Off to a good start
The U.S. economy is poised for its best growth in more than 35 years with commercial real estate positioned to benefit
>> Quick takes:
- Great reopening off to a good start
- U.S. economy leading the way
- Other major economies also poised for strong growth
- Government policy still supportive
- U.S. CRE market could ride U.S. economy’s coattails
The great reopening
As expected, the global economy experienced its worst calendar-year performance in at least 40 years, contracting by an estimated 3.6%. To put that in context, growth during 2009 at the height of the global financial crisis contracted by 1.4%. But unlike that downturn, which lasted for roughly 3 quarters, this recession lasted only about 4 months, from March through June, resulting in a powerful yet short contraction. But by mid-year economies around the world began to reopen, releasing a deluge of growth in the latter half of the year. Growth surged during the third quarter as economies reopened and proceeded at a slower, yet healthy pace during the fourth quarter to close out the year. Heading into the first quarter of 2021, that momentum ran headlong into new lockdowns in many countries, put in place to slow a resurgence in COVID-19 cases.
“… reopening economies should unleash pent-up demand and a return to more normal economic activity, boosting growth in the process.”
That dynamic will characterize growth in the economy this year: reopening economies should unleash pent-up demand and a return to more normal economic activity, boosting growth in the process. But those reopening will be pulling against still-closed economies. Clearly, control of the pandemic (including mass vaccination) will dictate where and when reopening unfolds, and this shows through in the preliminary first quarter GDP data. Measured in real U.S. dollars, the global economy likely grew by roughly 2% during the first quarter. But growth was concentrated in a relatively small number of large economies, particularly the U.S., which still represents roughly a quarter of the global economy. The U.S. is driving early global growth primarily due to two key reasons. First, fiscal stimulus in the U.S remains robust, well ahead of that of most other major economies. Stimulus packages passed and signed into law in December 2020 and March 2021 provided a fillip to first quarter growth. Second, the U.S. vaccination effort continues to excel. Through mid-April, the U.S. led the world in the highest absolute number of vaccinations and boasted the largest percentage of its population fully vaccinated among major economies.
As other major economies around the world catch up and vaccinate their populations, they will provide similar (though typically smaller) boosts to global GDP. Most countries’ economies should experience an outsized surge in growth during the initial stages of re-opening followed by slower growth in subsequent periods. But the timing of re-opening by country should vary somewhat, determined largely by the pace of vaccination. Diversifying (in effect) the timing of re-openings of major economies in 2021 should provide the global economy with more consistent growth throughout the year than will occur in many individual country-level economies. But the combined impact of these re-openings, particularly in the middle of the year, should drive the global economy to its fastest calendar-year growth rate in modern recorded history.
By the end of the 2021, the global economy should experience the effective inverse of 2020. Not only should the overall global growth rate switch from strongly negative to strongly positive, but also the pervasive contraction in country-level economies should get replaced by pervasive expansion. During 2020 roughly 92% of individual economies suffered a calendar-year contraction. In 2021 that percentage should fall to roughly 2%.
Holding rates low
Beyond vaccination, government policy is still playing an important role in the economy. On the monetary policy side, major central banks around the world should maintain their dovish stance during the balance of 2021. They will likely continue to hold short-term policy rates at or near historically low levels to provide continued support via incentive to borrow. But at the longer at end of the yield curve rates should head higher as cyclical inflation increases and investors sell out of long-dated bonds. Central banks around the world will likely view inflationary pressures in 2021 as transitory, increasing because of low-base effects – essentially low prices due to the recession in 2020 result in outsized inflation in 2021, temporary supply-chain disruptions, and stronger overall economic activity. Those should produce steepening yield curves, a healthy sign of economic recovery. This has already occurred in the U.S. reflecting its relatively fast start. Rising U.S. bond yields could put other long-dated yields around the world under some pressure, but central banks around the world retain enough control to limit such impacts.
Nonetheless, the narrative surrounding inflation has and should continue to shift dramatically. Inflation concerns before the pandemic largely focused on too-low inflation. Inflation concerns after the pandemic will likely focus on too-high inflation. And that will require a different stance from central bankers around the world. Continued weakness in labor markets, coupled with a relatively dynamic supply-side should keep transitory inflation from becoming permanent. But central banks will keenly watch for any sign inflation is moving beyond their comfort zones, waiting to utilize all available measures to keep inflation from spiralling beyond their control.
Fiscal policy impacts lessening
Although federal governments around the world have not fully abandoned fiscal policy, fewer governments feel the need to continue such robust spending, at least at 2020’s levels. Some minor fiscal tightening should occur as government spending declines on an absolute and relative basis and many of the stimulus packages enacted last year do not get renewed. Even in the U.S., where the new administration continues to push fiscal stimulus harder than other central governments, fiscal spending should ease relative to 2020. As consumption and private investment continue to recover, governments see less need to directly support their economies via fiscal policy. While downside risks to the economic recovery, especially vaccination-related risks, are abating, they nonetheless remain. Consequently, central governments around the world could step in if necessary and resume more aggressive fiscal stimulus. But that seems like a relatively low probability outcome at this juncture.
“In the U.S., the economy looks poised for its best growth since at least 1984.”
In the U.S., the economy looks poised for its best growth since at least 1984. Even with the relatively strong start to the year, the strongest growth in 2021 lies ahead during the second and third quarters when the economy fully reopens and widespread economic activity resumes. Such strong growth coming from the largest economy in the world should provide a solid foundation for the global economy. While not likely, in 2021 growth in the U.S. could rival growth in China for the first time in decades. At a minimum, the U.S. should temporarily narrow the gap in growth rates by hundreds of basis points.
In Asia, growth in the two largest industrialising economies, China and India, should exceed that of all other major economies in 2021. China’s economy has largely reopened domestically, though external reopening will not occur until widespread vaccination. China should benefit from both domestic economic activity and a foreign resurgence in growth via exports. In India, a widening domestic recovery, especially in services, should produce strong growth this year. Asia’s other major economies, Japan and South Korea, should also fare well. Although Japan’s economy should likely contract in the first quarter, the economy should grow near 4% annualized during the remaining quarters of the year. In South Korea, exports and investments should produce fairly even growth throughout 2021.
In Europe, lockdowns in the major economies – Germany, the United Kingdom, France, and Italy, coupled with a relatively slower pace of vaccination (excluding the United Kingdom), should produce a lag effect. Growth in the major European economies should be negative during the first quarter but rebound strongly in subsequent quarters. Accelerating growth in the latter half of 2021 should produce the strongest calendar-year growth rates that many of these economies have experienced in years, if not decades, and provide meaningful boosts to global growth.
Outlook and implications for the U.S.
Fortunes for the global economy look bright heading toward mid-year. A slow start to the year should yield to much more robust growth in the second and third quarters as the major economies of the world move largely past the pandemic. Risk seems concentrated on the upside, but two important downside risks remain. First, much of the recovery remains predicated on vaccination. So far that has gone well, but notable incidents with two of the major vaccines show that caution remains warranted. Second, inflation could present temporary disruptions if it results in volatile and markedly higher bond yields.
“The recovery in space market fundamentals in the U.S. could lead other major CRE markets around the world.”
The U.S. economy should lead the charge in 2021. Such fast growth from such a large economy will almost certainly produce a deluge of economic activity. But the timing matters as well. Because of robust fiscal policy and successful vaccination effort, not only should the U.S. economy rebound faster than other major economies, but its commercial real estate (CRE) market should see earlier improvement as well. The recovery in space market fundamentals in the U.S. could lead other major CRE markets around the world. That should capture the attention of investors, both domestic and foreign, driving up interest and volume in CRE investment in the U.S. Through the first quarter, the U.S. economy is playing a pivotal role on the world stage. The U.S. CRE market stands to benefit from that.