2021 started with the world concerned about a new variant of the virus that spreads much faster than the original one. First identified in the United Kingdom, it quickly appeared throughout Europe and in the United States. More importantly, it appears that the case in the United States was “born” locally, as the person is not known to have traveled recently.
In other words, the virus mutates rapidly, and the world is in a race against time. With potentially effective vaccines at hand, now it is crucial to inoculate as many people as possible. However, if we do the math and consider the new variant with a much faster transmissibility rate, the hospitals are at the risk of running out of capacity. As such, economies are forced to enter lockdown modes to help the health system cope with the situation.
For financial markets, it means that every forecast made at the end of last year regarding the economic recovery and how 2021 and 2022 will bring economic growth is put on hold. How long will the new lockdowns be in place?
Everything Remains Contingent on the Virus
The table above reflects the forecast for major economies in the world for the two years ahead – 2021 and 2022. When considered in relation to last year, it appears that not even at the end of 2022, the world’s major economies will recover to pre-COVID-19 levels.
For example, have a look at the United Kingdom. Its economy contracted 11.3% in 2020 and is expected to grow by 4.6% in 2021 and 4.5% in 2022. Those growth rates alone are not enough to recover the ground lost in 2020 – not to mention if we consider unpredictable situations like a general lockdown now in place in the country.
With a few exceptions (e.g., China, Ireland, Poland), the situation is somehow similar for major economies. In other words, the faster the world defeats the virus, the fastest the economic recovery will be.
For financial markets, the risk is that changes in the way the pandemic evolves and how countries react are not priced in the markets. To that extent, we should not exclude a strong comeback for the U.S. dollar in 2021, especially if we consider that the consensus is for it to weaken even further.