While stock markets worldwide remained supported by improved vaccine-related prospects, the much-debated question now is how far this will quicken the world economy’s return to normalcy. Image Credit: Gulf News archives

Dubai: While stock markets worldwide remained supported by improved vaccine-related prospects, the much-debated question now is how far this will quicken the world economy’s return to normalcy.

“Optimism is in the air - and for good reason,” said Luca Paolini, chief strategist at Pictet Asset Management, when giving his outlook for 2021. “Better treatments are being deployed against COVID-19 and there is a growing possibility of effective vaccines being available in a matter of months.”

While this improves the prospects for a recovery in the global economy and corporate profits, Paolini however cautions how it will still take a long time to return back to pre-pandemic normality and that 2021 will be only the start of the transition.

“Markets have begun to look through the short-term to the sunny upside of the vaccine-led recovery,” noted William Davies, Chief Investment Officer, EMEA, at Columbia Threadneedle Investments, when outlining his outlook for 2021.

“Where previously they appeared vulnerable to any spike in positive tests or hospitalisations, now they appear more sanguine.”

Economic view improves

In its latest economic outlook, the Organization for Economic Cooperation and Development (OECD) said it currently expects the global economy to build momentum over the coming two years, with real gross domestic product (GDP) growth projected to reach pre-pandemic levels by the end of 2021.

“For the first time since the pandemic began, there is now hope for a brighter future,” the OECD said earlier this week, citing progress with coronavirus vaccines.

It expects the global economy to contract 4.2 per cent in 2020, an upward revision from an estimate made in September that pointed to a 4.5 per cent fall in real GDP. It also views real GDP growth to hit 4.2 per cent in 2021 — trimmed from a September forecast of 5 per cent — and 3.7 per cent in 2022.

The OECD, which monitors and advises its 37 member countries on economic policy, expressed cautious optimism about the worldwide economy gaining momentum through to 2022, citing scientific progress, pharmaceutical advances, and adjustments in the behaviour of people and firms, among others, as factors likely to help keep the virus in check, allowing restrictions on mobility to be lifted progressively.

How recovery will look like

While at the start of the pandemic, economists largely forecasted economic recovery to be V-shaped, as the pandemic prolonged, economic prospects were dragged out and many of them shifted views on the potential rebound either being U-shaped or even L-shaped.

In April, Columbia Threadneedle Investments originally forecasted that the recovery would be U-shaped, while seeing the level of economic activity return back at pre-pandemic levels by the end of 2022.

“However, the strong efficacy of the drugs from Moderna et al would encourage us to believe that the recovery from the pandemic may be quicker in 2021 than we had previously anticipated,” Davies added.

“That should bring forward the economic recovery by as much as nine months, meaning we see a recovery to pre-pandemic levels by early-2022 or possibly even the end of 2021.”

Several encouraging developments in the race to deliver a safe and effective coronavirus vaccine have been announced in recent weeks, raising hopes the world could soon return to some semblance of normality.

China to drive revival

While economists worldwide view economic recovery to be uneven across countries, they are largely of the view that China was expected to account for over one-third of world economic growth in 2021, while the contribution of Europe and North America will remain smaller.

“One thing is clear: emerging markets will lead the economic recovery in 2021, propelled by China and supported by a weaker US dollar,” Paolini opined. “A recovery in the job market and record levels of household savings should lift consumer spending worldwide. Investment will also get a boost from rising profits and maintenance cycles.”

The OECD said it sees China, which started recovering earlier than its peers, recording economic growth of 1.8 per cent this year, the only economy to record economic growth in 2020. The world’s second-largest economy is to record real GDP growth of 8 per cent next year and 4.9 per cent in 2022.

By comparison, the US was expected to record an economic contraction of 3.7 per cent in 2020, before posting growth of 3.2 per cent in 2021 and 3.5 per cent in 2022. The euro area was seen reporting real GDP of 7.5 per cent contraction this year, 3.6 per cent growth in 2021 and 3.3 per cent in 2022.