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Rapid recovery in 2021: 'We'll be shocked at how strong economy comes back' but risks remain, say analysts

Kitco News

Kitco News has launched its 2021 Outlook, which offers the most comprehensive coverage of precious metals markets in the new year. Trillions of dollars were pumped into financial markets in 2020 and that won't come without consequences. Economists expect that investors will be Bracing For Inflation in 2021.

(Kitco News) Next year will be all about getting the coronavirus under control and igniting global economic growth after a year of shock and the deepest recession since the Great Depression. However, analysts warn that the real recovery can only begin in the middle of next year.

This year's unprecedented downturn was very different from the crisis of 2008-09, and the recovery will also be a very different one, said Goehring & Rozencwajg Associates managing partner Leigh Goehring.

"This global pandemic caused a huge economic shock, with the U.S. alone seeing its Q2 GDP fall 31.4%. It was the first such huge economic shock in the last 100 years or so that was not accompanied by some sort of impairment taking place in the banking system," Goehring pointed out. "The banking system is still completely intact and functioning. This is very different than what happened in 2008-09."

On top of that, global monetary authorities flooded the system with money, which will be especially felt next year when people return to their normal lives, Goehring noted.

"Once the virus is put aside as a fear, and that will happen with the vaccine, the money will be put back into the economy. People will want to go out, travel, go to restaurants, live their lives again. We will be shocked at how strong the economy comes back," he told Kitco News.

And this will trigger the biggest risk of 2021 — inflation, said StoneX director of global macro strategy Vincent Deluard.

"Next year will be a year of recovery. We have all these stimuli: fiscal and monetary. We have the potential for very rapid recovery. Kind of what you would see after a major war," Deluard noted.

StoneX sees the global economy growing between 5% and 6%, depending on the vaccine rollout. "But this scenario means that yields are going up and inflation starts to happen," Deluard told Kitco News.

The coronavirus moved people into the digital world, but some of that will be reversed, triggering inflation. "As people start to come out, we could see more demand and drastically reduced supply amid some still ongoing restrictions on the economy," warned Deluard. "Once inflation starts to pick up, it might be hard to contain."

Capital Economics also sees rapid recovery in 2021, noting that a non-economic factor caused this year's economic crisis.

"We are expecting next year to be pretty strong. Our forecast of 5% global growth is above consensus," said Capital Economics U.S. economist Andrew Hunter. "One other main reason to be positive next year is a big pile of savings that built up over the past several months. Saving rates are not far from record highs. Spending will trigger consumption growth next year as the vaccine is coming and households are in a strong shape to go out and spend."

Markets could even be underpricing the global economic recovery right now, Hunter noted.

"Expect inflation to pick up relatively quickly and get up to Fed's 2% target by the middle of next year. It is this potential upward pressure from rising demand and a still constrained supply that will push up costs," Hunter explained.

But before any of this happens, winter of 2021 is likely to be a morbid affair as coronavirus cases continue to climb at a record pace and markets are being spooked by the highly infectious new coronavirus strain identified in Britain.

"It looks like we will have near-term weakness first. Cases continue to surge as more countries and U.S. states introduce restrictions. That will weigh on the economy in the near term," Hunter said. "But the U.S. is well placed in terms of vaccine production/distribution. It will be getting back to the place where life starts to return to normal."

The Federal Reserve expressed this concern last week as central bank Chair Jerome Powell said that the next four-to-six months would be difficult.

"The issue is getting through the next four-six months. Clearly, there is going to be a need for help there," Powell said. "The coronavirus case numbers are so high and widespread, it seems that the impact on the economy will happen. You are seeing some slowing now and during the first quarter of next year."

The economic situation will start to improve in the middle of next year when people begin to re-engage in a broader level of activities, Powell added.

2021 growth projections

The Fed's current economic projections for the next year see economic growth at around 4.2%, the unemployment rate at 5%, and inflation at 1.8%.

Wall Street's biggest banks also highlighted the beginning of next year as problematic while citing global stimulus and the vaccine as the key elements behind growth next year.

One of the most optimistic outlooks comes from Morgan Stanley, which is projecting a global expansion of 6.4% in 2021. Three factors are driving Morgan Stanley's V-shaped recovery: synchronized global growth, an emerging-market rebound, and the return of inflation, said Morgan Stanley chief economist Chetan Ahya.

"This projection stands in stark contrast to the consensus, which forecasts 5.4% global growth and worries that the pandemic will have a bigger impact on private-sector risk appetite and, hence, global growth," said Ahya. "We maintain that consumers have driven the recovery, and investment growth—a reflection of the private corporate sector's risk tolerance and a key feature of any self-sustaining recovery—is bouncing back as well."

For the U.S., Morgan Stanley estimates GDP growth of 5.9%, citing consumer spending and average personal incomes.

Citigroup sees global growth at 5% next year, noting great opportunities for investors.

"The investment opportunities in this new economic cycle will reflect many new realities, shaped by the impacts of technology upon our lives during this pandemic, as well as upon the values that we share," said Citi CIO David Bailin. "Our optimism going into 2021 is buoyed by strong financial institutions, high household savings, and growing confidence levels among businesses and consumers alike. We're also seeing increased investor optimism due to low global interest rates that will enable a full economic recovery."

Another strong forecast comes from Goldman Sachs, which projects global growth to be at 6% next year. Once vaccines are made available and lockdowns end, the economy will rebound, while central banks worldwide remain dovish, Goldman said.

Other major bank forecasts include Bank of America's 5.4% growth outlook and JPMorgan Chase's 5.8% projection.

Other risks to watch

There are a few other risks to keep in mind when it comes to 2021. One of them is potential obstacles associated with the vaccine rollout, said Guardian Vaults Business Development Manager John Feeney.

"Even if a vaccine is successful, it will take a certain percentage of people lining up to take it. This will probably drag on for a few years. The percentage of Americans who said they were willing to get vaccinated was close to around half. It needs to be much higher than that," Feeney said. "There are still so many uncertainties next year, but everyone is getting way too optimistic."

Also, investors need to watch out for uneven growth and potential long-term economic problems, such as lack of new jobs, said OANDA senior market analyst Edward Moya.

"As far as next year goes, I think that the recovery is going to be strong, but it is not going to be balanced," Moya told Kitco News. "It will take a lot more time to restore the economy. I still see at least five million Americans unemployed by the end of next year. The longer you have this struggle in the labor market, the worse off the economy is going to be."

These longer-term issues are likely to be worked out only in late 2022, Moya added. "The accommodation is not going away any time soon, and over these next few months, I would not be surprised if we had the Fed adopt yield curve control while providing more accommodation," he said.

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