Transcript - Episode 22 - From the Great Lockdown to the Great Round: Our global economic predictions for 2021

Hannah Audino

Hello, welcome to the latest episode of PwC’s economics in business podcast. In today's episode we're going to be discussing what 2021 might bring to the economy. Now as has become the norm this year, I'm joined virtually today by Barret Kupelian and Rob Clarry from our macroeconomics team. Hi both.

Barret Kupelian

Hi Hannah, it is good to be here.

Hannah

So, 2020, well what an eventful year. And 2021 looks set to be just as eventful. Joe Biden will begin his presidency, along with the first female VP very exciting. This year there will also be elections in Scotland and Germany. China will launch its next five-year plan. The UK will host COP26, the UN's next global climate change conference, and the UK will also hold its next census in March. Of course, there is also light at the end of the tunnel, due to the earlier than expected rollout of a COVID-19 vaccine. So as usual, we in PwC’s economics team have put together our predictions for the year ahead. Both reports for the UK and global economies are out now for you to read. And in today's podcast, I'm going to talk to Barret and Rob about some of these predictions.

So, Barret kicking off with a big question, what is the outlook for growth in the global economy this year?

Barret

So, I suppose the short answer to your question Hannah is, as our title for the latest edition of the Global Economy Watch states, we expect to go from the great lockdown to the great rebound. Let me just outline some of the themes we expect should dominate in 2021. I think the first one, I'd say is that on aggregate, we think that the global economy is projected to grow at a rapid speed. Hence, the great rebound. So, in our main scenario we expect the economy to expand by 5% in market exchange rates, which is the fastest ever recorded in the 21st century. Now, what do we think and needs to happen for that to materialise, what are our assumptions underpinning that projection? Well, it's conditional on the successful deployment of the different vaccines that we've got and continued accommodative fiscal financial and monetary conditions. I think bar any accidents or unexpected policy measures in either of the large economies, that last assumption is a sensible one.

But, that is not a guarantee, and then I think the other thing I'd say is that the next three to six months I think of 2021 will be particularly challenging for the northern hemisphere economies that are going through the winter months. As they could be forced to further localised or full economy wide lockdowns. So, we might see for example, output in some advanced economies contract in the first quarter of next year. I mean, it's quite clear that the UK is potentially heading in that direction with the emergence of the new strain of the virus, and our main scenario is not that this spreads in other economies as well, but you know that's not guaranteed. I think the more positive stories for the global economy will pick up in the second half of the year, which is when we expect most of the large advanced economies to have vaccinated at least two thirds of their population, which, according to the World Health Organisation is required to halt the spread of the disease.

We also expect other vaccines to come online as well in due time, and there's quite a few trials of the different vaccines, we've already got available, that are undergoing some testing. For example, combining two of the vaccines together and, seeing whether that leads to different results and so on and so forth. So, I think the second half of the year will be quite exciting in that regards.

But what I would say, and this is going into our second theme is that the recovery is expected to be uneven across sectors, income levels and countries. So, you know, as I said in aggregate, we expect the global economy to grow at 5%, which basically means that it reverts to its pre-crisis levels of output by the end of 2021, but you'll see the unevenness across different countries. So at one end of the spectrum, you're going to have China, which is already bigger compared to its pre-pandemic size. And then on the other hand, you will have most of the advanced economies which are either service based, like the UK, France, Spain, or more focused on exporting capital goods which haven't really done well. And that's economies like Germany and Japan - they are probably unlikely to recover to their pre-crisis levels by the end of the year.

I think in these economies, growing but lower levels of productivity is likely to push unemployment rates higher as well. So, the OECD, for example, expects the unemployment rate to be about 7% in its member states with large variation within the actual states, and most of the jobs affected we expect to be those at the bottom of the earnings distributions, which then leads to questions about income inequality. So gradually I think towards the end of 2021, we'll see government's focus shifts from fighting the virus to actually dealing with the higher unemployment rates by either upskilling their workforce, creating jobs in newer sectors, and also in some cases redesign their growth models for the new economy as well.

Hannah

Thanks Barret, that is a really great summary and the outlook for next year. Now one of the outcomes of the worldwide lockdowns that we saw last year was a significant fall in demand for oil and therefore fall in prices. Rob, what does this economic outlook mean for oil prices this year do you think?

Rob Clarry

Yeah, I mean you're quite right Hannah. 2020 was an incredibly volatile year for oil prices. In April, we witnessed the largest contraction in prices in over 20 years, as these global lockdowns halted oil intensive industries such as transportation. And in the second half of 2020, prices recovered somewhat and this was largely driven by China's strong recovery and optimism surrounding vaccines. Looking ahead to this year, we're expecting more volatility. The price of oil will continue to be tied to the performance of the global economy which Barret just outlined; and we're expecting that in the first half, demand will remain weak, particularly in the Northern Hemisphere economies which, as Barrett has rightly mentioned could face further national or regional lockdowns.

Demand should pick up in the second half of the year, as vaccines become more widespread and economic activity accelerates. The supply side is going to continue to be defined by OPEC in Russia, who recently agreed to a small increase in supply from January, but output will still be quite a long way below pre crisis levels. Overall, we think that oil prices are likely to remain below $60 per barrel in 2021, that's lower than average price we saw in 2019 $64 per barrel.

Hannah

And what about the outlook for other commodities?

Rob

In terms of the outlook for other commodities, this will be to a large extent driven by the world's largest consumer of commodities - which is of course China. We are expecting China to grow about 8% this year, which is bullish for global commodities. If we think more specifically about base metals such as copper, lead, nickel, tin; many of these metals are essential inputs to green infrastructure and products. So, for example copper is used in electric vehicles, lead is used in the batteries that store electricity which is generated by solar power. While we're still some way off from the mass adoption of things like electric vehicles. We think that demand for these commodities will increase this year, as these trends continue to accelerate.

Hannah

One of the things we heard about last year was build back better, and the need to put the green economy at the centre of the global recovery. So, we saw a number of commitments to change with governments across the world last year. I think Japan pledged to be carbon neutral by 2050, China pledged to hit peak co2 emissions before 2030, and the UK also launched its 10-point plan for its green industrial revolution. In your report you predict that 2021 should be a major year for action and fight against climate change. Barret, what are the factors that are driving this prediction?

Barret

I think that's right Hannah, I think 2021 will be the first year in a long time, where the three main economies are trading blocks of the world, the US, the EU and China will refocus their efforts to fight climate change. So, the US is expected to 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 their transition towards greener economy and to decouple economic development from resource constraints and submit those plans to the European Commission by the end of April. And then towards the end of the year, the European Commission is expected to release the first tranche of grants and loans as part of a 750 billion euro package. So that process is going to start in the European Union. And then finally in China, we've got the five-year plan, some of the details of which were revealed in 2020. A lot of that will be focused on increasing energy efficiency. And towards the end of the year, some of these issues will be discussed at the Climate Change Conference in Glasgow. So quite a lot of activity will be happening in the climate change, green space, and I don't think this is just a story for 2021, but it's a much more medium-term story, and this aggressive push will sort of kickstart that process.

Hannah

Yeah, in our UK predications, we focus quite a lot on the climate change angle and so we think the UK has the potential to have the majority of its electricity generated from renewable sources in 2021. We also think there could be a big push for electric vehicles next year, as costs fall and the government invests in charging points, and of course due to the ban of petrol and diesel cars in 2030. So, Rob on the global scale, what are their industries and sectors, do you think this push towards net zero will impact?

Rob

Yes, you’ve both quite rightly identified some of these green themes that we think will grow in 2021. Another industry that we think will experience a lot of change this year is the global financial industry, and that's clearly going to play a fundamental role in mobilising the capital that's required to support this transition to net zero. At the moment, green bonds which are used by companies and governments to directly finance environmental projects currently make up less than 2% of the global fixed income market, but we think they're going to play a much bigger role this year. We are predicting the total green bond issuance will top half a trillion dollars for the first time.

Now we expect this to be driven by three main factors. So firstly, a growing number of companies and countries are going to look to fund its recoveries from the pandemic using these green financial instruments. In particular, as Barret mentioned earlier, the EU which is widely seen as the global leader in green transition, has announced that 30% of its 1.8 trillion euro recovery package will be financed with green bonds. This is just going to increase liquidity in the market and encourage greater issuance across the board.

Second, clear government policies and classifications will improve the functioning of the market. So again, the EU has announced that in 2021, it will publish its green bond standard, and this will just bring greater transparency to the market and these instruments. Finally, we expect investor appetite for environmental, social and governance firms to continue to increase this year, where they experienced really strong returns last year. Specifically, we think that in an optimistic scenario up to 57% of total European mutual fund assets could be held in these funds by 2025.

Hannah

Thanks both, that’s a really interesting discussion on hopefully what we will see as a big push towards the fight against climate change next year. I think one of the other key things on people's minds this year is going to be government debt. So, last year we saw public debt levels reach record high levels as governments provided significant fiscal stimulus. Barret, do you think public debt levels will remain high this year, and should we be worried about this?

Barret

So, the IMF estimates show that amongst the large advanced economies, so the G7, public debt is projected to increase by around 4 trillion in 2021. Now that's lower than the 7 trillion we experienced last year. But in relative terms, the stock of public debt in those economies is going to add up to about 140% of the G7 GDP. In the E7 economies, you know the numbers are smaller, but I would caveat these projections by saying that they were made before there was solid evidence of the emergence of a second wave in the Northern Hemisphere European economies. So, they would probably be even higher numbers I think once these projections are revised.

So, going to your question, is this something to worry about? I think the first thing I would say before going into the economic question, is more about the role or responsibility of governments, which is all about ensuring the wellbeing of their citizens in the face of this terrible virus; and that's irrespective of what it means to the economy. So, having said that, and focusing more on the economics - a key rule for public debt sustainability is for real GDP to grow at a faster rate than the real interest rates incurred on public debt. Given the level of extraordinary monetary support we have seen and we'll continue to see, as well as the fact that the economic growth rates will start to take up speed, this implies that this condition will be met and that most of the debt that we'll see is sustainable. So I would be probably less worried about the level of debt, whether that's in relative or absolute terms.

I think once we were out of this situation, as a policymaker, most of the effort will then as I said before, focus on helping the unemployed, helping on focusing to improve the economic outlook, which as I said will come through investigating new growth models of economic activity, and so on and so forth.

Hannah

What's your outlook for interest rates this year - do you think we will see a normalisation of monetary policy anytime soon?

Barret

I think lower for even longer is our main scenario. It is worth recapping what happened in 2020, which we went past a lot of businesses and analysts without a great deal of attention, partly because the pandemic was going on. So, in August 2020 the Federal Reserve completed a review of its mandate and decided to move to an average inflation targeting regime, which was much more focused on employment levels as well rather than unemployment levels, which was its historic approach. Now to cut a long story short, in practice this means that the Federal Reserve's target rate is likely to remain lower for a longer period of time than initially anticipated.

Now, we've also got the European Central Bank, which is you know another major central bank in the world. That's also undergoing a strategic review of its monetary policy strategy, and the results of those are expected to be announced later in 2021, There's already some signals that they could also follow a similar path, set by the US policymakers potentially by including much more of a green aspect to its mandate as well. But everything is pointing out that accommodative monetary policy in the major economies of the world is expected to continue into 2021.

Hannah

Great, thanks Barret, that's really interesting. Thank you to you Rob too. That’s all we've got time for in today’s discussion. It’s been great to reflect on what the New Year might bring. If you'd like to read more about all of our other predictions for 2021, you can read our UK economic update, as well as our global economy watch. Both reports are available at the links in the podcast description and thank you all for listening, I hope everyone's keeping safe and well. Please do subscribe to our economic and business podcast channel. Finally, for more information on the potential economic and business implications of COVID-19, please head to pwc.co.uk/covid-19 for information.