10 Factors That Will Shape the Recovery
Renowned economist and presidential advisor Nouriel Roubini on the top factors he is closely watching as global markets continue down their paths to recovery in 2021 and beyond.
Spread of Covid Contagion and Success in Flattening the Curve
Perhaps the greatest factor affecting recovery is how severe and prolonged the spread and contagion of the Covid-19 virus will be. Roubini believes the spread may linger through Q2 due to the number of new virus variants we are now seeing and the unknown efficacy of current vaccines against them.
Vaccine Distribution and Effectiveness
Although the Moderna and Pfizer vaccines both claim over 90% efficacy, they do not prevent infection or transmission, and are untested against new variant strains from the UK and South Africa. Roubini believes the virus cannot be easily controlled and says having to potentially develop vaccines for the new variants, coupled with the low number of people being vaccinated each day, will likely mean a slower return to normal than is currently projected.
How Much Permanent Economic Scarring Is There?
Economic, financial, and geopolitical risks will determine the shape of the Covid-19 recovery. Roubini believes the United States, advanced economies, and many emerging markets will experience a V-shaped recovery in 2021 if we have continued fiscal stimulus, additional vaccines, and personal and corporate deleveraging. He cautions, however, that numerous risks could lead to much more concerning U-shaped or even W-shaped recoveries in many parts of the world, including Europe.
Fiscal Policy Outlook
President Biden’s proposed $1.9 trillion stimulus plan would aid the US economy by providing income and unemployment benefits to those in need, help them pay down debts, and offer unemployment benefits. With the Democrats in control of the House and Senate there should be significantly more stimulus on the way, which would be beneficial to economic growth, the stock market, and a strong recovery of corporate profits.
Low Inflation or Deflation
The Federal Reserve will probably not stop quantitative easing until the inflation rate goes above 2%. Inflation could possibly return by 2023 or potentially lead to stagflation in some areas due to deglobalization, fragmentation of the global economy, and the balkanization of the supply chain.
How Much De-leveraging Versus Pent-Up Demand
Covid-19 has ushered in highly leveraged consumers, corporations, and small businesses, which could become a drag on consumer spending and more. The hardest hit consumers who have lost their jobs or businesses now face mortgage, rent, utility, auto loan, credit card, and student loan delinquencies. Stimulus should help deleverage some of these losses, but risk of a significant wave of both corporate bankruptcies and personal defaults remains high.
Rise in Inequality and Its Economic and Political Impact
Roubini believes this is a story of the employed versus the unemployed during Covid-19. The employed are doing well and benefiting from stock market returns, while the unemployed are barely able to make ends meet and are typically not invested in the market. This may lead to social and economic instability, as well as slower consumption of consumer goods in the near future.
US Political Risks and Biden Policy Agenda
The US can be seen as a source of geopolitical risk over the next four years due to continued gridlock and animosity between Democrats and Republicans. Tensions may also contribute to additional political violence and domestic terrorism by both right- and left-wing extremists who want to weaken the US from within by sowing discord.
US-China cold war, US-Iran tensions and much more cyber-warfare are risks to consider. Roubini warns that China, Iran, and Russia will likely continue to spread misinformation and engage in both cyber and asymmetric warfare across the globe.
Among the risks on Roubini’s radar in 2021 are EU/UK economic and political risks, China financial/policy risks, emerging markets risks – and risks of deglobalization, protectionism, fragmentation, balkanization of the global economy.
Be sure to watch the webinar replay above for an in-depth discussion on the road to recovery with Nouriel Roubini.
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Quantitative easing refers to monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.