What’s in store for 2021: a brief economic reflection and outlook
2020 was an extremely tumultuous and distressing financial year for many. Every nation took a substantial economic hit — and we aren’t out of the woods yet. However, some congratulations are in order. We hit the worst recession since the great depression, and yet, as a global economy, we are coming back at a steady and reliable pace. An economist I talked to recently described the worldwide economic recovery with imagery: “Picture a crashing wave with a sunny backdrop,” he said, “there’s still volatility, still disruption, but the sun is shining.” He evoked positivity coupled with realism — an apt description of my economic outlook below.
The global economy suffered hugely throughout the past year, and we won’t see complete recovery for a while, but one thing is for certain: the machine is back up and running. Whether that’s just the money printer or economy at large is an interesting question, but it goes without saying that there is one specific institution that deserves a hearty pat on the back: central banks.
Throughout the past year and coming into 2021, there has been particularly aggressive action on the part of central banks around the world. Some of the monetary policy put in place by the banks has certainly been contentious — the American stimulus bills, for example — but despite doubts, we have seen relatively little inflation or adverse consequences. Let’s look at some of the most popular tools used by central banks, and how they’ll be carried into 2021.
First, quantitative easing, or QE, has been a crucial card in the hands of banks. This policy, which allows for liquidity to be injected into the economy through the forced selling of government bonds by private banks, was used liberally by some of the biggest central banks in the world last year. America launched a $700 billion QE package and Europe a $750 billion one, along with many other central banks. QE forces investors to put money in riskier investments than government bonds, which was a needed kickstart for the economy in a time of hesitant spending. QE policy has been carried into 2021, with total affects yet to be discerned.
Another tried-and-true tool was the increase and decrease of the interest rate; arguably the most important instrument for central banks to manipulate the economy. Lowering interest rates allows more people to borrow money — for houses, appliances, cars — facilitating activity in markets that would be otherwise stagnant or failing. Over 2020, interest rates fell extremely low: United States rates were almost zero, UK rates were the lowest they’ve ever been, and China, Canada, along with many more countries also lowered rates substantially. We may see some long-term consequences to this policy; when people get loans, they have to put later earnings towards paying off their debt, and thus cannot buy as much. In the future, as central banks seek to bring interest rates back to a more moderate level, we may begin to see some debt-related issues in the global economy.
Simple stimulus directed towards specific markets and consumers was also widely used — most notably in the United States. CARES ( Coronavirus Aid, Relief, and Economic Security Act), the 2.2 trillion stimulus bill that was passed in congress back in March of 2020 included direct payments to Americans of $600 and help for small businesses to continue paying employee wages. South Korea’s central bank instituted similar measures, like payments directly to small businesses. These payments allowed some public relief of debt and some extra spending money; some grease to oil the gears of the economic machine. We’ll see this policy continued into 2021, particularly with further action from the American Congress, with a $1.9 trillion relief bill including direct payments of $2,000 to the public currently in the works.
All this intense policy seems like a recipe for inflation. However, there hasn’t been any worrying levels of inflation yet, despite the over 3.8$ trillion of new money created by just some of the world’s big central banks. Nonetheless, there is concern from some economists over the amount of consumer money in demand deposit accounts. About 11% of the United States’ GDP and 13% of Canada’s is in these accounts, waiting to be withdrawn. The spending of this tucked-away money will result in some inflation and necessitate a surgical precision in monetary policy by central banks to ensure that there isn’t too much — or too little — liquidity in the economy.
It is estimated that currently suffering industries, like tourism and dining, will see a big increase in activity once the money in these accounts starts making its way back into the economy. Right now, consumer money is centred in two specific industries: building materials, and food. People are tired of spending time in their homes and ready to invest in improvements, and of course, humans can’t really forego buying food. These markets are way up, but some remain in less-than-satisfactory condition. Energy, for example — energy corporations saw some big losses as manufacturing companies slowed down their automation heavy processes, big businesses shut down their lights, and transportation ground to a near halt.
The auto industry still hasn’t rebounded either; it took a huge hit around April, falling to extremely concerning lows, and hasn’t yet come back in any huge ways. We shouldn’t define our economy off of these industries, but we should still be striving for an all-encompassing recovery.
The differences in the status of industry recovery indicate a K-shaped recovery in the business side of things, which shouldn’t be our aim or our worst fear. A diversified K-shaped recovery with many industries taking their own pace of recovery makes sense in this situation. Is our Aerospace industry going to rebound right back while we’re still in a pandemic? No, and that’s okay, as long as we don’t see too many industries still going downwards.
So far, though, we can have some confidence in the ability of our global economy to bounce back. Despite a lot of worries right now, central banks aren’t the only thing holding up the global economy right now; many countries are actually experiencing a textbook V-shaped recovery in the aggregate, which economists agree simply doesn’t occur in economies solely supported by stimulus. Have faith; there is still fundamental strength in the global economy. Consumers still have trust in the economy, too- or else we’d see all those direct checks from central banks going straight into savings accounts rather than being spent.
This selective market demand shock we have seen in some parts of the world has given individual nations an opportunity to step back and evaluate the growth of their specific industries over the past years, as well as form goals and plans to get there. Canada, for example, is facing a reckoning that is past overdue.
For years, the natural resource-rich country has leaked manufacturing companies, jobs, and subsequently liquidity due to its high corporate taxes and the apparent monetary benefit of overseas manufacturing — namely — it’s a lot cheaper. In 2014, the Quebec AstraZeneca facility closed down, cutting 17% of the company’s Canadian workforce. The pharmaceutical company, which you’ll recognize as a leader in the race to beat COVID-19 with vaccines, was following a trend for Canadian STEM corporations: closing down locations to cut costs. This came around the same time as French pharmaceutical company Sanofi-Aventis lay-off of 100 Quebecois and Johnson and Johnson’s announcement that their Montreal lab would be closing down.
With these departures and more, Canada lost most of its pharmaceutical production capacity. And as foreign factories were forced to shut down and global production chains imploded, Canada fell victim to what it had lost. The nation is still suffering the effects — vaccine rollout is dangerously slow. If Canada continues on this vaccination pace, only a tenth of the population will be vaccinated by 2025. Globalization, even as it lifts millions out of poverty, seems to have hurt Canada in unprecedented ways.
This brings us to another economic trend going into 2021 — nationalization. Although the world’s most prolific nationalist — Donald Trump — has finally made his abrasive exit from the American presidency, his legacy as an ardent supporter of nationalist ‘America First’ policy will have lasting effects on the global economy. What’s more, China, with its leading 4-trillion dollar manufacturing industry, seems to have recovered from COVID-19 despite being the originator. America may be feeling some contempt to the Asia superpower, stoked by President Trump. The ex-commander in chief frequently referred to COVID-19 as the ‘China virus’ and made bitter comments blaming China for America’s coronavirus-induced economic downfall. Exacerbated by recent reports showing China’s economy may overtake the US by 2028, and incentivized by a desire to keep liquidity in the local economy, we may see a rise in nationalist policies and behaviours supporting domestic production from America and beyond.
Will this be beneficial? Well, looking inward for problems forces innovation. For richer countries — again, we’ll look at Canada — this period of reflection gives rise to huge industrial opportunities like AgriTech, AI, and e-commerce. Shopify, for example, is a company based in Ottawa that hosts websites for some of the biggest brands you know. Just last year, it surpassed the RBC to take the title of most valuable company in Canada. The tech giant employs thousands and holds billions in assets — and it’s gradually forcing Canada back into the global tech world.
AI and AgriTech will be two of the biggest industries in the coming years, as more markets automate and the environmental conditions in our planet decline. Canada has the talent, the facilities, the opportunity — and they very well may begin to capitalize on those means very soon.
That was a quick macro-economic brief — let’s take a short look into the micro-economic side of the story.
From late January into early February, the investment world watched in shock as an army of plucky day-traders assembled by the Reddit group r/wallstreetbets drove up GameStop prices around 1,700%, bankrupting some hedge funds in the biggest — and most absurd — short squeeze ever. This event indicates a worrying reality beginning to grip the stock market: gamification. Lockdown blues, stimulus checks, and transaction-fee free investing apps have given people the time, money and means to try their hand at the stock market, mostly through speculation.
Although risky investments usually signify a heartening kind of confidence in the economy from the general public, speculative investment for the ‘meme of it all’ could prove dangerous for the economy at large. At a time when fervent ‘tech mania’ permeates the investing community, leading to an overvaluing of tech stocks, we should be firmly advocating for a stock market rooted in reality. If investors begin to lose confidence in the ability of the stock market to value a corporation accurately, we may begin to see a decline in risky investments from the big spenders — a consequence we should be aiming to avoid.
This tech mania could have some benefits, though; a lot of emerging tech has prioritized sustainability. Companies like Tesla, for example, which has enjoyed a slightly fevered increase in stock price, makes fully electric cars. Investors predict that clean technology will be a major target for hedge funds and the government alike, which, yes, is a good thing. As investor money moves away from oil and into cleantech, jobs will follow, and the rest of our global economy won’t be far behind.
This investor awareness of the importance of cleantech is coming from the expanse of information available on global warming and its effects, which is the ideal situation. With information comes stable investments whose outcomes can be predicted — but, like I touched on before, we’re seeing a lot of the opposite. Robin Hood was a key player in the rise of the day trader that we’ve seen throughout the last year; the investment app allows anyone to borrow money and trade on the stock market with no fee. With any part-time investor, it’s a given there will be speculation, but lately, we’ve seen a lot more randomness than is really sustainable in the stock market. I mentioned the GameStop stock price rise, but the phenomenon had spread to other stocks, too — AMC, Nokia, Kosh — and a meme cryptocurrency known as ‘Dogecoin’.
Touted by Elon Musk and other celebrities on Twitter, Dogecoin rose 37% over 24 hours to a record of $0.084945 on February 8th. The cryptocurrency has since been placed as the top ten digital currency in CoinMarketCap’s ranking. Is this a serious investment? The answer is a definitive no. It is much more likely that Musk wants to profit off of day-trader willingness to invest freely than to promote what he thinks is an undervalued stock.
Bitcoin has also seen a flurry of activity; the cryptocurrency reached its all-time-high today of 46,073.70. This comes after Tesla revealed they have bought 1.5 billion in Bitcoin and plan to accept the currency as payment.
These investments trends are interesting, but they are also volatile; something we need less of going into 2021. There is hope that these new day-traders and experienced hedge funds will learn to co-exist and co-operate in the stock market, but that remains to be seen.
And so, in summary, what can we expect from the global economy going forward into 2021? So far, continued stimulus and aggressive monetary from central banks, different recovery paces for specific industries, a potential rise in nationalist monetary policy, and further speculation in the stock market. It should be quite a year.
