Forecast Overview

The world will focus on recovering from the COVID-19 pandemic in 2021, coming as the U.S. inaugurates a new president seeking to restore U.S. leadership in global affairs. 


Annual

<h3>The Global Economic Recovery Begins</h3><p>The COVID-19 shock to the world economy will last deep into 2021 even as vaccination eases restrictions on economic activity. The key task of policymakers in 2021 will be to refresh or to sustain economic activity given a continuing need for dramatically increased public income support and rapidly increasing debt. Aggregate global output may just barely return to pre-pandemic levels by end-year, and then only due to a stronger, earlier recovery in China and parts of Asia than elsewhere.</p><p>Global gross domestic product growth is projected at 4-5% with China contributing one-third of that. Recovery elsewhere is expected to be uneven, and much of the world will not reach pre-pandemic levels of GDP until 2022, including probably the <a href="/article/renewed-covid-19-concerns-put-us-economic-growth-doubt">United States</a> and Europe. Scarring from permanent job losses and insolvencies will contribute to long-lasting costs and a need for further extraordinary fiscal expenditures. Inflation, however, should remain subdued given a slow recovery in demand and slack in factor markets for labor and capital. For emerging markets and developing economies, the pandemic exacerbated existing vulnerabilities, especially with regard to sovereign and corporate debt. A large number of people have returned to poverty and a decade or more of aggregate gains in many of the poorest countries has been wiped out. A reversal will take years in the context of the overall environment of slow growth worldwide pre-pandemic; at best, this trend will resume once quick recoveries are exhausted.</p>

<h3>The U.S. Returns to Multilateralism</h3><p>The Biden administration will focus heavily on rebuilding U.S. relationships with key European, North American and Asia-Pacific allies as a part of a broader return to a more multilateral approach to foreign policy. It will attempt to strengthen the rules-based Western-led global order and try to ally with like-minded countries to reform the system to better confront 21st-century challenges, including China&#39;s rise, climate change and the tech sector. In doing so, we would expect the European Union and the United States to paper over differences on issues like defense spending and <a href="/article/what-biden-presidency-means-europe-us-relations">trade disputes</a> and the United States to try to paper over recent tension between Japan and South Korea. The United States will also reenter a number of agreements and institutions that the Trump administration abandoned, particularly those related to climate change and human rights.&nbsp;</p><h3>The U.S. Stays Tough on China</h3><p>The Biden administration will maintain an aggressive stance on China, but it will attempt to build a more cohesive international alliance against it. A key focus of the Biden administration will be on China&#39;s tech sector. President-elect Joe Biden will be less focused on targeting specific companies, preferring to target broad sectors. A widening of the tech war beyond artificial intelligence, semiconductors and 5G to include more restrictions on cloud computing, digital services and <a href="/article/us-sets-its-eyes-chinese-fintech-companies">financial technology</a> is likely. Although China increasingly will be forced to respond in kind with restrictions on U.S. and other Western countries, Beijing will try to temper aspects of its so-called &quot;wolf warrior&quot;&nbsp;diplomacy as it tries to thwart U.S. attempts to build an international coalition and prepares for the 100th anniversary of the founding of the Communist Party of China in 2021 and Beijing Winter Olympics in 2022.&nbsp;</p><h3>U.S. Open to Talks With Iran</h3><p>Biden will focus on <a href="/article/limits-biden-s-proposed-return-diplomacy-iran">entering negotiations</a> with Iran. There are significant constraints on the U.S. ability&nbsp;simply to reenter&nbsp;the Joint Comprehensive Plan of Action, but an agreement that sees a U.S. suspension of some financial sanctions on Iran&#39;s oil sector in exchange for Iran reducing its nuclear activities is likely. Iran&#39;s expansion of regional activity in recent years &mdash; including missile and drone attacks on Saudi Arabia &mdash; will likely force broader negotiations beyond Iran&#39;s nuclear program when it comes to a successor deal to the JCPOA. But those talks will last well beyond 2021, assuming they materialize at all.</p><h3>Focus on Climate in COVID-19 Recovery Plans</h3><p>National governments and corporations, including energy-producing companies and large energy consumers, will mount a significant push in 2021 to establish attainable medium-term emissions targets and will modify their business strategies to achieve them. Increased liability and risk along with pressure from corporate boards will accelerate these initiatives through 2021. Most governments will also make green projects a pillar of their post-COVID-19 economic stimulus programs and investors will continue to focus heavily on decarbonizing their investments as scrutiny on emissions-intensive industries continues to intensify.</p>

Global Trends

<h3>A Two-Speed Recovery in Europe</h3><p>A &quot;two-speed&quot; economic recovery will occur in Europe. While Northern European countries will recover most of the economic losses of 2020 in terms of GDP, employment, production, consumption and investment, most of these <a href="/article/covid-19-s-uneven-impact-europe-portends-equally-uneven-recovery">indicators of economic activity</a> will remain below pre-pandemic levels in Southern Europe. Northern governments will progressively lift their stimulus measures in order to reduce their fiscal deficits while governments in the south will keep, or even increase, their expansionary policies at the price of high fiscal deficits and worsening debt piles. As a result, financial risk (including a sovereign debt crisis and a banking crisis) will remain high in the south while decreasing in the north. The economic rebound in the north and the stimulus measures in the south will keep social unrest within tolerable margins in both regions, though socioeconomic conditions in the south keep the door open to anti-establishment sentiment and action. This north-south divergence in economic performance also makes it harder for the members of the eurozone to reach consensus on measures to increase economic and financial risk-sharing in the currency area.</p><h3>South China Sea Dynamics</h3><p>China will continue to quietly build up its already-commanding military position in the South China Sea as part of its broader regional maritime strategy, and will also rely on economic levers. The United States will also continue its push to counterbalance China&#39;s regional rise by shoring up the positions of South China Sea claimants with economic outreach, support in international institutions, sanctions against Chinese entities, and the transfer or sale of defense equipment. Both&nbsp;<a href="/article/philippines-takes-tougher-approach-its-south-china-sea-claims">the Philippines</a>&nbsp;and Vietnam will increasingly reach out to the United States for cooperation driven by their domestic political situations, but with the economic damage of COVID-19 still looming large, they will need to avoid jeopardizing their economic ties with China.</p><h3>Turkey&#39;s Economic Gambit</h3><p>Turkey will try to embrace a more orthodox monetary policy to help <a href="/article/contextualizing-turkey-s-surprise-interest-rate-hike">stabilize its financial situation</a> in the coming year, which will help protect Turkey from negative economic blowback from its bold foreign policy. Driven by strong national security imperatives that play well with the domestic support base for the ruling Justice and Development Party, Turkey will remain highly active in the <a href="/article/whats-driving-turkish-aggression-mediterranean-sea">Eastern Mediterranean</a> and Levant. Turkey&#39;s aggressive actions in these spaces will worsen its rivalries with influential Arab countries like Egypt, the United Arab Emirates and Saudi Arabia. But so long as Turkey does not incur <a href="/article/trump-s-exit-will-increase-turkeys-exposure-sanctions">major financial penalties</a>&nbsp;from partners like the United States and the European Union for its actions, Ankara will not shy away from intervening in Middle Eastern disputes to bolster its regional posture.&nbsp;</p><h3>India&#39;s Economy Begins to Recover, but a Vaccine Rollout Will Be Lengthy</h3><p>India&#39;s economy will begin to recover in 2020 and could see one of the highest headline figures for economic growth globally, but may not recover to its full level of economic output prior to the pandemic. The Indian economy was one of the hardest hit by COVID-19 in 2020, with the International Monetary Fund expecting a full-year contraction of more than 10 percent this year, a decline it is unlikely to be able to reverse entirely in 2021. It will be relatively easy for India to achieve a high level of y-o-y growth due to the depth of the 2020 recession. But for India&#39;s growth to become more sustainable, Indian Prime Minister Narendra Modi will need more <a href="/article/india-modi-bets-farm-controversial-economic-reforms">structural economic reforms</a>.&nbsp;This process will remain slow in 2021, failing to meet the aggressive timeline Modi has envisioned. India will meanwhile be tasked with a complicated rollout of a vaccine given its immense&nbsp;population, significant policy differences between states and the national government, and its large rural and impoverished populations &mdash; pushing the country&#39;s full economic recovery into 2022.&nbsp;</p><h3>Argentina&#39;s Financial Woes Persist</h3><p>The Argentine economy will continue to struggle in 2021, as the country will face the negative impact of both the COVID-19 pandemic and structural issues such as high inflation, low productivity, lack of confidence in the Argentine peso, and strong skepticism among domestic and foreign investors about the government&#39;s ability to reduce the country&#39;s fiscal deficit and sovereign debt levels. Local and foreign businesses operating in Argentina should expect interventionist policies by the state, prolonged currency controls and a weak rule of law that will hurt confidence in the economy and undermine growth.&nbsp;</p>

2021 ANNUAL FORECAST: A GLOBAL OVERVIEW

Forecast Overview

Subscribe to view this article