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2021 Annual Economic Outlook Aftershocks and Divergence in the Post-Pandemic Economy

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2021 Annual Economic Outlook Aftershocks and Divergence in the Post-Pandemic Economy Economics Group 2021 Annual Economic Outlook Aftershocks and divergence in the post-pandemic economy December 2020 Table of contents Introduction and Summary 2 U.S. Economic Outlook 4 U.S. Real Estate and Regional Outlook 8 U.S. Political Uncertainties 14 Global Economic Outlook & Uncertainties 19 Forecasts 24 Disclosure 26 1 December 10, 2020 | 2021 Annual Outlook the election have not led us to change that assumption. As Introduction and Summary of this writing, lawmakers are negotiating the details of another stimulus package, and more fiscal stimulus could The Pandemic Has Been the Economic Equivalent of a be forthcoming. That said, we have seen other Magnitude 9 Earthquake negotiations collapse in the past, so we will continue to assume that no more meaningful fiscal support will be The longest U.S. economic expansion since the end of the introduced in the new year. We would make some modest Second World War came to an abrupt end earlier this year upward adjustments to our forecast for next year if indeed as the COVID pandemic essentially shut down the another fiscal package is signed into law. economy. Following an unprecedented plunge in Q2-2020—real GDP nosedived at an annualized rate of The Federal Open Market Committee (FOMC) responded 31.4%—economic activity rebounded sharply in the to the shock that the pandemic imparted on the economy third quarter. But the shocks of the pandemic continue to by slashing its target range for its main policy rate back to reverberate throughout the economy as renewed surges in 0.00% to 0.25%, where it remains today. The FOMC also COVID case counts have led some local officials to re- reinstated its quantitative easing (QE) purchases of impose some restrictions. Furthermore, voluntary Treasury securities and mortgage-backed securities, and it decisions by individuals and businesses to follow guidelines rolled out a plethora of lending programs to stabilize credit regarding socially-distanced behavior have led to markets. Looking forward, we suspect that the FOMC will weakness in some sectors of the economy. Most foreign maintain its current target range for its main policy rate economies, which have experienced their own outbreaks of through at least the end of 2022. In addition, the COVID cases, have also been rocked by the pandemic. committee may eventually sanction further monetary accommodation if inflation struggles to reach 2% or higher Most economies will register sharp rates of contraction in on a sustained basis. Although the likelihood of a negative 2020. We estimate that global GDP will shrink 3.7% this policy rate seems to be rather low at this point, the FOMC year, the most severe global downturn since at least 1980. could potentially provide further monetary Although we forecast that real GDP growth in most major accommodation by concentrating its QE purchases at the economies will bounce back significantly in 2021, we long end of the yield curve in an effort to push long-term readily acknowledge that the economic outlook remains rates lower and/or by increasing its QE purchases. If the dependent on the evolution of the pandemic in coming FOMC errs, it will provide “too much” monetary months and quarters. accommodation rather than too little, in our view. In that regard, COVID cases in the United States have risen As noted previously, the economic effects of COVID have significantly over the past few weeks, and some U.S. states reverberated around the world. The Chinese economy, and municipalities have tightened restrictions in an effort where the pandemic originated around the turn of the to slow the spread of the virus. Accordingly, we have year, contracted 10% (not annualized) on a sequential downgraded our U.S. GDP forecast for Q1-2021, which a basis in Q1-2020. But China has largely been successful in month ago we had projected to be 4.0%, to only 1.2%. But subsequent months in combatting the spread of the virus, we have also upgraded our forecasts for the second and and the country has reported negligible numbers of new third quarters of next year due to the recent news that cases since March. We forecast that real GDP in China will scientists have developed a few vaccines that should help grow 9.6% in 2021 following its pandemic-induced life return to some semblance of “normal” by the middle slowdown to 2.2% this year. part of next year. We look for real GDP to grow at a robust rate of 4.5% in both 2021 and 2022. Real GDP in the Eurozone plunged roughly 12% (not annualized) in the second quarter as most governments in We have not made major changes to our U.S. economic the euro area locked down their economies to slow the outlook at this time that are based on the outcome of the spread of the virus. Although economic activity rebounded elections that were held in the United States on sharply in the third quarter as case counts receded over November 3. Our pre-election outlook was predicated in the summer, the reimposition of restrictions by most part on the assumption that lawmakers would not provide European governments that followed a renewed surge in further fiscal support to the economy, and the results of COVID cases means that GDP growth in the Eurozone 2 December 10, 2020 | 2021 Annual Outlook likely will turn negative again in Q4-2020. We forecast severely tested by lower oil prices and disarray in the that real GDP in the euro area will fall 7.4% this year before energy industry. growing 3.6% in 2021. Center city areas have been particularly affected. The near Cracks Have Opened Up Across Sectors, Regions and extinction of daily office commuters has deprived Countries downtown restaurants, bars, coffee shops, hotels, gyms, dry-cleaners, barber shops, doctors, dentists and drug Not only did the pandemic impart a significantly negative stores from a vital source of revenue, and many have shock to the global economy, but it has had asymmetrical permanently closed. Cities with expansive downtown economic effects on different sectors, regions and areas, such as New York City, Los Angeles and Miami, have countries. For example, the residential housing market in felt the repercussions even more acutely as a result. The the United States has been robust since the economy eventual return of office workers, business travelers and started to re-open in the spring. Extraordinarily low tourists should help these hard-hit areas bounce back, but mortgage rates and the desire more space from which to it may be some while until life returns to “normal.” work from home have led to the highest number of home sales and single-family housing starts since the housing The divergence in economic performance across countries bubble imploded more than a decade ago. On the other has also been marked. China, and Asia more broadly, hand, however, multifamily starts, which rose to a 31-year experienced the economic shock of the pandemic first. But high in 2019 as an increasing number of individuals opted those countries also have been largely successful in for the experience of urban living, have been trending combatting the spread of the virus in recent months, and lower in recent months. Although demand for multifamily the economic outlook in those economies is reasonably housing in urban areas likely will continue to struggle, at solid. Economic activity in the Eurozone and the United least for the foreseeable future, suburban demand may Kingdom is likely to relapse in the near term, and growth in hold up relatively better. We expect single-family housing the U.S. economy also appears to be downshifting starts to climb further in 2021. markedly. Many developing economies experienced steep declines in economic activity earlier this year, and COVID The pandemic has accelerated trends that were under way cases in many of these economies remain elevated, which in commercial real estate (CRE). Construction of retail will dampen near-term economic prospects. For other establishments has been under pressure over the past few countries beset by weaker fundamentals or political years as more retail spending moves online. But, the boom uncertainties, such as Turkey, South Africa and Brazil, the in online sales in recent years has helped to push recovery phase will likely be more challenging. construction of warehouse space to all-time highs. These trends likely will continue for some time. Similarly, In sum, the COVID pandemic has been the economic industries that are dependent on travel (e.g., airlines, equivalent of a magnitude 9 earthquake on the global hotels, convention centers, etc.) have been economy in 2020. Just as the aftershocks of a major disproportionately affected by the pandemic, and activity earthquake usually are not as devastating as the initial in those sectors likely will continue to struggle until event, the shocks that are being imparted by the pandemic vaccines are widely deployed and life returns to “normal” do not appear to be as economically catastrophic as the again. initial shock. Still, the economic outlook remains very dependent on the evolution of the pandemic in the coming Although every state in the country has been adversely months, and different sectors and economies will continue affected by the pandemic, several are lagging behind. New to feel its effects in varying degrees for quite some time. York and California have been cautious in their re-opening efforts, and hiring has been slow to regain momentum. The collapse in travel has devastated the Nevada and Hawaii economies, not to mention a myriad of local economies such as Orlando and New Orleans, which also are driven by tourism spending. Energy-driven areas such as North Dakota, West Texas and Alaska have been 3 December 10, 2020 | 2021 Annual Outlook but the potency of the tools currently at the Fed’s disposal are weaker today than the tools the central bank was able U.S.
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