Global economy set
for relaunch

• In 2020 global economy endured worst downturn in history
• Pandemic produced universal economic damage
• 2021 poised to be best year for global growth on record
• Global economy could exceed potential through mid-decade
• U.S. economy and CRE poised to capitalize on global rebound

Historic snapback potential

In 2020 the global economy suffered what should ultimately constitute its worst calendar-year performance during the modern era of economics, stretching back roughly 40 years. Although we will not see final numbers until later in the first quarter of 2021, the global economy likely contracted by -4%, far exceeding the -1.4% contraction during the global financial crisis in 2009. The year 2020 produced a tale of two halves, with contraction in the first half of the year followed by the beginning of a recovery in the second half. 

The pandemic produced unprecedented economic damage, standing out in two important ways. First, the global nature of the outbreak left virtually no corner of the global economy unscathed. Even countries that ultimately registered positive economic growth for the year still endured downturns in economic activity. Although pandemics have previously occurred throughout history, widespread globalization over the last few decades enabled the quick and easy transmission of the virus to all continents in a relatively short period of time. Second, the pandemic produced simultaneous supply-side impacts (via measures such as shutdowns and lockdowns) and demand side impacts (via people avoiding activities). Typically, the global economy faces acute problems on only one side of the economy at a time. But the combined magnitude of the concurrent supply-side and demand-side shocks sets this downturn apart from any previous global recession. 

Yet, that sets the stage for a potentially unprecedented bounce back in 2021. The economy looks poised to attain a growth rate this year in excess of 5%. If so, that would produce the strongest calendar-year growth for the global economy in recorded history. Once a large share of the global economy becomes immunized, likely by mid-year, a torrent of pent-up demand will get unleashed, further propelling the recovery. Until that juncture, the economy remains beset by massive uncertainty surrounding the pandemic. With the outbreak reaching records (as measured via various metrics) across several large economies, the race has begun to vaccinate a wide enough swath of the population to bring the pandemic under control and enable the economy to fully recover. But the exact path between now and that point remains highly unpredictable. That presents a terribly unusual situation whereby the short-term outlook contains more uncertainty than the longer-term outlook. 

Beyond this year, the global economy could find itself on a growth vector above capacity, at least through the middle of this decade. While likely not a perfect replication of the “Roaring Twenties” from the last century, the potential exists not just for a reallocation of economic activity from 2020 to later years, but also a reorientation of economic activity. Marginal changes in consumption and investment decisions can generate excess economic growth above potential for a period. The global economy seems poised to head down such a path. 

Accommodative monetary policy set to continue

Central banks around the world continued their accommodative monetary policy stances throughout 2020. They maintained historically (or near-historically) low short-term interest rates. They also intervened in asset markets not only to buttress economic growth by restraining rates at the long end of the yield curve, but also to help provide stability to asset markets and keep them functioning smoothly. Though no panacea, the policies have generally proved successful. Although some concerns have arisen around such loose monetary policy translating into strong inflation, that seems unlikely, at least in the short run. Aggregate demand will take some time to recover to the point where price pressure meaningfully builds, almost certainly beyond 2021. Even a more rapid rebound in some prices of goods and services, such as energy, should only have moderate impact on overall inflation in the short run. Moreover, central banks likely remember lessons learned from the last cycle when inflation remained stubbornly below target, even as the economy expanded. Those lessons provide central banks with some runway before they will feel compelled to raise rates to tamp down any inflation. That will enable them to primarily focus on supporting a stable, durable recovery. Therefore, accommodative policy should remain in place throughout the year. 

Fiscal policy still in play

Federal governments also supported the economy in 2020 via substantial and often unprecedented (on both an absolute and relative basis) fiscal support. Even until very late in the year, governments continued to provide support to their citizens and businesses. Governments attempted to fill the void left by the contraction in consumption and private investment. And though consumption and investment are recovering, they will likely remain well below pre-pandemic levels for many quarters. Consequently, federal governments will generally remain ready to provide additional funding if economies show signs of faltering, especially if vaccination programs require support. The trajectory of the pandemic and its impact on businesses and consumers will likely dictate how much and what kind of additional support occurs. The economic situation might not require additional stimulus in 2021. But governments will maintain a willing posture until widespread vaccination occurs and economies begin to earnestly recover. 

Regional view 

In the U.S., the economy experienced its worst peak-to-trough contraction since demobilization at the end of World War II. Although momentum is slowing relative to the breakneck pace from the third quarter and the pandemic and its associated containment measures are creating headwinds to growth, the economy looks poised to avoid a technical contraction in the first half of the year, even if growth continues to slow. Like the global economy, growth should accelerate in the latter half of the year once widespread vaccination occurs and releases pent-up demand. 

In Asia, economic performance proved uneven. China clearly and significantly outperformed all other major global economies in 2020, generating positive growth for the calendar year. That pattern of outperformance should continue this year. Although other major Asian economies contracted in 2020, as a group, large Asian economies fared relatively well vis-à-vis other regions of the world. That was due in no small part to their relative success in controlling the pandemic. Relative pandemic control coupled with vaccination poises Asia to outperform once again in 2021 led by the largest economies, China and India. 

The major economies of Europe experienced a particularly acute contraction in 2020. After contracting earlier in the year and then snapping back a bit (like much of the world), the re-imposition of severe lockdowns and shutdowns (relative to the U.S. or Asia) weighed down growth during the fourth quarter as well. The emergence of a more infectious strain of the virus in late 2020 has led to the extension and tightening of lockdowns and restrictions across the region in the early part of this year. As vaccination programs ramp up, brighter times lie ahead: a return to growth with a relatively robust pace of recovery seem likely in the second half of the year, or earlier if public health measures prove successful. 

Outlook and implications for the U.S.

The first half of 2021 remains crucial. While the global economy should continue to progress toward exiting the dark tunnel it finds itself in, how quickly it exits that tunnel remains unclear. The pandemic is intensifying across much of the world, creating significant headwinds even as vaccination propels the economy toward the proverbial light at the end of the tunnel. Both monetary and fiscal policy support will remain crucial during this time. The benefits of vaccination should accumulate over time, with benefits building slowly until major economies reach the point of herd immunity, enabling a more robust escalation in economic activity. The global economy should reach that point by roughly mid-year. 

For the U.S., a resurgent global economy and the prospect of better trade relations brings hope for better trade balances which could support economic growth at the margin in 2021. Unusually, the trade deficit widened during 2020, reversing the typical trend during recessions when trade deficits narrow and boost growth. That widening produced additional drag on the U.S. economy. As the economy heals and rebuilds throughout the year, that should provide confidence to investors in commercial real estate (CRE), even as space-market fundamentals lag the overall economy. Transaction volumes in the U.S. have held up relatively well, including cross-border investments. A resurgent economy and a forward-looking investment market should provide support to volumes and prices this year.