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2021: a pivotal year
After a dramatic 2020, 2021 offers glimmers of hope.
While the fate of economic activity in the first half of 2021 will continue to depend on the course of the pandemic and hopes of the gradual development of population immunity, we may see an easing of restrictions on movement and a more sustained recovery in activity from the second half of the year onwards. This progressive return to normal should bring about the gradual withdrawal of economic support measures. That is when the true legacy of the crisis will become apparent, notably in terms of business failures and damage to profitability and jobs hitherto masked by extraordinary public, monetary and bank support.
The year ahead will be characterised not only by the existence of these contrasting forces but also by questions as to whether it is even possible to get “back to normal”. These questions will open up fundamental debates that will continue to run well beyond the end of the year and into the long term. The conclusions of these debates will shape the post-COVID “new normal”. The temptation to duck these questions – prompted by a fear of change or the conviction that the existing model is still valid – may be great.
The COVID-19 crisis is a bitter foretaste of various kinds of shocks (public health, climate, geopolitical, etc.) that are likely to hit us in the future, probably with greater frequency than in the past. The nature and power of these shocks forces us to think about the most effective way to configure our regulatory institutions so as to be able to withstand them. They are very different from the shocks that have regularly affected advanced economies since the Second World War, triggered by the accumulation of imbalances by certain economic agents.
The institutions that arose in the post-war years were gradually moulded to be able to respond to the first generation of shocks – those that resulted from excessive accumulation. In Europe, the model that established itself and forged our common institutions was that of regulated liberalism, on which the principle of the social market economy is founded. Under this model, the state guarantees the framework within which private agents freely operate. The state must ensure that markets can operate efficiently and prevent the formation of anti-competitive monopolies. Conversely, state intervention in respect of short-term economic management and social protection is more limited. The formation of the Economic and Monetary Union increasingly drew inspiration from the German conception of regulated liberalism (or “ordoliberalism”), which prioritised commercial considerations and the goal of price stability, inherent in a model that hinges around commercial power. The principle of moral hazard not only marked the boundaries of state intervention but also defined the approach to adjusting imbalances. The risk of forced redistribution between states that had not opted to pool their resources made this a necessity: any excessive accumulation of imbalances must be followed by a necessary correction, at the responsible party’s expense.
Does the new environment force us to call into question the fundamental philosophy underpinning the existing system? Probably not, but it will require us to make adjustments.
In the face of COVID-19 and other potential exogenous shocks, adjustment through market action is neither justifiable nor economically efficient. The end role of the state as insurer of last resort cannot be replaced by any other institutional mechanism with the same efficiency and democratic legitimacy. The idea of moral hazard is irrelevant when it comes to organising the management of debt arising from a shock of this kind. The leverage applied by market pressure can end up being in conflict with the objectives of fiscal policy and its role as a last-resort circuit-breaker. The goal of reducing debt in the wake of such a violent shock can require a differentiated repayment trajectory and monetary support.
The “Chinese wall” between fiscal and monetary policy erected in the 1980s was justified by a high inflation and interest rate environment. But with today’s structurally low interest rates, deflationary trends and high levels of debt, an approach based on cooperation and complementarity between monetary and fiscal institutions could prove more pertinent. A coordinated “division of labour” between central banks and fiscal authorities, by way of each incorporating the other’s goal into its reaction function, could contribute to greater efficiency and credibility without necessarily undermining the pursuit of their respective goals. In the long run, there is a risk of fiscal dominance if inflation picks up, the European Central Bank’s balance sheet shrinks or markets reprice sovereign risk.
It is therefore now essential to prepare for this long-term future by overhauling Europe’s governance structures, including by establishing democratically responsible institutions tasked with managing "pandemic debt". This is not a question of throwing out the existing model: it's a question of leaving current institutions to focus on small-scale endogenous shocks while laying out an appropriate framework for intervention in the event of major exogenous shocks.
The public health crisis has also shown us that the role of the state, which appeared to have been weakened by globalisation and financialisation, is still powerful and that a rebalancing of the relationship between state and society is underway. In Europe in particular, the unfolding of the crisis has highlighted the extent to which sovereignty is no longer just about a state’s ability to make decisions unhindered within its borders; rather, it’s about sharing sovereignty so as to extend control beyond the state’s borders. However, this entails constraints and necessitates compliance with treaties and conventions. These obligations are a necessary step if states are to protect their citizens’ living conditions. If this goal is hampered, though, we may see further attempts to “take back control”. The concept of liberal democracy is a very demanding one: rolling back the state’s role as economic regulator and buttress against economic inequality can quickly turn this concept into an oxymoron, amid growing tension between liberalism and democracy.
The COVID-19 crisis has upended and accelerated Europe’s structural transformation agenda. The European Union has put in place a powerful instrument to support this transformation, which will be instantiated at the domestic level in national recovery plans to be finalised during the first quarter of 2021. This transformation will trigger disruption (redistributing added value and jobs between sectors; changing productivity and competitiveness trends; and impacting thelabour force, income distribution and the sharing of profit/earned income). How well placed a country is to tackle these changes will depend on its specific structural characteristics (its specialisation, its competitiveness, its role in global and European value chains and the skill level of its workforce). Supportive policies and changes in governance structures will play a key role in each country’s success. The ability of countries to be part of new European supply chains, leverage technological breakthroughs and come up with better governance structures to manage this huge public expenditure while getting the private sector on board will determine who comes out on top in the post-crisis world. The ability of states to support this transition and limit the number of losers from the transformation will be a key factor in determining both their own legitimacy and that of European institutions.
Italy – 2021-2022 Scenario: 2021, same as last year?
The resurgence of the pandemic in Europe is expected to jeopardize the recovery begun in the third quarter. The new containment measures announced in early November are expected to negatively impact fourth-quarter growth; but the expected decline in GDP is nonetheless expected to be smaller than what was observed in the second quarter. Counting the fourth-quarter decline, 2020 GDP growth is estimated to be 9.2%.
Macroeconomic Scenario for 2021-2022: lasting scars after a chaotic recovery
After a persistently anaemic H1, vaccines and 'soft lockdown' strategies along with generous – and crucial – fiscal stimulus measures are opening the door to a modest yet, like the crisis, uneven recovery. This type of environment – marked by a slow, likely chaotic recovery; multiple uncertainties; and as easy a monetary policy stance as can be sustained – is good for keeping rates extremely low.
What will growth look like and how vigorous it will be? Will we still be governed by the pandemic and the trade-off between growth and health safety? It is a delicate bargain that we can only hope will be less radical than in 2020. Vaccines and 'soft lockdown' strategies are stirring hopes that growth can finally jump the 'stop-and-go' track of 2020. After a persistently anaemic H1, the recovery, nursed along by monetary and fiscal policy, is nonetheless expected to be modest and uneven. And then, the gradual reduction in stimulus plans will reveal the lasting scars of the economic shock wrought by this pandemic.
First off: a quick world tour by major geographic region. In the US, while the nature and timing of a new stimulus plan have yet to be defined, the resurgent virus is casting the shadow of a steep decline in H121. The acceleration expected for the second part of the year should lead to a recovery of 3.1% after 2020's limited contraction of 3.6%. At end-2021, GDP in volume terms is still expected to be slightly below its pre-crisis (ie, end-2019) level. In the Eurozone, where the consumer and corporate stimulus pipeline is expected to stay open, growth should hover around 3.8% after its 7.4% contraction in 2020. Based on structural features (including the sector breakdown of supply and jobs, the weight of services, export capacity and the suitability of exported products) and national strategies (the health/economy trade-off, how ample and effective the support measures are), both the extent of the shock and the speed and strength of the recovery will vary dramatically. Thus, at end-2021, although Eurozone GDP is still forecast at 2.4% below its pre-crisis level, the gap should be limited to 2.0% in Germany while remaining close to 7.4% in Spain and edging close to 2.2% and 3.9%, respectively, in France and Italy. In the United Kingdom, whether or not a minimum trade agreement is reached to prevent the hardest Brexit, the fallout of the pandemic will be joined by a de-nesting process. Following a major 2020 ontraction estimated at 11.1%, growth is expected to approach 4.5%, leaving GDP 3.8% below its pre-crisis level at end-2021.
In emerging countries, the economic recovery will be more difficult and more radically uneven than 2021 growth forecasts suggest. On the heels of a scant 3% contraction in 2020 should come a recovery of close to 5.6%. Behind this figure lies a very diverse landscape: an optical illusion masking both the immediate effects of the crisis, derived from stricter and more varied monetary and budgetary constraints than in the developed universe, and its lasting consequences in the form of a deepening structural gap between emerging Asian countries and the others. Asia, especially North Asia, has suffered less, and is preparing to rebound better, with China in the lead. In China, growth should once again approach 8% in 2021 after having paid only very modest dues in 2020, as it slowed to 2.6% while escaping the recession. So, can we count on China's energy to whip Asia into shape and get the rest of the world back on track, based on what happened in 2009? Well, no. As most of the catching-up has been exhausted, Chinese growth has slowed, and China no longer has the torque to tow the rest of the world behind it. In addition, it no longer wants to, as evidenced by its new 'dual circulation' strategy aimed at limiting its foreign dependence.
In essence, then, each will have to fall back on its own strengths: the large economies will be further aided by massive fiscal stimulus packages, ultra-accommodative monetary policies and favourable financial terms, which will also relieve emerging countries' external funding constraints. In response to the crisis, the monetary levees have actually broken, and accommodation seems to be nearly maxed out. And while some sacred cows may yet topple (eg, the assumption of negative rates in the UK, which cannot be ruled out), it does appear that the monetary policy easing exercise has come to an end (in the sense of new tools) and that we should count on improvements/extensions to existing mechanisms. Although these mechanisms seem to be calibrated for an end to the crisis, they will have to be supplemented by fiscal policy to consolidate the recovery, once the exceptional stimulus packages have been reduced. Looking at Japan, where monetary innovation went very far, we see that fiscal policy plays a more direct role in reducing the output gap. And the Bank of Japan supports it, acting as a 'built-in stabiliser' of long-term rates by controlling the yield curve.
This environment is marked by a slow, probably chaotic recovery; multiple uncertainties; and monetary policy easing: a good environment for keeping interest rates extremely low. Good news will have to materialise on both the health and the economic front for any recovery to take shape; but even then, it will be limited by the absence of inflation and the capacity surplus. In addition, past and future interest rate trends can only be judged on the basis of progress in the Eurozone, where clear solidarity has prevented fragmentation, risk premiums paid by the so-called peripheral countries have been reduced, and the EUR has done well. Therefore, our scenario puts end-2021 US and German ten-year sovereign yields at close to 1.25% and 0.40%, respectively, coupled with spreads of 20bp, 50bp and 100bp vs the German Bund yield for France, Spain and Italy. In line with a recovery scenario – even one that is timid and out of sync – the USD, that unbeatable counter-cyclical, could depreciate to the benefit of the EUR and currencies that are pro-cyclical or carried by risk appetite. The depreciation of the USD would, however, be limited by the resurgence of Chinese-American tensions weighing especially heavy on Asian currencies: the crisis has only temporarily eclipsed the dissensions between the US and China.
While the timetable for the 'resumption of hostilities' is uncertain (with the US transitioning to a new administration, putting out domestic fires, and rebuilding its international bridges), and while Joe Biden's presidency does promise a change in tone (less unilateral, more predictable and quieter!), the roots of American resentment remain. The bogus de-escalation of US-China trade tensions cannot hide the 'dislocation'. Rising protectionism and political risk went a long way towards slowing down hyper-globalisation. The crisis should do much to regionalise areas of growth, as evidenced by the signing of the Regional Comprehensive Economic Partnership uniting China, ASEAN member countries, and major US allies (Australia, South Korea, Japan and New Zealand). This crisis has accelerated fragmentation and exacerbated weaknesses. It may also leave us with growing disparities in performance, growth outlook, and social indicators, especially in emerging countries.
Catherine LEBOUGRE - catherine.lebougre@credit-agricole-sa.fr
Consult the publication: https://etudes-economiques.credit-agricole.com/en/Publication-EN/2020-Decembre/World-Macroeconomic-Scenario-for-2021-2022
World – Macroeconomic Scenario for 2021-2022
After a persistently anaemic H1, vaccines and "soft lockdown" strategies along with generous – and crucial – fiscal stimulus measures are opening the door to a modest yet, like the crisis, uneven recovery. This type of environment – marked by a slow, likely chaotic recovery; multiple uncertainties; and as easy a monetary policy stance as can be sustained – is good for keeping rates extremely low.
Spain – 2021-2022 Scenario
Spanish GDP rebounded 16.7% quarter-on-quarter in Q3 (after -17.8% in Q2) but is still down 8.7% year-on-year. Our scenario remains cloaked in uncertainty, primarily due to doubts about the course of the pandemic. Our growth forecasts are -12% in 2020 and 3% in 2021. The low growth in 2021 is due to a negative overhang caused by the Q4 decline. In 2022 the rebound is expected to be 5.9%, which would leave Spanish GDP 4% below its 2019 levels.
Eurozone – 2021-2022 Macroeconomic scenario
A wave of optimism surged after it was announced that a vaccine would soon be available. However, the resistance of the pandemic’s spread to the latest restrictions to mobility is a warning that the link between virus and mobility is still strong. Our conviction is that this link will not be broken right away, and our scenario remains wedged between medium-term promises and short-term threats. We forecast GDP growth of 3.8% in 2021 and 3.9% in 2022.
Germany – 2021-2022 scenario
The intensification of the health crisis is pushing the German government to tighten its containment with a new temporary cessation of so-called "non-essential" activities. These measures restricting activity and mobility are breaking the current growth dynamic. We now anticipate that activity will be curbed in the first half of the year, followed by a firmer recovery in the second half, leading to annual growth of 2.5% in 2021. In the following year, growth should continue to fully normalize thanks to the completion of mass vaccination and thus reach +3.4% in 2022.