Jim Power: It's not all about the vaccines - reasons to be cheerful about the economy in 2021
President Donald Trump: His successor President Joe Biden is likely to get the US to reengage with the climate change agenda, which is absolutely essential for the survival of the species. File picture: Andrew Harnik
The inherent risks involved in economic forecasting were more than adequately demonstrated once again in 2020. At the beginning of the year, I was certainly somewhat upbeat about prospects for the global economy.
My relative optimism was predicated on a belief that a hard Brexit would be avoided at the end of January, and that ahead of the US presidential election in November, president Donald Trump would seek to engineer an outbreak of peace between the US and China on the trade front.
By the middle of February, I was starting to feel comfortable about my views, as a hard Brexit was indeed avoided, and a semblance of peace broke out between the US and China. So far so good, but then everything changed utterly in early March.
The impact of Covid-19 on the global economy and global policy-making has been quite extraordinary, and it will continue to exert a significant influence on global economic activity and policymaking well into 2021.
The economic performance of different countries in 2020 was heavily driven by the path of the virus; the structure of the economy, with those countries with a heavy dependence on tourism most adversely affected; and the manner in which the authorities restricted economic and social activity.
It is still too early to reach any definitive conclusions about which countries handled the virus best, because the relative performance of different countries tends to ebb and flow, and within the space of weeks various regimes went from hero to villain and vice-versa.
It is probably the case that more authoritarian regimes such as China, found it easier to shut down economies and societies, than more liberal countries such as the US. Even within the US, the performance from state to state varied significantly.
As we look forward to 2021, dare I say it, there are grounds for greater optimism.
However, this optimism is very firmly based on a successful global rollout of safe and effective vaccines.
Of course, the sense of optimism also has to be tempered by the new strain of the virus that was highlighted in the days leading up to Christmas.
The speed at which the various vaccines were developed and approved is very impressive.
Assuming the virus is gradually brought under control in the first half of 2021, we are likely to experience a significant rebound in business investment, global trade, consumer spending, and international travel.
In other words, the economic activity that has been artificially put-on hold could rebound very quickly, akin to a coiled spring being released.
However, as we moved towards the end of the year, serious restrictions were being reimposed all over the world, and this is likely to remain a recurring reality until the vaccines are safely and effectively delivered in sufficient quantities. In other words, the early months of 2021 could be very challenging, but there is light at the end of the not-too-distant horizon.
The various vaccines represent the source of light. Here's hoping.
Another source of optimism in the coming year is the fact that the very divisive president Trump will be replaced by Joe Biden.
The platform on which president-elect Biden built his 2020 election campaign was called Build Back Better. This basically revolves around fostering economic recovery; improving infrastructure; bringing broader benefits to lower-income communities and minorities; improving education and the skills of the workforce; and creating a greener economy and society. If delivered, this would be a very positive agenda for the US economy and its very divided and unequal society.
Of perhaps greater relevance is the fact that Biden is likely to have a much more global and internationalist perspective. He is likely to adopt a much more positive approach to global international relations, and particularly seek to rebuild the somewhat damaged relationship between the US and the EU.
The future relationship with China is a different matter because the more confrontational approach that president Trump adopted has understandably a high level of popular and political support within the US.
It is also likely that president Biden will liaise more with the EU in relation to the most appropriate and hopefully united way to approach the economic and political threat posed by the rapid emergence of an increasingly strengthening China.
It is worth noting that China was one of the few economies to deliver positive economic growth in 2020.
One way or another, president Biden is likely to represent relatively good news for global co-operation, global trade, and multilateralism.
In addition, he is likely to get the US to re-engage with the climate change agenda, which is absolutely essential for the survival of the species.
Notwithstanding the uncertainty around the immediate path of the virus and the uncertainties around the various vaccines, there are grounds for hope that from a global economic perspective, 2021 will be a better year than 2020.
One real positive to come out of the Covid-19 crisis is that central banks and governments around the world reacted quickly, aggressively, and in a co-ordinated manner to address the unprecedented challenges. Indeed, the US Senate has voted overwhelmingly to approve a fiscal stimulus package of almost $900bn (€745bn), which is the second-largest economic relief bill in US history. The biggest was in March.
This sort of fiscal reaction is common to many countries around the world, and thankfully conservative fiscal orthodoxy did not prevail.
On the policy front, one of the challenges for policymakers over the coming year is that if there is a strong vaccine-related rebound in global economic activity, how will and how should policymakers react.
The problem is that governments and central banks around the world have injected massive stimulus and liquidity into the global economy and financial system over the past year. This has come via very expansionary fiscal policy; aggressive quantitative easing; and zero or near-zero official interest rates almost everywhere.
It seems unlikely that inflation will come back with any sort of vengeance, and any spike in certain prices is likely to be a once-off rebound from artificially depressed prices in some parts of the global economy due to Covid-19. The pandemic was very definitely a deflationary rather than inflationary event.
Even if inflation were to start to pick up, policymakers would and should be very limited in their response.
In an environment where governments everywhere are borrowing and running up significant budget deficits and debt, it is essential that long and short-term borrowing costs are kept as low as possible for as long as possible. In terms of debt sustainability, the last thing the world needs is any uptick in borrowing costs.
Central banks will just have to suck it up and accept a bit of inflation in the system.
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