The economic outlook: What could possibly go wrong? – Part I: Introduction to the series
|Summary
The U.S. economy went on a roller-coaster ride in 2020 due to the COVID pandemic.Looking forward, we expect that U.S. economic growth should strengthen significantlylater this year as vaccines become widely deployed, which should allow the economyto fully re-open. But the history of economic forecasting is replete with examples of projections that went sharply awry. In a series of reports that we plan to publish in comingweeks, we hope to shed some light on risks, other than the uncertain trajectory of thepandemic, that the U.S. economy could face in the next year or two.
Economic growth in most economies should bounce back sharply in 2021
Real GDP in the United States experienced a roller coaster ride in 2020 (Figure 1). The economyessentially ground to a halt in the second quarter - real GDP nosedived at an annualized rate of 31.4%- as the pandemic took hold in the United States. But growth came roaring back in the third quarteras restrictions were relaxed and the economy re-opened. Economic activity decelerated sharply in Q4,but we project that real GDP growth remained positive at roughly 4%.
Looking into 2021, we forecast that GDP growth will remain slow in the first part of the year duelargely to renewed restrictions that many local offcials have re-imposed due to the renewed surge in COVID cases. But as an increasing number of individuals receive vaccines, restrictions should start toease and the battered service sector should return to some semblance of "normal." We forecast thatpent-up demand for postponed spending on services (e.g., restaurant dining, personal travel, etc.) willlead real GDP to grow at an annualized rate in excess of 7% in the second half of the year relative to the first half. We also forecast that the economy will continue to expand at an above-trend rate of 4.8% in 2022.
Most other foreign economies experienced similar dynamics in their GDP growth rates. That is, mostforeign economies suffered steep declines in GDP in Q2-2020 with subsequent strong rates of growth in the third quarter. We estimate that global GDP contracted 3.7% in 2020, by far the sharpestdecline in at least 40 years (Figure 2). But economic activity in most foreign economies should alsoaccelerate considerably later this year as those economies re-open due to the widespread deploymentof vaccines that we anticipate. The pandemic originated in China, but the country has been successful,at least relative to most other major economies, in subsequently keeping it suppressed. We forecastthat the Chinese economy will grow roughly 9% in 2021, and we look for real GDP in the Eurozone andthe United Kingdom, which both contracted considerably in 2020, to grow 3.2% and 2.4% respectivelythis year. In sum, we look for the global economy to expand nearly 6% in 2021, following its sharpcontraction last year.
But what could go wrong?
Obviously, the economic bounce-back that we forecast for 2021 could be delayed even longer if thedeployment of vaccines proceeds at a slower-than-expected pace and/or a more virulent strain of thevirus appears. But are there risks aside from COVID that could cause the U.S. economy to significantly under-perform our expectations over the coming year or two?
In a series of reports that we plan to publish in coming weeks, we intend to address a number of risksthat the economy could potentially experience in the foreseeable future. We will begin our series byanalyzing whether inflation, which has long been dormant, could make a meaningful comeback thisyear and next. If it does, market-determined interest rates could snap signiflcantly higher and profitmargins could potentially be squeezed. Other potential risks that we will cover in the series include fiscal decits and debt in the United States, the debt-servicing abilities of American households, andrisks related to commercial and residential real estate in the United States. We will also address thepotential for premature fiscal tightening in the United States and in major foreign economies, whichcould lead to significantly slower global economic growth than we currently forecast, and we willanalyze the potential for a debt crisis in China.
To reiterate, our base case forecast looks for U.S. real GDP to grow at an above-trend rate of 4.6%this year and at an even stronger rate of 4.8% in 2022. These projections are more robust than theconsensus view, but most forecasters look for above-trend U.S. economic growth in both 2021 and2022 as well. Specifically, the Blue Chip panel of economic forecasters looks for 4.2% real GDP inthe United States in 2021 and 3.4% in 2022. But the history of economic forecasting is replete withexamples of projections that went sharply awry, because of developments that were in some casesunknowable in advance (e.g., the OPEC oil boycott in 1973-74) or in other cases were caused byevident imbalance in the economy (i.e., the housing bubble in the early years of the 20th century).What are the potential risks to the economic outlook to which readers should be cognizant? We hopeto shed some light on that question in this forthcoming series of reports.
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