After an awful year, we are seeing promising signs that the coming year could be a more convivial one. Even accepting that we live in a world that frequently delivers all manner of shocks, we can reasonably expect a better year. A new president in the US brings hope that political relationships will be reset so that we get greater predictability and stability in big power relations. The worst effects of the pandemic are likely to be over by the middle of next year, allowing the global economy to get back on its feet. Then, ordinary citizens of the world could enjoy the benefits of the many new technologies that are taking off, presenting us with a range of exciting new products and services.
The age of great unravelling — why things are more unpredictable than before
But first a reality check. The past year has served as a warning for anyone who makes predictions. The Covid-19 pandemic made a mockery of economic forecasts. Sadly, the pandemic shock may not be just a one-off. After all, the world seems prone these days to big shocks — just look at the series of crises we have been shaken by in recent years, including the 2008 global financial crisis and the European sovereign debt crisis. The reason why we should be prepared for more such developments is that long-standing relationships and fundamentals are no longer stable and predictable. As they unravel, the foundations of the system we have been used to are being shaken.
Take the world of big power politics. China has erupted on the scene in one of those political disruptions that occurs maybe once in 100 years or more. Beijing can now force changes in important areas — and no one, not even the US, can stop China. It has demonstrated this with its takeover of strategic locations in the South China Sea and by launching game-changing initiatives such as the Belt and Road Initiative. The old relationships among big powers are being up-ended and it is impossible to predict what shape a new political order will take — or even whether the path to that new order will be peaceful or not. As the US loses its dominance, it is also becoming less willing to help sort out emerging crises as it used to. Thus, whether it is in the Middle East or in the recent Armenia-Azerbaijan war, tensions are left to escalate until they explode into violence, unlike before when an American intervention may have averted a crisis.
Climate change is another big dislocation — nature does not behave in its old, more or less predictable ways but instead throws extreme events at us in totally unexpected ways. Droughts, the hottest temperatures in living memory in many places, wild fires even in icy Siberia and typhoons of increasing ferocity and frequency are visited upon us.
In the world economy, the process of globalisation seems to have slowed, and in some areas, perhaps started to reverse. In a world of more protectionism and inward-looking policies, it is not clear whether flows of goods, services, people and capital between countries will grow or shrink. The many new innovations that are now leaving the drawing boards create yet another set of uncertainties: Who are the winners and losers, which incumbent companies will die as their products become obsolete and which start-ups will turn into unicorns? Where will workers lose their jobs and what new types of jobs will emerge? How will governments respond and what new regulations may cause a promising unicorn to suffer reverses?
So, we have to expect the unexpected; that is just a fact of life. As we look into the future, all we can do is make educated guesses based on what we do know, accepting that there will be surprises along the way. The good news is that, based on what we can realistically project, 2021 could be a great year. Yes, there are a lot of things that could go wrong, but it also looks like we should be able to manage those potential challenges.
The global economy could surprise positively
A few factors are coming together to power the world economy. First, the drag on global growth from the Covid-19 pandemic will end, producing a strong snap-back in demand. Vaccines are being rolled out, improved drugs and clinical management are already reducing the seriousness of the illness and the increasing availability of cheap, fast and accurate testing allows for less stringent restrictions on economic activity. Barring some unexpected disappointments, the current surge in Covid-19 infections and deaths will be the last serious one. As confidence returns, ordinary folks and businesses will unleash their pent-up demand, and that means more consumer spending and more investment that will help economic output recover strongly.
Second, this surge in spending will be further supported by ultra-easy monetary policy, which we do not see changing even as the world recovers. The US Federal Reserve, the European Central Bank and the Bank of Japan have all made it clear that there will be no retreat from ultra-low or even negative interest rates, nor a rollback of quantitative easing. There is still scope for emerging economies to ease monetary policy as well. Fiscal policy will probably not be as stimulative as in 2020 in the big, developed economies but neither will it be contractionary.
Separately, several developing economies have adopted bold supply-side reforms that will also drive growth higher. In Indonesia, for instance, we have seen a courageous reform of labour laws that, together with President Joko Widodo’s deregulation efforts and energetic infrastructure drive, will make the country more competitive and spur investment. Similarly, in India, we have seen important reforms in agriculture and labour markets.
Third, China is likely to be a big driver of global growth. Having quelled the pandemic sooner than others and backed by monetary and fiscal stimulus, as well as an ambitious 14th Five Year Plan, Chinese growth will accelerate. Since China is now about 18% of the global economy and about 10% of world imports, this higher growth will drive up demand around the globe and help raise the prices of key commodities that many poor countries rely on for their sustenance.
Fourth, technology will be a big engine of growth. In the world of information technology, we expect businesses to step up spending as accelerated digital transformation continues to drive demand while headwinds such as inventory adjustments subside. Indeed, in the information technology space, the impressive improvements in computing speed will enable a range of new products and capabilities. In the coming years, we will see innovations such as blockchain being used more widely, providing an uplift to efficiency.
But there are many new technologies emerging outside information technology. Renewable energy in the form of solar and wind power is gaining traction faster than forecast, spurring investment in new forms of power generation and electricity grids. There are many advances in the biomedical area — new medicines, breakthroughs in the treatment of cancer and other frightening diseases and new equipment to improve medical treatments and diagnostics. As the totally unexpected speed of the development of vaccines against Covid showed, drug development is now speedier than before. There are also many new materials being developed that can change our lives — composite materials that make aircraft lighter and able to travel vastly longer distances than before, for example. And there are advanced manufacturing processes such as 3D printing that are already establishing themselves.
What can go wrong?
First, geopolitical troubles will not go away, so we will no doubt see a few more episodes of political disruptions in 2021. But there is also reason to believe that the larger risks could become less damaging in their impacts.
- US-China relations, the source of great uncertainty in 2019/20, is likely to be on a more predictable footing. Joe Biden will not be soft on China, but his experienced and pragmatic foreign policy team will bring more structure and discipline to foreign policy. The result will be a nuanced approach to China — there will be continued competition in the form of a defence build-up, robust pushback in areas such as the South China Sea and restrictions on technology will remain. But Biden is probably sincere when he says he also wants a constructive relationship with China, where the two will cooperate in areas of mutual interest such as climate change and perhaps the Korean peninsula.
- However, as Biden takes over an America weakened by political divisions and poor handling of the pandemic, there is a chance that one or more of the US’ rivals will be tempted to test him. Whether it is Russia, North Korea or Iran, there could be periods of tension as these challenges are thrown at the new president.
- There continues to be a popular backlash against many aspects of the global economy. People are angry about rising inequality and a sense that powerful elites are gaming the system. At the extreme, this backlash takes the form of ugly populism and nationalism, which can produce violent protests and shocking election results that bring disruptive leaders to power. But even in countries with gentler politics, it probably means policy changes that could hurt companies — such as higher taxes, more intrusive regulation and the forcible break-up of companies that have grown too large for comfort.
Still, it will not be all bad in politics. In Europe, for example, the Brexit issue should be finally settled, one way or the other, allowing Europe to focus more constructively on addressing other challenges.
Second, there may be greater volatility in financial markets, perhaps even the occasional sharp correction that could crystallise other financial problems.
- While we do not expect consumer price inflation to spike to levels that would alarm policymakers (above 2% to 3%) in 2021, there could be occasional episodes of inflationary concerns in markets. As economies recover, there will be less slack in economies and companies will regain some pricing power, enabling them to raise prices again. If oil prices rise again, that could add to higher prices.
- There could also be a payback to the huge build-up in debt of recent years. As the recent wobbles in China’s bond market remind us, even in economies that are growing nicely, and even with relatively low interest rates making repayment of loans easier, a high stock of debt can create stresses. If those stresses are not managed well, we could very well get a crisis.
So yes, it is not going to be all plain sailing. But we also do believe policymakers have a better grasp of what needs to be done to avoid political or financial stresses escalating out of control. Lessons have been learnt, there is better coordination now and new tools developed to contain challenges.
Conclusion: It will be a better year
After a year of unremitting bad news, it is natural for us to expect the worst and downplay the positives. Yes, there will be unpleasant surprises, but we think the political and policy fundamentals will improve enough to allow those things to be managed. That will allow the constructive developments to triumph over the bad news.
Manu Bhaskaran is CEO of Centennial Asia Advisors