As the COVID-19 virus spread over the world, the governments and central banks responded quickly
Money was flowing in from everywhere as fiscal and monetary expansion reached unprecedented levels.
However, households tend to also save a portion of their income. For instance, households always save a portion of their disposable income for future consumption. The more uncertain the future is, the bigger the savings. Thus, it leads to smaller spending rates and lesser money that will eventually be disposed of in the economy.
What policymakers do not want to see is higher savings or savings in excess that will affect the supply of money. Only that sometimes there is nothing the policymakers can do to influence consumer behaviour. However, if and when households perceive reduced uncertainty, the savings rate comes down, and spending increases. That is when the economy is expected to bounce back.
What Will 2021 Bring?
As we come closer to the end of the year, the economic outlook for 2021 has changed suddenly. One week ago, the news that Pfizer and BioNTech have a successful vaccine against the COVID-19 virus sent a wave of optimism throughout the world. Yesterday, Moderna, another pharmaceutical company, announced the results of its phase 3 trial on another vaccine. They were even better.
Other vaccines are in the pipeline, proving that science is here to save the day. Will this change the optics in consumer behaviour? Will the savings rate decline and leave room for strong consumption? Is there anything like a relief rally that everyone keeps talking about?
It may very well be.
A Bank of America recent survey shows that 91% of correspondents of its Global Fund Managers Survey said that they expect a stronger economy in the twelve months ahead. While it may not seem like much, this is the highest level in almost two decades!
The developed world economies received massive stimulus from central banks and governments. However, the trend is set to continue. Only in November, the Reserve Bank of Australia and the Bank of England delivered more stimulus. In December, the European Central Bank and the Fed in the United States will do so as well. In fact, the Fed vowed to use all available tools to boost the economy.
In other words, economic growth does exist. To boost it, more is needed — and more will come. Coupled with strong spending predicted for 2021, the prospects of a strong economic rebound are great.
If only we could get the virus under control.