermine international policy norms. Seeing their economic power diminished by vast increases in US fossil fuel production in recent decades, former Mideast adversaries are being forced to rethink alliances, even going so far as to pair up as ‘frenemies’. Witness, for instance, the normalization of relations between Israel and the United Arab Emirates, or the recent visit of Prime Minister Netanyahu to Saudi Arabia. Why? Because as the oil-rich, Sunni states of the Arabian Peninsula lose economic power, their assessment of risk shifts from Israel to their population-rich, historically adversarial Shia neighbors, above all Iran.
Less vitriol, but division will not go away
2021 holds the promise of pandemic relief and economic recovery, driven by astonishing human innovation and resilience. But the political demise of Donald Trump in 2020, which may one day be followed by the same for nationalists and populists elsewhere, should not be seen as akin to political vaccination, instantaneously resetting matters to a more agreeable past.
The year ahead will usher in greater predictability and less stridency in domestic and global political affairs, but it will also highlight that forces greater than individuals divide us and create conditions for strife. It is those fundamental dynamics that we must address if we are, collectively, to embark on a more sustainable economic and geo-political path.