Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 387

2021 economic and market outlook report

The ‘Vanguard Economic and Market Outlook 2021: Approaching the Dawn’ says the expected path to economic recovery hinges on controlling COVID-19. An improvement in the health of the global population will result in an improvement in the economy. Thanks to swift fiscal and monetary policy responses, many economies are in a better position now than during the second and third quarters of 2020.

The next phase of recovery depends on greater immunity to COVID-19 and reduced consumer reluctance to engage in normal economic activities. Should a vaccine become distributed, administered broadly, and be effective, much of the economic losses from COVID-19 could be recovered in the next year. That said, there is risk that if immunity does not rise, economies may only see marginal progress from current levels.

The way the health recovery will drive economic activity is like this:

Which leads to the base case economic scenario for 2021:

  • Major economies will achieve greater immunity to COVID-19
  • Face-to-face social and business activity will normalize
  • Unemployment rates will fall
  • Inflation rates will move higher, and
  • Pre-pandemic levels of economic output will be reached

In countries with more effective containment of the virus, such as in Australia and China, the return to normalcy may prove to be slightly faster, with Australia’s expected growth of 4% likely to fuel an expected return to pre-pandemic levels by the middle of next year compared to the end of the year for countries such as the Euro Area and the UK.

Three post-pandemic scenarios

Looking beyond the shadow of COVID-19, our outlook details longer-term effects that the pandemic may have on the economy, including: the acceleration of work automation and digitalisation (i.e. working remotely), continued slow-deglobalisation and supply chain recalibration, as well as changes in the expectations and preferences for government policy.

Under the confluence of these forces, Vanguard hypothesises three possible post-COVID scenarios over the medium-term with consequences for growth, inflation, interest rates and productivity. We assign probabilities to each, as follows:

Compared with falling into a prolonged stagnation (‘off-course’) or a rapid reflation and surge in productivity gains (‘path improved’), we see a return to steady but still moderate growth, and interest rates normalising gradually from historic lows, though remaining low and supportive for some time.

Based on these scenarios, balanced portfolios with different asset mixes may not always shoot the lights out but they will not produce the worst results either. They are a good solution for most long-term investment portfolios and for investors who do not hold a strong view about the future state of the economy.

A moderating outlook for global asset returns

Vanguard’s Capital Markets Model projections gives an outlook for global and Australian equities in in the 5%-7% and 5.5%-7.5% range respectively for returns over the next decade. While this range is below returns seen over the last few decades, equities are anticipated to continue to outperform most other investments and the rate of inflation.

10-year annualised forecast: setting reasonable expectations

Interest rates globally are expected to remain low despite a constructive outlook for firming global economic growth and inflation as 2021 progresses. While yield curves may steepen, short-term rates are unlikely to rise in any major developed market as monetary policy remains highly accommodative. Bond portfolios of all types and maturities are expected to earn returns close to their current yield levels.

Risks to the Australian outlook

The risk to the economy and markets should shift as 2021 progresses. Between now and widespread vaccine distribution, health-related risks to economic growth and sentiment should prevail. However, as growth and inflation firm in 2021 and immunity to COVID-19 increases, an 'inflation scare' is possible. Ultimately, inflation could cyclically bounce higher in the middle of 2021 from current lows owing to an ongoing economic recovery, before plateauing back to the mid to low 1% levels, and such a move could introduce market volatility.

Meanwhile, the tapering of relief measures poses a risk to the consumption and financial stability outlook, but Vanguard takes comfort in the resilience and speed of the initial recovery to date, and expect the household savings buffer to be used to smooth spending.

In 2020, disciplined investors were yet again rewarded for remaining invested in the financial markets despite troubling headlines and a challenging environment. For 2021, the wisdom will be to maintain that same level of discipline and long-term focus, while acknowledging returns may moderate from the past.

 

Qian Wang is Chief Economist, Asia-Pacific and Beatrice Yeo is Economist, Australia in the Vanguard Investment Strategy Group. Vanguard Australia is a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any individual.

For articles and papers from Vanguard, please click here.

 


 

Leave a Comment:

     

RELATED ARTICLES

Investment forecasts unreliable in unpredictable times

Podcast: US recession risks and a simple wealth-creating strategy

This time it really is different … or not

banner

Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

The secrets of Australia’s Berkshire Hathaway

Washington H. Soul Pattinson is an ASX top 50 stock with one of the best investment track records this country has seen. Yet, most Australians haven’t heard of it, and the company seems to prefer it that way.

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

Overcoming the fear of running out of money in retirement

There’s an epidemic in Australia that has nothing to do with COVID-19, the flu, or the respiratory syncytial virus. This one is called FORO, or the fear of running out of money in retirement, and it's a growing problem.

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

Latest Updates

Financial planning

Our finances should enable and not dictate our lives

Most people would prefer to have more money than less of it. But at what point do the trappings of wealth and success start to outweigh the benefits of striving for more?

Economy

This vital yet "forgotten" indicator of inflation holds good news

Financial commentators seem to have forgotten the leading cause of inflation: growth in the supply of money. Warren Bird explains the link and explores where it suggests inflation is headed.

Shares

Emerging market equities are ripe with opportunity

Emerging markets offer compelling value compared to history and the stretched valuations of developed market equities. Investors can benefit from three big tailwinds, but only if they are selective.

Taxation

Tomorrow's taxpayers pay for today's policy mistakes

Less affordable housing isn't the only thing set to weigh on Australia's younger generations. If new solutions for pension deficits and the use of resource revenue aren't found quickly, tomorrow's taxpayer will foot the bill.

How would a switch to nuclear affect electricity prices?

The Coalition's plan to build seven nuclear power stations in 15 years faces scrutiny due to high costs and slow construction. And it is unlikely the investment would yield cheaper energy for Australian households and industry.

Strategy

Reader feedback from our 2024 survey

Articles that are easy to understand, quick to read, and credible; being able to engage via the comments section; and keeping Firstlinks free and independent are just some of the features valued by our readers.

Strategy

Have your say on Firstlinks and the topics we cover

We’d love to hear your thoughts on Firstlinks and how we can make it better for you. If you’d like to help us out in a just a couple of minutes, please take our short survey.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.