By David Skilling*
In this last note of an extraordinary 2020, I offer some thoughts on five economic and political dynamics that I think will profoundly shape 2021 across advanced economies.
1. China pushback and a fragmenting global system.
China’s increasingly aggressive behaviour around the world (Australia, Sweden, Hong Kong), as well as more explicit strategic economic rivalry, is generating growing pushback. The US trade wars, and growing frictions in technology, are one example. Many European countries are also taking a firmer line, no longer separating economic and political aspects of the China relationship.
The new Biden Administration will sharpen these tensions in 2021. It will likely take a more structured approach to the US/China relationship – and will ask more of its friends and allies on China. Despite a greater commitment to multilateralism in the incoming Administration, this may lead to a more fragmented global economic and political system.
Advanced economies – and particularly small economies – will have to make hard choices in 2021 on positioning. And firms won’t be able to avoid these decisions either.
Even partial decoupling from China is not straightforward; and China’s strong recovery this year has been a source of support for many advanced economies. But the global economy will more explicitly pull apart in 2021.
And China’s new ‘dual circulation’ policy approach, with a greater focus on building domestic strengths, will reinforce this decoupling process.
2. A new social contract.
Four years on from the political earthquakes in the UK and the US, the populist wave is receding with a win for President-elect Biden, what looks likely to be a (thin) Brexit deal, and competent governments performing much better through the Covid crisis.
Although this is far from a return to the status quo ante, the dynamics that contributed to these political shocks are increasingly recognised. Governments are under pressure to renew the social contract for a changed world so that the gains from progress are more broadly shared.
And the response to Covid-19 has accelerated the development of a larger, more active government. This is markedly different than after the global financial crisis when there was not a structural policy response to the clear economic, social and political pressures.
2021 and beyond will see policy innovation at a scale not seen for decades to respond to existing issues as well as the structural Covid recovery process. This will include redesigned social insurance and public goods provision, and new types of industrial policy.
In many ways, small advanced economies provide a guide as to what this might look like, having delivered strong economic and social outcomes while embracing globalisation and technology.
3. The world is going green.
Green issues will move even more quickly into the mainstream in 2021. Governments and firms are making increasingly ambitious commitments in response to growing citizen, shareholder, and customer pressure; as well as the increasingly obvious physical realities of climate change.
This has been accelerated by Covid-19; many of the recovery packages have significant green transition elements.
The economics of the green transition are improving, with the cost of deployment of renewables plummeting. The speed of deployment of renewables is likely to continue to exceed expectations. Indeed, the pricing of clean energy stocks has run well ahead of other benchmarks in 2020, while oil and gas stocks have lagged.
Governments will act with intensity to create growth engines in this space, and to support firms and households to operate in a lower emissions manner.
More stranded assets (from transport to the oil and gas sector), as well as new growth opportunities (plant-based foods, sustainable construction), are likely in 2021.
4. An uneven recovery
GDP growth is forecast to bounce back in 2021, although most advanced economies will not return to 2019 GDP levels until at least 2022. There are risks, from vaccines to geopolitics; and the new lockdown measures will dampen the pace of recovery in many economies.
However, the profile will be positive. And I am increasingly persuaded by the potential for stronger, sustained productivity growth over the next several years.
But this growth will be uneven across and between economies: a rising economic tide will not lift all boats equally. Some sectors are structurally advantaged – notably the technology sector, where Covid has accelerated the digital transition – and these sectors will continue to out-perform in 2021. Managing the distributional consequences of this will be a major policy priority for governments in 2021.
There will also be unevenness across countries. Countries that can safely reopen quickly, and that can position themselves to benefit from the new drivers of growth will out-perform: this will require investments in skills and innovation, and supporting the transition into new growth sectors.
The distribution of outcomes across sectors and economies will widen; not everyone is positioned to have a stronger 2021. Small advanced economies will continue to out-perform, as they have through 2020.
5. Macro policy regime change.
The macro policy regime in place for the past few decades is changing, with negative policy rates, QE, and very high public debt levels. In 2021, many of these changed norms will become institutionalised: new fiscal policy guidelines, new coordination models between central banks and finance ministries, and so on.
Much of this new orthodoxy is appropriate given the severity of the Covid shock. The economic recovery process through 2021 will require macro policy support: large fiscal deficits, low policy rates, central bank purchases of government debt.
But there are side effects. Although these macro policy shifts have dampened economic volatility over the past decade, 2021 may mark the end of this phase.
For example, expect inflation to begin to pick up through 2021: loose monetary policy combined with ongoing fiscal stimulus in the context of a strengthening economy with new supply side frictions (e.g. on globalisation) will create inflationary pressures. And central banks will be more prepared to accept above target inflation.
These macro policy settings and outcomes, with accompanying volatility, will be a marked change from the regime that has prevailed from the 1990s.
After some false starts over the past decade, 2021 will be a year in which the impact of structural economic and political changes become clearer: from climate change and geopolitics, to new drivers of economic growth and a new social contract.
Covid-19 has acted as a catalyst, accelerating the adjustment to new economic, political, and geopolitical realities. Buckle up for another landmark year.
Five specific predictions for 2021
With heavy caveats on the limitations of forecasting, I also offer an additional five specific predictions for 2021:
The HKD peg is gone by the end of 2021, as part of China’s efforts to push the US out of the region - and to reinforce the premature ending of ‘one country, two systems.’
‘Brexit fever’ breaks in the UK, after a thin deal with the EU is struck this month. Boris Johnson exits as PM in the first half of the year, and the focus turns to negotiating a forward-looking set of arrangements for the UK/EU relationship in a new political context.
A freshly-pardoned President Trump (& family) continues to campaign through 2021 on claims of a stolen election, keeping alive the option of a Presidential run in 2024 to try to maintain a hold on the Republican Party.
Taiwan becomes a key flashpoint between the US & China, because of its growing technological and geopolitical significance. The US significantly steps up its commitment to Taiwan.
The euro hits 1.35 against the USD as a European recovery takes hold, and as loose macro policy continues in the US - coupled with concerns on US political risk.
Let me know what you expect to see in 2021.
*David Skilling is the founding director of Landfall Strategy Group. He advises governments, firms, and financial institutions in the Asia-Pacific, the Middle East, and Europe on the impact of global economic and politics, with a particular focus on small advanced economies. You can find more of David's work here.