Global economy watch: Predictions for 2021 - PwC

2021 will be the first year where the three main economies or trading blocs of the world — the US, the European Union (EU) and China — will refocus their ... 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Weidentifythreethemesthisyear: Globaleconomyprojectedtogrowatrecordspeed Inourmainscenarioweexpecttheglobaleconomytoexpandbyaround5%inmarketexchangerates,whichisthefastestraterecordedinthe21stcentury.OurprojectionisconditionalonasuccessfuldeploymentandspreadofeffectiveCOVID-19vaccinesandcontinuedaccommodativefiscal,financialandmonetaryconditions.Nevertheless,thenextthreetosixmonthswillcontinuetobechallenging,particularlyfortheNorthernHemispherecountriesgoingthroughthewintermonthsastheycouldbeforcedtofurtherlocalisedorfulleconomy-widelockdowns(asrecentlydisplayedintheUK).Outputinsomeadvancedeconomies,forexample,couldcontractinQ1oftheyear.Wethinkthateconomicgrowthismorelikelytopickupinthesecondhalfoftheyear,whichisalsowhenweexpectlargeadvancedeconomiestohavevaccinatedasubstantialshareoftheirpopulation.  ...buttherecoverywillbeunevenacrosssectors,countriesandincomelevels Bytheendof2021orearly2022,weexpecttheglobaleconomytoreverttoitspre-pandemiclevelofoutput.However,thispicturemasksanunevenpattern.AtoneendofthespectrumistheChineseeconomy,whichisalreadybiggercomparedtoitspre-pandemicsize.Ontheotherendaremostlyadvancedeconomieswhichareeitherservice-based(UK,France,Spain)ormorefocusedonexportingcapitalgoods(Germany,Japan)andareunlikelytorecovertotheirpre-crisislevelsbytheendoftheyear.Intheseeconomies,growingbutlowerlevelsofoutputisprojectedtoleadtopushupunemploymentrates.InitsDecember2020economicoutlook,theOrganisationforEconomicCo-operationandDevelopment(OECD)projectsanunemploymentrateofaround7%initsmemberstatescomparedtopre-pandemiclevelsofaround5.5%.Mostofthejobsaffectedarelikelytobethoseatthebottomendoftheearningsdistributionwhichislikelytoexacerbateincomeinequalities.Wethereforeexpectgovernments’focustograduallyshiftfromfightingtheCOVID-19virustodealingwithhigherunemploymentratesbyupskillingtheirworkforceandcreatingjobsinnewlyemerginglabour-intensivesectors. Synchronisedpushforgreeninfrastructure 2021willbethefirstyearwherethethreemaineconomiesortradingblocsoftheworld—theUS,theEuropeanUnion(EU)andChina—willrefocustheireffortstofightingclimatechange.TheUSisexpectedtore-jointheParisAccordandhostaninternationalclimatesummitearlyintheyear.EUmemberstatesareexpectedtofinalisetheirplanstoacceleratethetransitiontowardsagreener(andmoredigital)economybytheendofApril.TheEUCommissionisthenexpectedtoreleasethefirsttrancheofgrantsandloanswortharound0.5%ofEurozoneGDP(or5%overfiveyears)tospeeduptheprocess.Finally,China’s14thFiveYearPlanisexpectedtobeputtoaction—partofwhichincludesincreasingenergyefficiency.ThisandotherissuesarealsoexpectedtobediscussedattheUnitedNationsClimateChangeConference(COP26)inGlasgowlaterthisyear. Predictions2021 Italyexpectedtore-jointhe$2trillionclub... AccordingtotheInternationalMonetaryFund’s(IMF)latestestimates,ItalianGDPisexpectedtotopthe$2trillionlevel,re-joiningsevenothereconomiesincludingtheUS,China,GermanyandIndia.Thelatterwasalsothefifthlargesteconomyinmarketexchangeratesin2019,havingovertakenboththeUKandFrance.ButchangesinexchangeratesalongwiththeimpactofthepandemicmeansthatIndiaislikelytobetheseventhlargesteconomyintheworldinmarketexchangeratesin2021,overtakenthistimebytheUKandFrance.Thisislikelytobetemporaryas,basedoncurrenttrends,IndiaisagainpoisedtoovertakeFranceandGermanybeforethemiddleofthisdecade. Fig2:GDPofthelargesteconomiesintheworldinnominalUSDterms   2019a 2020p 2021p US 21.4 20.8 21.9 China 14.4 14.9 16.5 Japan 5.1 4.9 5.1 Germany 3.9 3.8 4.3 India 2.9 2.6 2.8 UK 2.8 2.6 2.9 France 2.7 2.6 2.9 Italy 2.0 1.8 2.1 Brazil 1.8 1.4 1.4 a:actualp:projection Source:IMFWorldEconomicOutlook PublicdebtlevelsinG7projectedtoexceed$57trillion... EstimatesfromtheIMF’sOctober2020WorldEconomicOutlookshowthattheG7publicdebtisprojectedtoincreasebyaround$4trillionin2021,whichissignificantlylowerthanthe$7trillionincreaserecordedlastyear.Inrelativeterms,thistranslatestoapublicdebtlevelofaround140%ofG7GDP,reflectingthelevelofsupportworkersandbusinessescontinuetorequireaswegraduallyexitthehealthemergency.Bycomparison,intheEmerging7(E7)economies,publicdebtisexpectedtoincreasebyaround$2trillion. Isthissomethingtoworryabout?ThekeyruleforpublicdebtsustainabilityisforrealGDPtogrowatafasterratethanthelevelofrealinterestratesincurredonpublicdebt.GiventhelevelofextraordinarymonetarysupportavailablecombinedwiththeGreatReboundineconomicactivityratesimpliesthisconditionwillbemet.  Isdemographystilldestiny?Japan’ssurprisinglyexpandingworkforce Japanhassomeoftheworld’smostchallengingdemographics.Sincethecountry’spopulationpeakedat128millionin2010,ithasshrunkby1.3millionpeople.Datafor2018suggestedthatnaturaldeclinealone–thenumberofdeathsminusthenumberofbirths,ignoringmigration–reached448,000,suggestingthisdeclineisaccelerating.Thegovernmenthaswarnedthatthepopulationcouldfallaslowas88millionby2065.Furthermore,thepopulationisold:28%isover65,comparedwith18%intheUKand15%intheUS.Thistrend,too,willaccelerateinthecomingyears. Anageingandshrinkingpopulationhasimportantimplicationsfortheeconomy.Fewerworkersmeanthatproductivityhastoriseeveryyearjusttopreventtheeconomyfromshrinking.Meanwhile,ahigherproportionofpensionersinsocietymeansmorepeopleusingpublicservices,suchashealthcareandtransport,withoutcontributingtogovernmentrevenuethroughtaxation.Inthisrespect,Japanisatestcaseforothereconomiesfacingdemographicchallenges.  ButinJapansomethingcuriousishappening.In2018,thenumberofpeopleaged15andoverfellby0.1%,butthenumberofpeopleworkingroseby1.7%.Thisgrowthwasnotenabledbyareductioninhighunemployment;joblessnesshasbeenlowandfallingforyears.Instead,analreadystronglabourmarketfoundawaytostrengthenfurther.Figure2showsthatin2012Japanhadanemploymentratethatwasaboutaverageamongadvancedeconomies.Butby2018,itsparticipationratehadrisentoamongthehighestintheworld.Growthinemploymentalsopickedup.  Figure3givesanindicationofwheresomeofthisgrowthhascomefrom.Japan’sfemaleemploymentratehashistoricallybeenquitelow,relativetoitspeers.Variousreasonshavebeensuggestedasexplanations,includingacultureoflongofficehours,entrenchedgenderrolesandalackofflexibilityinthelabourmarket. Butthesecharacteristicsofthejobmarketarechanging.Asrecentlyas2002,therewasaten-percentage-pointgapbetweenthefemaleemploymentratesintheUSandJapan.ButastheUSrateplateaued,theJapaneseraterose,anditisnowcomfortablyaheadoftheUSrate.  AnotherfamouscharacteristicoftheJapaneselabourmarket–the‘m’-shapeddistributionofwomeninworkbyage–isalsoshifting.Ahigherproportionofwomenarenowreturningtoworksoonerafterhavingchildren.Theshallowerdeclineinparticipationamongwomenintheir30smeansthegraphincreasinglylookslesslikean‘m’andmorelikean‘n’. Governmentpolicyhassomethingtodowiththis.Ithasincreasedthenumberofnurseryplacesandwillmakeprovisionforall3-5yearoldsfreeby2021.(Careforyoungerchildrenwillbeprovidedforthoseonlowerincomes.)Alawpassedin2015demandsthatlargerfirmssettargetsforhiringandpromotingwomen.(Therearenopenaltiesfornon-compliance.)Otherlegislationcapsovertimeat100hoursamonth,amovedesignedtobothpreventover-workandgeneratenewroleswheredemandclearlyexists. Figure4showsanotherareaofunderutilisedlaboursupply:olderworkers.(ThisgrouparenotcapturedinthedatashownonFigure2.)DuringJapan’speriodofrapideconomicdevelopmenttheproportionofover65sinworkfellsteadily,eventuallyreachingalowofaround18%intheearly2000s.Butaslifeexpectancyhascontinuedtogrow,retiringat60hasbecomelessappealing.  Thegovernmentisalsonudgingwould-bepensionersinthedirectionofremaininginwork.Itwishestopushuptheretirementageforstateworkersfrom60to65andboostthepublicpensionforthosethatopttodeferdrawingfromit. Already,Japanisleadingtheworldbyretainingsomanyolderworkers;itsrateofaround25%ishigherthanthatintheUS(18%)andtheUK(10%).   Effortstoincreasefemaleandolderworkers’employmentispartlybecauseofculturalpreferenceforthesemeasuresoverhigherimmigration.Nonetheless,inlate2018parliamentapprovedthecreationoftwonewvisacategories,onethatistimelimitedandanotherthatofferstheopportunityofeventualresidencyrights.Ithasbrandedtheseastop-gapsolutionuntilitcangetyetmoreJapaneseintheworkforce.  Howlongcanthesetrendscontinue?Ifthedeclineintheunemploymentratecontinuedatthe(verysteady)averagerateofthepasteightyearssincethepopulationpeaked,theeconomywouldhitzerounemploymentin2027.Itispossiblethatthisdatecouldbedeferredifthelabourforcecontinuedtogrow,buttheeventualimpedimenttothiswillbetheshrinkingpopulation.Figure2suggeststhatJapanhasalittlefurthertogotoemulatetheemploymentratesofsomeEuropeancountries,butheretoo,therewillbealimit.Eventually,theremarkableperformanceofitslabourmarketwillrequiremorebirthsandmoreimmigrantstobesustained.   Lowerforevenlonger? InAugust2020,theUSFederalReservecompletedareviewofitsmandateanddecidedtomovetoanaverageinflationtargetingregime,whichismorefocusedonemploymentlevels(ratherthanthenaturalrateofunemployment,whichisatheoreticalconcept).Inpractice,thismeansthattheFederalReserve’stargetrateislikelytoremainlowerforlongerthanpreviouslyanticipated(seeFigure3). TheEuropeanCentralBank(ECB)isalsoundergoingastrategicreviewofitsmonetarypolicystrategy.Theresultsarelikelytobeannouncedinthefourthquarterof2021andtherearesomesignalsthattheECBcouldfollowasimilarpathsetbyUSpolicymakerslastyear.Accommodativemonetarypolicyisthereforeexpectedtocontinuein2021. Globalgreenbondissuanceexpectedtotop$500billionforthefirsttime Regionaleffortstocurbcarbonemissions(EUGreenNewDeal)aswellasinternationalagreements(e.g.ParisAccord)requirevastsumsofinvestmentingreeninfrastructureinthecomingdecades Greenbonds,whichareusedtodirectlyfinanceenvironmentalprojects,currentlymakeuplessthan5%oftheglobalfixedincomemarket.In2021weexpecttotalgreenbondissuancewilltophalfatrillionUSdollarsforthefirsttime(seeFigure4). ThistrendisfurtherlikelytobehelpedbytheEUGreenBondStandard,whichisexpectedtobringalevelofstandardisationtothesefinancialinstruments.  Finally,weexpectinvestorappetiteforEnvironmental,SocialandGovernance(ESG)fundstocontinuetoincrease.Specifically,inanoptimisticscenariowethinkthatupto57%oftotalEuropeanmutualfundassetscouldbeheldinfundsthatconsiderESGby2025.(Seeourresearchonthistopichere). Oilpricetoremainbelow$60bblbutlikelytopickupinsecondhalfofyear... Eventhoughoilpriceshavelatelyrecoveredfromthelowsin2020,wethinkthattheywillcontinuetoremainrelativelysubdued.BarringanyshocksorgeopoliticaldevelopmentsintheMiddleEast,demandforoil,particularlyfromtheNorthernHemisphereeconomies,islikelytoremainsubduedforthefirstsixmonthsoftheyear(eventhoughithasrecentlypickedupinChina).Itismorelikelytoincreaseinthesecondhalfof2021astheCOVID-19vaccinebecomesmorewidespreadandeconomicactivityaccelerates.Asimilarpatternisexpectedforoilproductionlevels,withsupplyexpectedtoremainfarbelowpre-crisislevelsinthefirsthalfoftheyearbeforegraduallyincreasingasdemandreturns. …butelectricityproductionfromrenewablesisprojectedtocontinuetogathermomentum: DespitefossilfuelsbeingthedominantsourceofelectricitygenerationwecontinuetoexpectthatsolarPV(SolarPhotovoltaics)capacitywillgrowatrapidratesonthebackofgrowingcapacityintheEU,IndiaandChina.Ifcurrenttrendscontinue,solarPVcapacityisoncoursetosurpassnaturalgasin2023andcoalin2024intheglobalelectricitysector. Economicprojections:January2021 Viewourprojections Furtherpredictionsfor2021 EuropeanFootballChampionships: WithEuro2020nowsettotakeplacein2021,wehavehadonemoreyeartothinkaboutourpredictionsforthetournament.HavingwatchedtheNetherlands(ourpickinlastyear’spredictionsarticle)sufferindifferentformthisyear,we’vegonebacktothedrawingboard.Instead,wethinkthatFrancewillfollowupitssuccessinthe2018WorldCuptotaketheHenriDelaunayTrophyhome.AllezLesBleus! TokyoOlympics: Ourpreviousanalysisofthefactorsthatcanexplainthenumberofmedalswonbyeachcountryfoundthatpopulation,averageincomelevelsandwhetherthecountryisthehostnationareallstatisticallysignificantfactors.Despitethepotentialforreducedcrowds,wepredictthatthehostnationeffectwillcomethroughagainandseeJapanbeatitsrecordmedalhaulof41registeredatthe2016RiodeJaneiroOlympics. Elections: Nationalelectionsarescheduledincountriescoveringone-thirdoftheEuropeanUnion’spopulation.CitizensintheNetherlands,CzechRepublicandGermanywillheadtothepollswiththemanagementofthepandemiclikelytobefrontandcentre.Apotentialre-electionoftheDutchPrimeMinistercouldendupmakinghimthesecondlongestservingleaderinEuropebehindthePrimeMinisterofHungary,ViktorOrban. Downloadthereport(227kb) Fromthegreatlockdowntothegreatrebound Relatedcontent Countryriskpremiaquarterlyupdate Impactofcountryriskoncompanieswithinternationaloperationsorconsideringopportunitiesabroad. GlobalEconomyWatch-Projections GDPandinflationprojections.AssesstheinterestoutlookfortheUS,theUKandtheEurozone,Globalconsumerspendingandgrowthprospects. Contactus JonathanGillham Director,Economics,PwCUnitedKingdom Email BarretKupelian SeniorEconomist Tel:+44(0)2072131579 Email HannahAudino Economist,PwCUnitedKingdom Tel:+44(0)7483348728 Email Followus PwCofficelocations Sitemap Contactus © 2017-2022PwC.Allrightsreserved.PwCreferstothePwCnetworkand/oroneormoreofitsmemberfirms,eachofwhichisaseparatelegalentity.Pleaseseewww.pwc.com/structureforfurtherdetails. Legalnotices Privacy Cookiepolicy Legaldisclaimer Termsandconditions