Some Observations on Major Economic Trends in 2021

• 10-May-21
• admin

At the beginning of this new year, there is a sense the 2021 is going to be better than the last year. There are a couple of factors that lead to this thinking.

Firstly, the conventional outlook is that with the vaccines for Covid 19 now available, tested to be 95% effective, it would only be a matter of time when the global economy will recover. That is, of course, not wrong. But it is like saying that in any raging bull market, a crash will eventually mark its end.

 

Unfortunately, we still don’t know the timing of the end. When is “eventually”? Will the end of the pandemic occur in 2021, in fact before the summer, as most epidemiologists, including the venerable Dr Anthony Fauci, have forecast? We are probably just only at the beginning of the end.

While economists should not get into public health forecasts, the same is true the other way round. Whether the economy will recover after Jun 2021 is not so easy to pinpoint, as this is hardly a medical issue. The most important implication of the post vaccination world is that consumption will be restored which will in turn lead to reduction of unemployment in broad swathes of the global economy which have been devastated by the lock-down approach to the pandemic.

That in fact already simplifies the public health recovery program. In the first three weeks of vaccines being available, we can already see that getting them into people’s arms is proving to be a major logistical problem. This is not a surprise. What should we expect from the Trump Administration in the so-called Operation Warp Speed? It is all about the publicity of claiming that “a vaccine has been found”; whether it can then be efficaciously applied, do they care? Trump and his cronies certainly don’t. They are on their way out, and they are showing the indifference of losers not willing to take responsibility for a very complex operation. It amounts to criminal neglect.

With that said, it is very likely that the new Administration under Biden and his Chief of Staff Ron Klain, can turn this around. Maybe we can indeed get to apply 100 million vaccinations in 100 days. That’s still a hope, not yet reality. Given that both the UK and France are also having teething problems in applying vaccinations to entire populations, it is proving to be a long rocky road ahead, with every government stumbling along. Forget warp speed.

And these are the most advanced countries in the world, with supposedly great infrastructure and logistics. Can we imagine what will happen when we are trying to vaccinate the remaining billions of the world’s population in the rest of the developing world, especially the Indian subcontinent and Latin/South America where the pandemic is raging? This may take years.

As such, our first observation about the post pandemic global economy, is that expectations are too high that the crisis will be over soon. No, simple arithmetic tells us that full vaccination of even half of the world’s population, to reach some form of herd immunity, is years away. It won’t happen during 2021. It is not six months away. It won’t be done by the start of the summer. “Post pandemic” is like predicting the end of a bull or bear market. We really don’t know except that it will be longer than you think.

Does that mean that there will be no recovery in 2021? No, that’s not really true either. Economic activity is driven by “expectations”. So if people “expect” the end of the pandemic within a certain time frame, there will be a revival of economic activity initially. But because there will be wide swathes of the global population not yet immunized, the virus will surely surface here, there and anywhere, causing the usual lockdowns from time to time. Just like there are many diseases that have never been quite conquered by mankind, including the common flu or dengue fever, Covid 19 may become one of these, especially if it mutates to lower infectiousness or fatality, and mankind takes it into stride. People are now so Covid19 weary, that they expect the news-worthy aspects of these vaccines (like it is 95% effective) will turn the tide like in polio vaccines, which aimed at eradication. That may not happen with the coronavirus. A person promised a 95% effective vaccine a year from now may be dead in three months. We will see hiccups in the economic recovery. Be ready for a bumpy ride.

Needless to say, the Western central banks are expected to continue with current easy monetary policy which will aid in the economic recovery. Conventional wisdom is that this will continue for the next few years, which will drive stock markets up and the cost of debt down, both of which will refuel economic expansion. But whenever the coronavirus strikes, air-pockets in the economic growth path will appear. The global economy will lurch and stagger forward rather than sail smoothly through. Until sufficient numbers on the planet are immunized, in an unknown n number of years, rather than in n months, resurgence of the disease will be common. It is likely that the people who are optimistic that the world will resume normality within 2021 will be disappointed and the people who don’t have defensive postures to handle this volatility will be blind-sided.

The World Bank has just issued an updated economic forecast and it does not look good. This has been reported by the Wall Street Journal:

“Even before Covid-19, the World Bank had lowered its projections for global growth in the 10 years that began in 2020. The pandemic is exacerbating that trend, raising the prospect of a “lost decade” ahead, the World Bank said Tuesday, as it also cut its forecasts for the coming year.

The bank’s semiannual Global Economic Prospects report attributes the long-term downgrade to lower trade and investment caused by uncertainty over the pandemic, along with disruptions in education that will hamper gains in labor productivity.

“If history is any guide, unless there is substantial reform, we think the global economy is headed for a decade of disappointing growth outcomes,” Ayhan Kose, the bank’s acting vice president for equitable growth and financial institutions, said in an interview.

Before the pandemic, the bank projected that potential global growth between 2020 and 2029 would slow to a yearly average of 2.1%, from 2.5% in the previous decade, as a result of aging populations and lower productivity growth. On Tuesday the bank lowered its projection to 1.9%. Potential output assumes the world economy is operating at full employment and capacity.SIGN UP

The World Bank said the global economy is expected to grow 4% this year after contracting 4.3% in 2020. That 2021 projection is 0.2 percentage point lower than it forecast last June, reflecting the resurgence of the coronavirus and renewed restrictions on economic activity. For emerging-market and developing nations, the World Bank now sees growth averaging 3.3% a year from 2020 to 2029, down from its 4.0% forecast before the pandemic and 5.0% during the previous decade. The World Bank’s mission is to reduce poverty through lending and advice to developing countries.

“The world can’t wait for everyone to be vaccinated to inoculate the global economy against another lost decade for growth,” Mr. Kose said. “That means policy makers need to act and act aggressively to get ahead of the pandemic.”

He called for investments to improve technology, health care, education and the environment, as well as improvements in governance and debt transparency, particularly in emerging and developing economies.

Years of disappointing growth also followed the 2008 financial crisis. Global forecasts were repeatedly downgraded, falling to an average 2.4% annually for a 10-year look ahead in 2019 from 3.3% seen before the crisis.

The downward revision for 2021 mostly reflects slower growth in advanced economies, with the U.S. now projected to expand 3.5%, down from 4% in the bank’s June forecast. The euro area is expected to grow 3.6%, down from

4.5%.

Emerging-market economies are forecast to grow 5% in 2021, up from 4.6% projected earlier, helped by China. The bank projects China, the world’s second-largest economy, will grow 7.9% this year after expanding 2% last year, when it was the only major economy to avoid a contraction.

The 4.3% collapse in the global economy last year was slightly less severe than previously projected, mainly due to shallower contractions in advanced economies supported by aggressive government stimulus. China’s recovery also helped, the World Bank said.

While advanced economies have been able to take advantage of low interest rates to finance stimulus measures cheaply, debt risks are growing in emerging-market and developing economies, many of which were already struggling with heavy debt burdens before the pandemic.

Solvency risks currently concealed by low interest rates could “surface in the next episode of financial stress or capital outflow,” the World Bank said.

Yuka Hayashi at yuka.hayashi@wsj.com

Even if we accept that the lower trend and greater volatility of the global economy will be the norm in the next few years, the next question is whether it makes sense to regard the Western economies to be monolithic any longer? There is the economy of the super-rich or the top 1 percent, which behaves very differently from the economy for the rest of the population. Even if we are generous and call this the Upper X (ie more than 1) percent economy where people get college educations, live in collaborative, meritocratic environments (called cities), develop new technologies and are willing to step away from 19th Century lifestyles marked by individualistic rural or small-town environments, we cannot deny the huge gulf between the X percent and the Rest.

The Upper X is a fully capitalist economy, driven by technological prowess and working styles best implemented in urban settings. Then there is the other economy of the masses in the boonies, which is trying to cling on to a forsaken age, when a living can be eked out from the earth in farming or animal husbandry through individual effort, or in small towns of single factories making marginalized products. That labor has been made redundant, leading to the political turmoil that resulted in Brexit and Trumpism. If there are two discordant economies within each country in the West, especially in the United States, would the rules of engagement pre-Covid be relevant in the new era of a frequently occurring pandemic relapse?

For one thing, a different path is being pursued in China. Its response to the pandemic has been quite different from America and the West, not in terms of the direction of a fix, but by the intensity of will, and national cohesion. What Abe Lincoln said of the US also applies to China – to paraphrase the man, when a country is politically divided, the economy will be damaged. China will outstrip everybody else in growth. They will enjoy a “freedom” only spoken of meaninglessly in Western political circles. What is freedom when 20 percent of the population have to queue for donated food? Over time, the difference in economic performance between the two countries will make a huge difference. One of the big changes to be expected in the new year is the beginning of a shift from global economic preeminence from the US to China.

Nobody, however, should disparage superpowers. America's problem is that a consistent set of policies cannot be developed to run the entire country because the Upper X and the Rest economies are so different. The economy of the Upper X, maybe of 30 million to 50 million folks, is highly competitive in the world, possessing great wealth and the most advanced technologies, more efficient than anybody else, will still lead the world and can give China’s best and brightest a run for their money any time. But America will be slowed by the rest of the country, who hold political power in their numbers. And government will be hampered in global competition by these masses.

Within the above general background, what are the major long-term trends that are emerging?

My long-term forecasts, looking from the vantage point of the first week of 2021, for the global economy are as follows:

Forecast 1 :

The multipolar economic system. The growth of China’s economy relative to the US has been covered by many economists and does not need to be repeated here. It is interesting to note however that in terms of GDP in nominal terms, the US is ahead of China by about 6 trillion US dollars, at 20.81 trillion for the US and 14.89 trillion for China in nominal US dollar terms. In PPP terms, China’s GDP is at 24.16 trillion, 3.5 trillion ahead of the US. For China to catch up in US Dollar terms, it is a gap of 40 percent. If the RMB gains 10-20 percent in the next couple of years (from 6.5 to below 6 yuan to the dollar), the gap in US dollar terms will be just 20-30 percent. World Bank data shows that the differential growth rate between China and the US is 5.6 percent in 2020, 4.4 in 2021 and 1.9 in 2022. By 2023, the gap will be reduced by nearly 12 percent, adding to the gain of perhaps 15 percent due to the decline in the dollar. At a further differential growth rate of 3 percent (say 2 percent growth in the US and 5 percent growth in China) in ensuing years, the gap will be closed in a time frame of another 3 years, by about 2026. There are too many moving parts for us to shoot for higher accuracy in this forecast.

Five, six years is a pretty short time. A very important question is whether the world can adjust to Chinese leadership in the global economy in that time. It was easy in the last several decades for every country outside the US, to structure its economic activities to American and Western consumption patterns, because they were the largest economies around and were the biggest buyers, whether the products are bananas or boats. The language of international trade in English also helps to make Western leadership in the world easy to follow. The US Dollar is also the currency of trade. If China as the world’s largest economy is no longer just buying ores and raw materials, and purchases consumer goods other than those made domestically, is speaking a vastly different language, and uses the RMB, how will it change the world?

Especially since the United States is not going to just fade away. In five or six years, it will still be a very powerful second largest economy (especially of the Upper X economy), marginally behind China. And if the Democrats under Biden are still in power, they will try to forge alliances with the rest of the West to counter China. That has been the Biden strategy articulated since the Nov election but it is not likely to get traction towards a united front against China anytime soon, as Germany just signed a major trade deal with China, in the face of American entreaties not to do it. Instead, the superpowers will seek economic co-existence.

Forecast 2 :

The End of Populism. The de facto division of America into the “haves” economy and the “have-nots” economy will also cloud things going forward. The haves will ignore Washington’s initiatives to limit trade with China. These are sophisticated international MNCs and entrepreneurs with profit and economic efficiency as their only motivations. They will manufacture where they make the most money whether it is in Chengdu or Cincinnati, and sell to whoever can pay. Politics is irrelevant. On the other hand, the have-nots in the other American economy, now seemingly ossified in an outdated world, following piped pipers, will become increasingly socialist as they sink into an obsolescence that can only be bailed out by government largesse. They are mostly rural Republicans. What an irony.

The good news in America is that on 6 January, the winning of the two seats by the Democrats in the Georgia run off elections will lead to a revival of proper, rather than deadlocked, dysfunctional government in the country to be led by Biden. All the politicking since Nov 3 by Trump and his sycophants have shown that they have totally lost it. They may still be shouting from the sidelines for some time to come and that’s all there is to it – a lot of noise without purpose or relevance. A bloody waste of time. Beyond Jan 20, nobody will even care. (Especially after the insurrection in Washington DC on 6 Jan 2021). All the voices that are relevant have spoken, and the rest of us in the world now can look forward to rationality coming back to US domestic politics and hence in its international role in the world. That is a good thing.

Not only that, it already looks like there may well be a President Kamala Harris in the future if she does well as president of the Senate at a critical time in history. In time, there may even be (a long shot of course) a President Ossoff, who is only 33 years old, the youngest Senator to be elected in nearly half a century since Joe Biden who became a Senator at age 30. Most of all, the Georgia run off elections exposed the final death throes of the Trump presidency, and of a man who led his party to intellectual bankruptcy and unforgiveable loss. The man, for all the bluster, lost his party the presidency and the Senate, and could not recapture the House. Also remembered in history as the man who incited the Jan 6 insurrection. Trump is finished.

Over in the other “free” country, the UK, where disingenuous politicians pad their own nests by misleading unsophisticated voters to believe in a silly idea called Brexit, we now see one culprit Boris Johnson, strut around crowing about a treaty that means nothing. The Europeans were discreetly limiting loss and the so-called post-Brexit trade agreement contains many issues that will flounder in further negotiations in the future. As the British economy descends from a position as a key part of a powerful economic bloc, it is instead pursuing a new strategy as an isolated island across the English Channel. WTF? The pre-Brexit strategy of the two populist leaders, Trump and Johnson, working together, is DOA. Johnson is on his own. Let’s see how long he can last.

Populism is dead.

Forecast 3 :

The world is still flat. Every pundit in the world in 2019 and early 2020 used to predict a contraction of the global trading system. Most had expected the Trump presidency to continue and nobody had expected Covid 19 would demolish American exceptionalism and the Trump claim on power. Based on Brexit, even wise men thought that trade would shrink. And that China would lose its ability to make goods for the rest of the world, in the face of trade barriers and political isolation.

That prediction has not been borne out. Trade continues to flourish and in fact is on track to expand tremendously in the coming decades. The US trade with China is not slowing down, and is expanding, as American imports close in on record highs during the Trump presidency as consumers got used to higher prices caused by tariffs. China did not pay for those tariffs; Americans did (much like the little bits of the Wall built on US Army funds). And they were obviously willing payers, as trade data show.

At the same time, the definitiveness which many so-called experts say would lead to changes in the global supply chain, shifting away from reliance on China’s manufacturing prowess, also did not come to pass. It is not easy to change supply chain networks established by end-to-end production capabilities diversified into a zillion small enterprises all over China, and which no country can hope to replicate within a decade or two, even if highly competitive factories in China have their hands and feet bound. The world continues to be flat, and capitalists will continue to seek the higher returns, from the lowest costs. The politicians in the US will be yelling their faces blue to gain traction among the disenfranchised who have lost their jobs, but other well-to-do Americans keep on buying.

Forecast 4 :

The environmental story will rise to prominence. For too long, humans have pretended there is no problem when they cannot see it. This is particularly true of idiots who choose to believe Trump. The damage to the environment is real, and Biden in rejoining the Paris Accords community is making a statement on American commitment. That is all good. The global economy will also need to adjust to lower consumerism, better waste management and cleaner production processes, including energy usage. If the performance of Tesla in the stock market is spell-bounding, it is a sign of acceptance that fossil fuels would head in the same direction as fossils – stay buried. And if Singapore can make chicken that tastes like chicken in a lab as a profitable business, then the trends are right for the long term.

Forecast 5 :

The infrastructure story will also be revived. The poor state of infrastructure in the US has long been observed and American politicians keep promising infrastructure spending to make it look less like an underdeveloped country. But infrastructure is best undertaken by government, and it is massive infrastructure projects that will bring America into the 21st century as well as provide the new jobs to replace the ones their own capitalist Upper X countrymen sent away. The US Senate under Mitch McConnell were caught in a bind. These Republicans want to have a less intrusive government, and would not permit the Democrats to bring such projects into the legislative agenda. Even Trump failed to do anything in this sector. With McConnell demoted, there is hope that dysfunctional government will begin to repair itself.

And as we all know, part of the success of the Chinese economy is literally built on rolling out extensive infrastructure across the country. And beyond that, there is the Belt and Road Initiative. When that is done, the Silk Road and the Cheng Ho sea routes will become a 21st century projection of Chinese power as was achieved during the Han/Tang Dynasties and then the Ming Dynasty when China dominated the world in the East. The Americans will need to have a similar economic response both domestically and internationally to give the world some balance.

At the end of the first week in January 2021, it is now clear that there has been a sound rejection of the Trump movement by urban America, corporate America, and centrist America. The final days of flailing and thrashing around of the wounded beast is really something to behold. But it is all sound and fury with zero legal and, in the end, political substance. Yet, highly educated, obviously intelligent, lawmakers and at least a significant minority of the population bought into the fiction of a badly run election leading the country to an insurrection. The worst of human greed and selfishness, as well as intellectual bankruptcy, was there for all to see.

Let’s hope Georgia and Jan 6 bury all that outlandish insanity. Let’s hope that America, with all its strength and merits, will finally correct the aberration of the last four years. Let’s hope populism is finally decapitated. With Biden expected to be a new rational leader of the US and of the West, and Brexit relegated to irrelevance, the world order is expected to return to normality, where difficult trade and economic issues need to be solved in the midst of a long-term effort to rid humankind of Covid 19. And let’s also hope that these can all be resolved on the basis of reason and logic, rather than one-sided untruthful, illogical diatribes. The Trump era, when the school prefect was also the playground bully, was threatening to tear up the world order the rest of us outside America saw as the long-term solution to two millennia of human conflict. Biden’s Administration may lead to expectations of the resumption of a proper world economic order to reduce poverty through trade, ways to reduce militarism, as well as a serious endeavor to save our planet. Let’s hope it all comes to pass.

 

 

By:

Wai Cheong

Investment Committee

 

The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.