Today marks an important milestone in the fight against the pandemic – the first person received the vaccine jab in the United Kingdom. Should the vaccines work, the economies will bounce back strongly in 2021. As such, traders and investors have a busy time forecasting the pace of the recovery and the implications for the financial markets.
During the pandemic so far, the “solution” to the economic crisis came from the United States. It was only after the Fed opened USD swap lines with the rest of the world that the financial markets stabilized and so governments and policymakers had the time to deliver proper responses. Therefore, the ones able to predict the U.S. economic performance accurately, will have a competitive advantage in the markets.
Back to the Pre-Virus Expansion Trend
The U.S. economy is forecast to contract about 4% in 2020 but to recover in 2021 and grow by 4.7%. A big issue here is the size of the possible fiscal stimulus expected in the first half of the year.
The market expects a second round of fiscal stimulus, but that would be difficult to estimate due to a divided Congress. Estimates go from $500 billion to over a trillion dollars, and the difference between the extremes is big enough to impact growth in 2021.
Personal consumption is expected to bounce back strongly. The savings rate increased dramatically in 2020 as households expressed caution in front of the pandemic. However, as vaccines against the virus are rolled out, consumer confidence should rise, and so the savings rate will come back to normal levels. In other words, that surplus should find its way back to the real economy, contributing to economic growth.
Dormant inflation will likely persist. Despite the Fed printing more dollars, the economy evolves below its potential, so inflation threats may not materialize until the economy reaches the pre-virus expansion trend. This gives the Fed even more firepower to act in the case of unexpected turns in the pandemic.
Obviously, the way the pandemic evolves is key to any economic forecast. Effective vaccines and mass vaccination will lead to a faster economic recovery. What about potential vaccine issues ahead?
In other words, there is still a lot of uncertainty to be accounted for, but at least the light at the end of the tunnel is in sight. After all, the vaccine jab reached its first patient today.