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

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

Shares

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Shares

The ASX is full of old, stodgy, low-growth companies

Eight of the ASX's top 10 stocks are more than a hundred years old, while in the US there's just one. It points to our market being filled with low-growth dinosaurs compared to the US where innovation and renewal rule.

Retirement

Time to review the family home's exemption from Age Pension test

Improving housing mobility in Australia is crucial for enhancing both individual well-being and the economy. Potential reforms include ensuring greater rental security and incentivising downsizing among older homeowners.

Superannuation

Death benefits from super don't need to be this complicated

This may surprise you, but a person's super balance does not automatically form part of their estate. A simple change could bring greater certainty to Australians, quicker payouts for families, and lower super fees.

Economy

The RBA deserves kudos for a job well done

Over the past few years, the Reserve Bank of Australia has been subjected to a blizzard of criticism. Yet, despite its flaws, it may just have engineered that rarest of beasts: the fabled soft economic landing.

Investing

Asia deserves a closer look from investors

As part of their global exposure, Australian investors typically allocate most to Developed Markets equities, and a smaller portion to Emerging Markets. This looks at the latter position and whether there might be a better way.

Sponsors

Alliances

© 2025 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.