19 January 2021

Economists Turn Rosier on 2021 Outlook

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As 2021 begins, A variety of economic forecasters are upping their outlooks for the year based on a second round of coronavirus relief from Congress and the rollout, albeit it slowly, of a handful of COVID-19 vaccines.

While cases of the disease continue to climb, along with death totals that have passed 350,000 in the United States, many analysts see the economy returning to pre-pandemic levels this year. Continued support for low interest rates from the Federal Reserve, supplemented by a last-minute $900 billion relief package from Capitol Hill, are key ingredients underpinning the recovery.

Changes in consumer behavior, including an increase in personal savings and personal income as a result of the $2 trillion stimulus package passed last March coupled with increased home equity from rising home prices, also leave many households actually better off than they were when the pandemic struck almost a year ago.

In April, as a nearly nationwide shutdown took hold, the personal savings rate shot up to 33.7% and still remains elevated, at 12.9% as of November. In December 2019, just as the virus was being discovered in China, it stood at 7.2%.

"The elevated level of personal savings represents a lot of pent-up demand for things like travel and entertainment that could be unleashed in the second half of 2021 pending widespread vaccinations," says Greg McBride, chief financial analyst at Bankrate. "While the savings rate is impressive, it is not indicative of the majority of households but rather has happened largely at the upper end of the income and wealth scales. That being said, in the long run the more Americans that have a savings cushion to fall back on, the better."

Goldman Sachs estimates that global gross domestic product has recovered about 75% of the loss experienced in the first half of 2020 and that shutdowns related to the pandemic are only dragging the global economy down about 8% from pre-pandemic levels compared to 20% at the peak of last year.

"We expect a large rebound in (the first half) on the back of widespread immunization – with 50% of the population expected to be vaccinated by April – and forecast above-consensus 5.3% growth in 2021," the firm wrote in mid-December.

Not that everything is rosy. The employment picture is still far from what it was in early 2020, when the unemployment rate reached a record low of 3.5%. Still, Goldman forecasts it to drop to 5.2% in 2021 from its present 6.7%.

Markets continue to trade near record levels and Wall Street firms such as JPMorgan see changes in work and consumer behavior driven by adjustments to the COVID-19 pandemic driving the economy and markets going forward.

Key among those are the ongoing digital transformation of many industries and activities, innovations in health care and a move to a more sustainable Earth.

"Digital transformation was the defining market trend of 2020 as businesses, consumers and families learned how to live in an online world," JPMorgan wrote in its recent 2021 outlook. "Even so, we are just beginning to see the ways in which technology will influence future production and consumption."

The evolution of 5G wireless technology is one of those key drivers, In 2021, JPMorgan expects the number of 5G smartphones purchased by consumers to double to 450 million while its use in manufacturing environments will increase.

In health care, a major push will come from more widespread and advanced use of diagnostic testing. The need for rapid and affordable testing was highlighted by the presence of a global virus, but advances will come in other areas such as liquid biopsies that can diagnose cancers a year earlier than current tests.

Goldman says 2021 "could well be a tipping point for adopting new ways to maximize resources in the areas of energy and food production. Stocks tied to clean energy and next generation or electric vehicles soared in 2020 by 100% and 33%, respectively.

Emerging trends in agriculture include growing food vertically indoors, which allows a greater amount to be grown in the same amount of space and also the ability to create specific climates for certain foods.

The coronavirus and its resulting lockdowns, the firm notes, exposed issues with food insecurity, access and waste.

The positive tone for 2021 is not without some caveats. Increasing tension between China and the U.S. over technology and the country's military expansion are among the top concerns, along with the nuclear ambitions of Iran and North Korea. And the continuing divide among voters in America is also mentioned as a risk.

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