2021 macroeconomic outlook

First and foremost, 2021 will see a big uplift in growth, even if only compared to the lows of 2020. In the advanced western economies, the roll out of a COVID-19 vaccine should take place over the course the year. This should allow the gradual conclusion of social distancing and a return to some form of normality.

Loose monetary policy is set to continue as Central Banks remain focussed on supporting growth. Meanwhile public sector borrowing is set to fall back from recent highs but is likely to remain elevated across many countries.

In the Eurozone, GDP growth could reach 4.2% according to forecasts by the European Commission. However, there are significant risks that the differing pace of recovery could lead to a growing divergence between the different members of the Euro Area. While export-oriented economies such as Germany and the Netherlands could benefit from increased external demand, countries dependent on tourism and hospitality could see a slower recovery. Moreover, structural factors, such as the high rate of unemployment in Spain and Greece could hamper the recovery in these economies.

Likewise, for the US, 2021 could bring a more robust recovery as the rollout of the vaccine should help contain the ongoing COVID outbreak and restore consumer confidence. A potential for greater government spending could see a steeper yield curve. In the medium to long term, we could see a programme of public investment aimed at greening the economy. 

The UK may see a boost from an early vaccine roll-out which could see a lifting of social distancing restrictions by the end of June. However, the impact of Brexit will hold back recovery in 2021 with growth potentially reaching 6%, and GDP not reaching its pre-COVID level before Q3 2022. 

In countries across East Asia, efforts to contain the pandemic have been largely successful, and as a result the contraction in GDP over the course of 2020 has been more limited. After shrinking by a record 6.8% year-on-year in the first quarter of 2020, China’s GDP rebounded strongly in the second and third quarters and this consistent pattern of growth should continue into 2021. 

The year 2020 could well be a watershed moment for the world economy. The unprecedented scale of the economic shock provided by the pandemic may lead to deep and widespread shifts to how we work and buy. Adapting to these changes will be key to securing sustainable improvements to productivity and living standards.