Covid had a huge impact on the global economy – will it bounce back in 2021?

Nobody could have seen the pandemic coming, let alone its financial implications, says Hamish McRae. But can we predict what next year will be like?

Despite the pandemic, 2020 saw house prices soar (PA)

We get things wrong. If this year has taught us anything it is how woefully wrong everyone’s predictions for 2020 have been. True, missing the only thing that really mattered can be excused because of its rarity. Things that only happen once in a century are hard to call. But even when the gravity of the pandemic did become apparent not many people got the financial implications right. The worst-ever peacetime blow to the global economy, yet US shares and UK house prices hit all-time highs? What’s to make of that?  

Given this monumental collective failure there’s a temptation to ignore the various forecasts for financial markets for the coming year. But once you get past the “clever people get things wrong” point, what do you do? We all have to make the string of decisions, large and small, that we meet in our daily lives. We have to decide about jobs, homes, pensions and the like. And we have to do something with our savings, even if it is just leaving them in the bank. In making these decisions we have to make implicit forecasts about what we expect will happen.  

So we are all forced to be amateur forecasters whether we like it or not. What hope is there for us when the professionals get things so wrong?  

As far as the economy is concerned, there is a common sense approach. There has been a huge blow this year but now there are vaccines that we know do work, we can see that next year will see a decent recovery. We don’t know the timing of the strength of that, but we have enough experience of the economic cycle to be pretty sure that jobs lost now will come back in some form or other.  

This gives some sort of anchor to help us plan things like job changes, whether we should move home and so on. Take house prices. They may fall back, but if they do we would not be in unknown territory. We have experience of the house price crash after the 2008-9 recession, when prices on average fell by 20 per cent. That is not to say the risks are as great now – I don’t think they are – but at least we are not flying completely blind.

For financial markets things are even more tricky. All the financial enterprises are making their forecasts for the coming year for interest rates, exchange rates, share prices, oil prices and the like, but the result is confusion. There are too many influences, too many things going on.  

For a straightforward view on all this I found myself turning to Jim O’Neill, now Lord O’Neill, who made his name when chief economist at Goldman Sachs as the creator of the famous Brics report. This was 20 years ago. Brazil, Russia, India and China were the four largest emerging economies, and the report was based on an economic model that was able to predict how these countries would come to rival the nations of the developed world.  

It was one of the most influential bits of economic research that has ever been published. There are annual Brics summits (with South Africa joining the club). There is a Brics development bank, now called the New Development Bank. True, things have not turned out exactly as suggested – China has done rather better, Russia much worse – but the big message stands that power is shifting to the emerging world.  

So what does Lord O’Neil think now? He is, on balance, optimistic about 2021. In a briefing for Project Syndicate, he set out both the bull case and the bear case for equities next year.  

The core of his bull case is that with Joe Biden in the White House there will be a return to multilateralism and global cooperation. There will also be several vaccines available and as these are rolled out this will boost a strong global cyclical rebound.  

The bear case is that shares overall are not cheap, that the US high-tech sector in particular is vulnerable to tighter regulation to curb its apparent monopoly power, and that there are dangers that a revival of inflation might lead to higher interest rates. He also thinks the dollar will tend to decline but if that does happen it will boost commodity prices which will in turn help emerging markets.  

“On balance, then,” he concludes, “I count myself among the bulls.” That is a global view, focusing in particular on US equities. But since US markets make up more than half the value of the world’s share markets, what happens there will affect us all. If he is right, then 2021 will indeed be a year of decent recovery in many different ways.