Prepare for a boom: the V-shaped recovery won’t become a W in 2021

Following the widespread lockdowns introduced in recent weeks,  including the largest European countries, many commentators have quickly concluded that the Q3 rebound from the Q2 collapse in economic activity will fizzle out so much and so quickly, that any  notion of a V-shaped recovery is over, and we are on the path of a W. It is not surprising to read these views and they could be right. But beyond a blip for parts of the fourth quarter, I suspect not.  

Indeed, at the time of writing — soon after the US election and news that the Pfizer/BioNTech Covid-19  vaccine has passed through Stage 3 trials — my view is that, unless many countries make a considerably worse mess of these lockdowns than previously, the more likely possibility around the world is that, at least the first half of 2021, but probably also the remainder, and going through 2022, may witness statistically an economic boom, and certainly one that might feel like it at times.

I have written before about the clear evidence that much of the world economy witnessed a huge  bounce-back in Q3 from the Q2 collapse. While offering in itself nothing about the prospects  for sustained economic recovery, this certainly confirmed that some improvement in economic activity had occurred around the world through October. Even here in the UK, we will get news, before this  week is over, that Q3 saw a double-digit rise in GDP.

Before elaborating further, let me emphasise that, whatever happens with a first-half 2021 economic recovery, it might not mean that this recovery will be sustained beyond 2022, nor does it tell us how equitable any such recovery may be, either within countries or across the world. There are huge challenges to which policymakers, business and society will have to rise: about how to pay for the  financial costs of the pandemic, huge issues about distributing vaccines around the world, as well as  many substantive issues about the fairness of modern capitalism that the Covid-19 crisis might have  exacerbated. And, of course, there is climate change.

That said, the nature of any further economic rebound through 2021 and 2022, especially its degree,  and the subsequent response from monetary and fiscal policymakers, will itself have a bearing on all these issues. For example, the stronger the rebound in GDP, especially if accompanied by the end of temporary tax abandonment measures, will allow for less concern about the underlying national debt problem that has been unleashed by this crisis. This is partly why I have been advocating the case for a shift to nominal GDP targeting in many countries, in order to boost  the probability that a very strong rise in nominal GDP can occur. This, then, will allow for more thoughtful decisions than otherwise likely about the need for tax increases (beyond ending  temporary tax holidays), as well as government spending cuts.

As for the vaccine distribution issue, with the near certainty that Joe Biden will become the next US  President, suddenly the chances of a more globally co-ordinated path for vaccine distribution around  the world, especially for the lower income countries, has improved. Even though the forthcoming G20 in Saudi Arabia on 21-22 November will be held while President Trump is still in charge in the US, the other G20 countries will almost definitely be planning  for a life with Joe Biden. 

Sadly, among many areas that have been held back by Trump’s odd stance about American global leadership has been the issue of global co-ordination of vaccine production and distribution (as well as treatments and diagnostics). This should now change, and a flavour of this might emerge at the Saudi G20. The need for G20 members to show individual and collective leadership in supporting the ACT-A initiative linked to the WHO, including the provision of  finance, is almost in the no-brainer category. Their need for around $35 billion is less than one tenth of one per cent of global GDP, at least as it stood at around the end of 2019. This is tiny compared to the $9 trillion that the world has lost due to the pandemic, according to the IMF. Decisions about climate change and more equitable aspects of capitalism  are challenges which lie beyond the scope of this article, but these too are likely to be influenced by the emergence of President Biden.

Following the Pfizer news, it is highly likely that other promising vaccine candidates will soon follow,  with the possibility of at least another two before 2021 is over. As can be seen from the immediate  reaction in equity markets today, those sectors most adversely affected by the pandemic, notably global travel and tourism, have been dramatically upgraded by market prices. This is set to continue as suddenly a path opens towards a semblance of normality. Indeed, along with the ongoing  dramatic improvements in the speed and accuracy of tests for Covid-19, it looks as though in the next few weeks, business will be able to at least map out some kind of framework for a post-Covid-19 world. With evidence that useful vaccines are not just some wild optimistic fantasy, this allows policymakers to think much more creatively than the blunt lockdowns that they had to engineer in 2020. In turn, all seven billion of us around the world will start to approach the future with some hopes, perhaps only modest for some, but greater for others, that the nightmare  of 2020 has a finite end.

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