After the steep economic contraction and high unemployment caused by the Covid-19 pandemic, the rollout of vaccines has led to a prognosis for a quick and robust recovery. Some of the most optimistic projections are from Morgan Stanley MS , which forecasts global GDP growth of 6.4% for 2021, and from Barclay’s, which forecasts a 5.6% increase.
Such optimism, however, is not only likely to be overstated, it also could be potentially counterproductive. If economists, policymakers, business leaders, and others expect the global economic engine to go into high gear in 2021, governments may ease off on much-needed stimulus. For business leaders, this could result in subpar planning and forecasting of their own.
A more realistic picture, in my view, accounts for the very real risk of the U.S. falling into a recession in the first half of 2021 unless there is sufficient stimulus. Hopefully, the most recent passed stimulus package plus President-Elect Biden’s proposed stimulus package will forestall such a contraction. Either way, the economy is far too fragile to jumpstart on its own.
Given the severity of the pandemic’s impact on businesses — particularly hospitality, travel, and retail — recovery is not going happen quickly. As I observed recently, we will not wake up one day and find that the vaccines are widespread, people are employed, and consumers are spending again. It’s going to take time for the pieces of the economic puzzle to fit together.
No Recovery Until the Second-Half 2021
In my view, economic growth in the U.S. will be slim at best in Q1 and Q2 2021, which admittedly is a contrarian view compared to some forecasts that have been as high as 5% for Q1 2021 U.S. GDP growth. I foresee the recovery not starting until sometime in the second half of the year, perhaps as late as Q4. GDP will not rise quickly; instead, it will be 2022 before we see a more normal pace of economic growth.
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Here are four reasons for my more tempered outlook:
- Rising U.S. unemployment. The most pressing economic issue is joblessness. In December, 140,000 jobs were lost, and the unemployment rate remained at 6.7%, reflecting rising Covid-19 cases and shutdowns to control the pandemic, according to the Bureau of Labor Statistics. Although unemployment has improved from the April labor market doldrums, the unemployment rate and the number of unemployed people (currently 10.7 million) are nearly twice the pre-pandemic levels in February 2020, when unemployment was 3.5% and 5.7 million people were without jobs. In the most recent week, new applications for unemployment claims rose by 181,000 to 965,000 on a seasonally adjusted basis, the single biggest increase since March. My expectation is that joblessness will increase further in Q1 and Q2 2021 as Covid-19 cases continue to spike.
- Slower than expected vaccination rate. Approval in late 2020 of the Pfizer and Moderna vaccines raised people’s hopes of a swift end to the pandemic and a return to normalcy. Optimism, once again, led to disappointment, as the rollout of the vaccines has been slower than expected, with fewer than 3 million shots given by year’s end. Although President-elect Joe Biden has pledged to release nearly every available dose of the vaccine, it’s not clear that the entire U.S. population can be vaccinated in 2021. Until the “herd immunity” goal has been reached, spikes in Covid-19 cases could prolong the economic malaise.
- More stimulus for those who need it most. A bipartisan deal, reached at year-end, is providing $900 billion in stimulus, including checks of $600 per person for adults making up to $75,000 per year, as well as extended unemployment benefits of up to $300 per week. President-Elect Biden’s proposed $1.9 trillion rescue package raises the payments to $2,000 per family and the unemployment benefits to $400 per week. For families facing unemployment currently, this money will provide some temporary relief — but only that. For those families that are currently employed, it is not clear how the extra money will be used. Many families could save the money rather than spend it. This is why it is debatable as to whether Biden’s proposal to raise the payments to $2,000 per family will have much impact. More stimulus relief is needed for people who need it most. Those who have jobs and sufficient funds for living expenses may use some of the stimulus money for discretionary or delayed purchases; but potentially, it’s not going to jumpstart the economy sufficiently
- Pandemic fallout. Even as the vaccine rolls out and the economy begins to gain traction, a quick rebound is unlikely in any sector of the economy. The pandemic has caused the economy to become dislocated and it will take time for the pieces of the economy to be put back together again. In some sectors, in fact, the fallout could be particularly severe. For example, restaurants have limped along with increased takeout, but what remains to be seen is how many will go bankrupt before the pandemic is over. It will take time for new restaurants to be created and for people to be willing to go out to dinner again. Of course, retail has been hard-hit and the landscape has forever changed as retailers pivot to e-commerce.
It’s All About Employment
Ultimately, economic recovery will hinge on employment. Although joblessness has rebounded from the April 2020 depths, when the unemployment rate reached 14.7%, the labor market is far from stable. In fact, it could take another few years — perhaps as long as 2025 — for the economy and the employment picture to return to where they would have been had the pandemic not happened. Although that may be disappointing to those who want or expect a quick, “V-shaped” recovery, it is a realistic picture that could help businesses and policymakers to make better decisions.