What Tomorrow Brings

At this time of year, you would by now have read many letters or research articles predicting the key trends or themes to watch out for in 2021. We will add to this clutter, but do so by looking at the key trends that transpire when economies recover from deep recessions –

• Global financial markets have tended to rally as economic recoveries have strengthened over time–so we expect further equity price momentum in 2021 unless we experience sharply rising inflation (stagflation),
• House prices have tended to remain depressed for two to three years after a deep recession,
• Credit growth has also generally taken longer to attain the rates observed during non-recession periods,
• Monetary policy has played a crucial role in restoring financial markets' health while limiting the economic downturn – we expect monetary policy to continue supporting the ensuing global recovery.
• Countries that cannot sustain expansionary fiscal policy may face tremendous challenges ahead. The strength of the global recovery has historically been different across countries and country groups. Following the 2009 global recession, advanced economies experienced the weakest recovery because they withdrew fiscal support out of concerns for public debt growth.

Despite the challenges experienced in 2020, the positive news around the development of a vaccine has fueled positive momentum in global equity prices over the last two months. History tells us that Global recoveries have generally been characterized by a broad-based rebound in economic activity and a normalisation of financial conditions. We hope you will have a great and restful festive season on this positive note because we have a lot to look forward to in 2021.

Kose MA, Sugawara N, and Terrones ME. (2020). Global Recessions. World Bank Group Policy Research Working Paper.