What’s going to happen to the economy in 2021? Now that we’re approaching the end of the third quarter of 2020, there are three scenarios for the coming year that savers, investors and people planning for retirement should keep in mind.
Yellow means proceed with caution
Steve Chen
The Good Case for 2021
Though some people (like Bill Gates) have been predicting a coronavirus pandemic for years, this one took financial markets and the global economy by surprise. The result was the biggest drop in GDP and employment in history. In April, some people were predicting a V-shaped economic recovery, and Ben Bernanke said COVID would be more like a “great snowstorm” than a replay of the Great Depression.
Six months later, the global economic recovery has been mixed. Germany predicts a V-shaped recovery and economic growth of 4.4% in 2021. In China the economy returned to expansion in the second quarter, and services, which were most affected by pandemic lock downs, are showing strong growth as Chinese consumers release their pent-up demand.
In the U.S., however, unemployment remains elevated, and the federal government may not pass another stimulus measure before the election on November 3rd. The likelihood that the economic impact here will resemble a great snowstorm seems more unlikely with every passing day. There is a case for optimism, however.
A lot depends on the development and adoption of a vaccine for COVID-19, but even Anthony Fauci is cautiously optimistic that one will be approved for widespread use by the end of 2020 or early 2021. Even if a vaccine comes closer to Q2 2021 (still a record for a new vaccine), major advances in the treatment of COVID-19 are being discovered that drastically reduce the mortality of the disease.
The U.S. economy has also shown some green shoots as housing starts in July “blew past expectations” and topped the same number from a year earlier. There is still a lot of fear around COVID-19, and some of our economic habits — like flying often for cheap — will take longer to rebound than others. But if new case counts go down significantly across the country and don’t tick up again when social restrictions are lifted you will probably see a flood of economic activity as consumers open their wallets in earnest.
Since 1950, the average recession has lasted less than a year, and never before has the U.S. government dedicated so many resources to fighting a recession. The extraordinary action promised by the Fed and a possible second round of stimulus could make 2021 “the best year for the economy in history,” according to writer and Wall Street Journal columnist Morgan Housel.
The Bad Case for 2021
Housel isn’t a perma-bull on the economy — he’s a realist. As an author who just wrote a book titled “The Psychology of Money”, Housel says the big lesson 2020 taught us is to expect surprises.
Even given the best-case scenario with a vaccine, Housel sees profound psychological changes that will shape our behavior as consumers. “I think people for the rest of their lives after this year will probably have a higher propensity to save money because the fear that was struck in them in March when business owners and retirees and everyone in between had a great February and then woke up in March and said, I might be going bankrupt,” he told me recently.
So far the 21st century has produced an economic shock every ten years: first the Dotcom Bubble bursting, then the Great Recession, and now the pandemic recession. “Fool me once, shame on you,” as the old saying goes. Consumer spending and saving has been supported by government stimulus, but if further stimulus measures aren’t passed, the money consumers and small businesses put aside for a rainy day will be saved (not to say hoarded) for necessities, discretionary spending will trend down, and the economy will stall.
The pandemic-induced recession also fast-forwarded changes that were slowly happening already. As Philipp Carlsson-Szlezak and Paul Swartz of the BCG Henderson Institute have noted, the pandemic might be a catalyst for productivity growth in the services sector, though that change will come with possibly massive dislocations as workers who previously had stable jobs have to retrain or take early retirement. There is also a very real recession happening in most major cities now – driven by white collar workers going remote en-masse and leaving city centers looking like ghost towns.
A tectonic shift in how the economy is organized could sap growth for 2021 and beyond.
The Ugly Case for 2021
In the worst-case scenario all the breaks we assume in the good and bad cases break bad, and what could have been a merely bad year becomes ugly.
Stock market observers have wondered how equities not only rebounded from their losses but have set new records in 2020 even as the economic picture for millions of Americans looks bad. The truth is, as an indicator of future cash flows, the stock market is betting on either the good case or a mild version of the bad case for the economy in 2021.
But that optimism is based on the conditions outlined above. Two negative developments in particular could derail the stock market rally, which would be a clear red flag that things will get ugly. The first is a setback in vaccine development. If case counts start to rise after the new vaccine(s) are deployed on a wide scale, either because the vaccines were rushed to the consumer and prove ineffective or because the virus mutates, we could see a replay of March 2020.
But that seems unlikely. The number of vaccines under development and the efficacy of new treatments indicates we will have the medical ability to control the disease in the near future. The bigger problem is that the government’s willingness to keep the economy going with fiscal stimulus evaporates both in the run up to election day and after it.
No matter which party wins the White House and the Congress, if there isn’t a strong enough majority to overcome the current deadlock, millions of people who have been depending on government help to pay their bills will face real challenges around paying their bills and paying rent..The federal government will also have to coordinate the distribution of a successful vaccine, and political deadlock and polarization could also undermine the ability of average Americans to get it and/or be willing to take it.
Finally many Americans are increasingly worried about the election and their futures given the back drop of the pandemic, the weak economy and social unrest. So far social unrest hasn’t been able to pierce the bubble of optimism protecting U.S. markets, but that may be because all sides are optimistic they will prevail in the upcoming election.
On November 4th if there isn’t a clear winner and a clear policy direction to go with it, equity investors could pull their money out of markets. Without further stimulus, small businesses that have been hanging on by the skin of their teeth could throw in the towel, and the wounds of 2020 will become long-term scars on the economy and the country. No matter what happens it pays to think ahead and create your own plan for what may come.
Note: if you want to build a plan that helps you think through your Plan A, B and C – you can build your own retirement plan for free here.