By: Myles Zyblock, Chief Investment Strategist, Scotiabank
The year in review
With each passing year, it seems like we are met by some sort of surprise. But nothing, at least in our experience, holds a candle to the events that unfolded in 2020; not the Asian currency crisis, the dot-com collapse of 2000, or even the financial crisis of 2008.
The world was gripped by a ferocious pandemic, the likes of which had not been seen in at least a century. Schools were closed, stores were shut, and travel came to a complete standstill. Our lives were turned upside down in a matter of weeks.
The waves from this shock led to some of the steepest declines ever recorded in credit, equity, and commodity markets. Asset price volatility surged to a level not seen since the 1930s Great Depression. For a brief period, oil prices turned negative for the first time ever, as demand dried up and oil producers actually paid buyers to take the commodity off their hands.
Policymakers responded to this crisis in the only way that they knew how: to flood the system with stimulus. Tax cuts, lending support and income supplements were just a few of the many tools governments used to offset the collapse in private sector incomes. Central banks threw in their support by slashing interest rates and buying up troubled assets, legacies of the last financial crisis, in order to help stabilize the economic and financial system.
What then followed was a stunning reversal of fortune. Prices skyrocketed from their late-March lows and, by August, both equities and credit had moved back into positive territory for the year. The initial surge higher was in response to hope, that the mountains of policy stimulus would stabilize the economy. We quickly learned how to work, shop and communicate better from home. This helped the thawing process and added to investment optimism.
Yet many industries such as airlines, commercial real estate, hotels, resorts, entertainment and energy are still behaving as if the world economy is a long way from anything which resembles normal. The virus is spreading again across the U.S. With hospitals filling up and mortality on the rise, it feels like this situation is far from being resolved.
The interaction between the virus and the economy are at the heart of this unfolding story. Buckle up. The next several quarters have all the makings for a fascinating ride.
Economic cracks resurfacing
The most recent surge in virus caseloads, particularly across Europe and the U.S., is likely to weigh on economic activity over the next few months. Growing concerns about the spread will encourage individuals to remain indoors or to reduce unnecessary travel and interaction. The impact of government-imposed restrictions will also play a role in the slowdown.
It is too soon to say, but it would be very surprising if some sort of slowdown was entirely avoided. Many economic indicators clearly point to slower growth ahead in Europe. Similar data suggests that the U.S. has lost momentum in some sectors of the economy, but not enough at this stage to alter our view of its ongoing recovery.
Keep in mind that we are about one year into this pandemic and have learned many new ways of doing things. These adaptive behaviors should be able to take a lot of the sting out of this recent wave of viral spread. Government support that is now in place, and more which seems likely to follow, in both Canada and the U.S., will also help to stabilize global economic growth. Most importantly, we have promising new vaccines which will play a primary role in shaping the economic and financial market environment as the calendar turns to 2021.
Shots heard ‘round the world
Vaccine development is a highly complex process. It involves several stages which include preclinical and technology development, phased trials, and licensing. We are naïve about this subject matter. But, the level of complexity is evidenced by the fact that it has usually taken 10 to 15 years for a vaccine to be developed. And in some cases, like AIDS, we are still waiting for a vaccine effective enough to be licensed.
Yet, three viable coronavirus vaccines appeared on the world stage over the course of November. Phase III trial data showed high efficacy estimates in reducing symptomatic cases for Pfizer-BioNTech Moderna. This places the coronavirus vaccine breakthrough in a league of its own; a complete testament to human ingenuity and innovation when enough smart people focus on a single problem.
Governments are now closely working with the vaccine producers to ensure that everybody who wants a vaccine will be able to get one. In Canada and the U.S., the initial vaccine rollout has begun on a small scale, with high-risk health workers, first responders and the elderly receiving the initial vaccination shots. U.S. health authorities say that they expect significant impact on the dynamics of the outbreak as early as the second or third quarter, while Canadian officials hope to have the large majority of Canadians vaccinated by the end of 2021.
There are concerns about the ability of the health authorities to get the doses to the people who need it most, tracking the doses, making sure the vaccine doesn’t expire before the end of its useful life, and following how people are doing in cases of “breakthrough” infection. In America, many of the distributional considerations have been left to the individual states which risks ad hoc or messy decision making. But, let’s not lose sight of the forest for the trees: inoculation against COVID-19 is now within reach.
The recovery’s next important phase
The world economy has rebounded following its historic second-quarter collapse, when Gross Domestic Product (GDP) growth for the major G7 countries dropped by an astonishing 36% annualized. Activity has vaulted higher with help from forceful government stimulus packages and innovative labour force and supply chain adjustments. It’s not hard to see how much worse this economic downturn might have been without the flexibility provided by various technology-based products and services. In fact, we might still be in a very deep freeze.
Aside from some economic speed bumps, the inoculation programs that have just begun should open the door to greater mobility, confidence and the long-awaited shift back to normalcy. It is hard to know exactly what this new normal will look like. It is unlikely to look the same as our pre-pandemic past. Regardless, life for many will most likely improve over the coming year.
The private sector has built up enough savings, with ample spare capacity, to suggest that the current expansion could be sustained for several years into the future. Governments are likely to only slowly withdraw stimulus after they have the confidence that corporate profits are in a solid uptrend and much of the damage inflicted on the labour market has been corrected.
For central banks, this might mean that we will not see any interest-rate increases for at least the next one to two years. And, subsequent fiscal stimulus packages, while smaller, will most likely be present far into 2021.
After falling by close to 4% in 2020, the economics community expects global GDP growth to bounce back to around 5% in 2021. We have no real disagreement with these views, thinking that most economies will post solid growth, with the Emerging Markets leading the way. GDP for both Canada and the U.S. will probably finish 2021 about 4% higher. In our opinion, the economic recovery is going to transition, with immense help from medical technology, towards a more self-sustaining phase during the next year.