When Will the Jobs Come Back?
PGIM Fixed Income finds the labor force participation rate continuing to decline well after the end of a recession, which supports the notion of running a high-
2020 has been a year that many of us will be happy to bid farewell. The COVID-19 pandemic has claimed nearly two million lives globally so far and forced lockdowns and rolling restrictions on populations. This in turn caused an economic crisis and financial market mayhem that has added to the human toll. The global economy has experienced a roller-coaster ride in 2020, as the pandemic caused the deepest recession in the post-war period. Fortunately, governments and central banks around the world stepped up with an unprecedented policy response delivered at lightning speed, which provided some relief and a sharper than expected economic recovery.
The COVID-19 global recession has been different from past recessions during which the service sector experienced smaller declines than manufacturing. In the current crisis, the service sector bore the brunt of the decline due to the public health response and individual behavioral changes needed to slow the transmission of the virus. Were it not for the sizable, swift, and unprecedented policy response that maintained disposable income for households, protected cash flow for firms, and kept credit flowing, the global recovery would have been much weaker. Central banks and governments in both developed and emerging economies delivered policy support of around $28 trillion, or 33% of global GDP, in monetary and fiscal stimulus, including $10 trillion in the US, or 48% of US GDP1. Collectively, these actions prevented the pandemic and resulting economic collapse from morphing into a longer-lasting financial crisis and a repeat of the previous global crisis, according to the International Monetary Fund.
QMA believes game-changing news on the vaccine front should bolster the economic recovery in 2021. In record time, multiple firms have developed vaccines that showed over 90% success in final clinical trials in November. The UK became the first country to authorize the Pfizer/BioNTech vaccine, and the company started delivering the first doses there in early December. Regulators in the US and Eurozone also greenlighted the vaccine in December. With vaccine approval, production, and mass distribution expected to ramp up in the next six months, developed and emerging economies are on track to reopen and normalize next year. Consensus forecasts incorporate expectations for a V-shaped economic recovery in 2021. Given pent-up demand, inventory restocking, supportive financial conditions and potential for rising “animal spirits,” QMA sees upside risks to global growth forecasts. Fresh fiscal stimulus and continued monetary accommodation could add even more fuel for next year’s recovery.
Source: Bloomberg. Data as of 11/30/2020. There can be no assurance that the forecasts will be achieved.
The 2021 recovery will likely be uneven across countries, with stronger rebounds in countries and regions that have better controlled the virus and distribute the vaccine more quickly, enabling a faster relaxation of economic restrictions. China, in particular, started its recovery sooner and should see a strong expansion next year; QMA thinks China will be a key driver of global growth for both emerging and developed economies in 2021.
While the initial rebound from the pandemic-induced recession has been faster and stronger than expected, the pace of growth for advanced economies is slowing in Q4 due to the resurgence of the virus, which has triggered renewed lockdowns and restrictions on activity. We could be in for a tough period in the first quarter of 2021, and additional policy stimulus may be necessary to provide a bridge to the spring and mid-year when vaccines are more widely available and some percentage of the population is inoculated. The passage of a US fiscal relief package in the current lame duck session of Congress is likely to provide insurance against the risk of shorter-term economic setbacks, if the package becomes law.
Inflationary pressures are likely to remain under control in 2021, with most economies still operating at below full-capacity levels, especially in labor markets. High levels of precautionary savings due to economic and health anxieties related to the pandemic should also keep inflation pressures at bay. Price pressures could build if pent-up demand fuels a surge in spending on services that consumers had been forced to forego due to lockdowns and restrictions on movement. For example, hotels and airlines could see significantly improved pricing power stemming from a vaccine-related bout of Spring Fever vacation splurges. Supply may not be able to keep up with surging demand in certain sectors, as capital projects may have been put on hold, or temporary supply disruptions could cause higher production costs and/or supply bottlenecks. However, QMA thinks any price spikes related to these issues are likely to prove temporary and isolated, as the deep structural economic forces keeping inflation low have not abated. These include aging demographics, technological innovation and automation, global competition, high debt levels and inequality. The policy environment presents a source of longer-term inflation risk because central banks are likely to maintain ultra-low policy rates for an extended period and continue with bond purchases in the context of rapidly rising government debt levels, which increasingly is seen as debt monetization. This is resulting in rising inflation expectations at desirable levels currently, but could present risks down the road if these policies are maintained for too long.
1 Cornerstone Macro estimates as 11/30/2020
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