A two-phase economy for 2021

29 December 2020 | Markets and economy


A year that brought the world the most pronounced economic shock in generations is nearing its end with a strong dose of positive news. Reports of COVID-19 vaccine efficacy that surpassed even the most optimistic assumptions suggest that by the middle of 2021 we may have vanquished our greatest pandemic fears and can look confidently to better times ahead.

“Vaccine developments have materially shifted both the health and the economic outlooks,” said Josh Hirt, a Vanguard economist and a co-author of the Vanguard Economic and Market Outlook for 2021: Approaching the Dawn. “We believe we’re looking at a midyear pivot point where, although we perhaps haven’t yet achieved population immunity, enough people will have been vaccinated to allow economies to settle into a post-COVID stage.”

A challenging period no doubt lies ahead as the approach of winter in the Northern Hemisphere brings a new surge in virus cases. Economic recovery is likely to be uneven and extend beyond the next year. As we discuss in our economic and market outlook, we expect monetary and fiscal support to continue their crucial role in sustaining the recovery.

The pandemic’s effects on consumer behavior are likely to linger even after vaccinations begin, especially in face-to-face sectors such as hospitality and entertainment, where reluctance to reengage may be overcome only gradually. We nonetheless foresee the potential scarring effect of permanent job losses as limited and foresee global economic growth returning in 2021 to a trajectory similar to that of the pre-COVID world.

Vanguard assessment of global economic risks

This illustration breaks down Vanguard’s assessment of global economic risks based on three scenarios. In our base case, to which we ascribe a 60% probability, major economies achieve herd immunity by the end of 2021 and social and business activity normalizes by the second half. We ascribe a 30% probability to the upside scenario, which accelerates these time tables, and a 10% probability to the downside.

Note: The odds for each scenario are based on the assessment of members of Vanguard’s Global Economics and Capital Markets Outlook Team.
Source: Vanguard, as of November 30, 2020.

Vaccine scenarios likely to drive the pace of economic recovery

Vanguard expects that the pace of economic recovery will be inextricably linked to health outcomes. “A degree of population immunity will be required before consumers are comfortable engaging in face-to-face activities such as concertgoing and traveling,” Mr. Hirt said. “Only then can economies regain a solid footing.”

Population immunity, or herd immunity, refers to when a sufficient portion of a population is immune to an infectious disease to make its person-to-person spread unlikely. The math behind COVID-19 population immunity is fairly intuitive. The more effective a vaccine or vaccines may be, the smaller the percentage of people who need to be vaccinated to achieve such immunity.

Several pharmaceutical companies have reported results from clinical trials of COVID-19 vaccines that have surpassed the most optimistic estimates for efficacy. How safe and effective they are in the real world, and how quickly they can reach a critical mass, will help inform the pace and degree of economic recovery.

The year ahead is likely to be marked by two distinct phases, said Max Wieland, a Vanguard economist. Essential questions related to the first, and more challenging, phase as the virus prevails will help determine economies’ starting points in the second, post-pandemic phase. “Will there be more layoffs?” Mr. Wieland asked. “Will currently unemployed workers face a longer period out of work? And how will companies’ and families’ finances hold up? These are some of the things we’ll be watching.”

Vanguard expects, as discussed in Approaching the Dawn, that central banks will continue to keep interest rates low and that fiscal policy will play a larger role in sustaining the recovery over the next year than it did in previous recessions, including those following the 2008–09 global financial crisis. Vanguard believes that such policies should aim to mitigate risks related to employment and corporate and household solvency.

The economic downside and upside

Although we can’t ignore the immediate risks to vulnerable parts of the economy, especially those related to face-to-face activity, our outlook also considers the potential upside.

“We would expect everyone to be really focused on meaningfully ramping up production of vaccines and trying to get the most vulnerable and most exposed populations vaccinated as soon as possible,” Mr. Wieland said. “Logistical, storage, and production challenges can be sorted out. The public and private sectors can work together to get vaccines out quickly to the people who need it most. That would certainly be an upside.”


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The views expressed in this material are based on the author's assessment as of the first publication date (December 2020), are subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc. The author may not necessarily update or supplement their views and opinions whether as a result of new information, changing circumstances, future events or otherwise. Any "forward-looking" information contained in this material should be construed as general investment or market information and no representation is being made that any investor will, or is likely to achieve, returns similar to those mentioned in this material or anticipated in this material.

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