There are signs of light in the world economy. By the second half of 2021, many individual economies will probably have opened up much more. But not all may be so fortunate and significant risks will remain.
With vaccine programmes well under way in many economies, lockdown restrictions should continue to be lifted and GDP growth will pick up steam in Q2 and Q3 2021 and beyond. This should be a year of big growth numbers: our forecast for U.S. GDP growth is 5% in 2021 as a whole – the highest since 1984, albeit off the back of a severe recession. We provide summary forecast tables on page 22 of the full report.
Markets have, of course, long anticipated an economic recovery and accordingly had already started to move up in 2020. Markets are now focused on what the recovery might mean, particularly in terms of inflation – a potential impact we identified in our original 2021 economic outlook – Tectonic shifts: Looking beyond COVID-19. Other impacts identified by the outlook (e.g. debt escalation) are already evident and others are likely to come into focus as the year progresses. We summarise the 2021 impacts in our graphic below.
“We are not going back quickly to a pre-pandemic global economy, and the process of normalisation may not be smooth”
Christian Nolting, Global Chief Investment Officer, Deutsche Bank International Private Bank
So we may be able to move back towards a pre-coronavirus environment, but not that quickly
– and at the same time, the pandemic has exacerbated pre-existing trends, meaning that the process of normalisation may not be smooth. As we noted in our original 2021 outlook, the world has changed for individuals, corporates and governments. Investors might also bear in mind the old saying: “red sky at night, shepherd’s delight; red sky in the morning, shepherd’s warning”. Initial brightness around the dawn of resumed economic growth may indeed conceal rather rougher weather coming in behind. So after a period of strong growth, investors will ask two questions: what are the consequences of what has happened, and where do we go from here?
For an investor, this means having a portfolio that is capable of weathering storms ahead – by using strategic allocation and additional risk management where needed. As we have noted, markets always look ahead and while monetary and fiscal policy appears to have set the foundations for economic recovery, it is not clear how well it can maintain its second, unspoken objective of keeping financial markets stable, so that turbulence does not derail the recovery. Market volatility in February and March around changing inflation expectations showed the difficulties of doing this, and the possible limits to central bank power. Other temporary market wobbles may occur as the year progresses, either due to worries about the consequences of the coronavirus crisis (e.g. debt levels) or perhaps, to quite separate innovations (e.g. central bank digital currencies). Over the next few months, concerns may also focus on higher inflation expectations, fuelled by higher year-on-year rates of inflation, particularly given very low oil prices a year ago during the economic downturn. Effective risk management needs to be a part of any portfolio.
But an investor also needs to look beyond immediate market noise and identify longer-term investment themes: this rapidly-changing world will create many. We discuss likely developments in our key investment themes from page 17 onwards (see full report). As before, these can be placed in a framework of technology, demographics and sustaining the world we live in – what we call the TEDS triangle. These will remain relevant for investors long beyond 2021.
Our full CIO Insights report “Signs of light" includes economic forecasts for 2021 and 2022, along with individual asset class outlook summaries and forecasts to end-March 2022. Please refer to the Important Notes at the end of the report for disclosures and risk warnings.
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