The Grip Tightens

This is part two of my 2021 forecast series. I began last week (you can read it here) discussing a three-handed alien race envisioned by science fiction writers Jerry Pournelle and Larry Niven. They had two regular hands and a third “gripping hand,” which though less dexterous, was far stronger. My analogy was that the COVID-19 vaccine has us in the Gripping Hand. Any forecast for 2021 must first consider this decidedly “known unknown.”

Today we’ll begin by looking at new virus developments, some of which are good, some very good, and some frightening. We (the entire world) are in a very tight race with dire consequences if we lose.

Vaccine Race

The one thing we can say with certainty about this year is that the virus outweighs everything else. The economy can grow if we control the virus, or more likely shrink if the virus keeps spreading.

That said, the impact will vary by country, as some seem better at controlling it. But the new UK variant, known as B117 (somehow bringing to mind a World War II bomber), is threatening to upend some previously successful apple carts.

That means, from a global level, growth prospects depend heavily on vaccine success. The World Bank’s annual forecast was very plain about this. It has four scenarios:

  • Upside Scenario: Vaccine campaigns proceed swiftly with wide public cooperation, allowing governments to roll back their precautionary measures. Economic uncertainty dissipates and 2021 sees 5% global GDP growth, but a return to prior trend in 2022 with only 1.7% global growth.
  • Baseline Scenario: Caseloads fall in major economies as inoculations proceed, with social distancing measures gradually reduced. Economic activity recovers as household consumption returns. In that case, the World Bank expects 4.0% global growth in 2021 and 3.8% in 2022.
  • Downside Scenario: Cases remain high as supply bottlenecks and logistical problems slow vaccine deployment. Activity remains depressed as households continue to fear contact-intensive services. Here, it expects global growth of only 1.6% in 2021 and 2.5% in 2022.
  • Severe Downside Scenario: As in the downside scenario, the pandemic is difficult to manage and vaccine distribution is slow. The prolonged economic slowdown erodes corporate balance sheets and triggers widespread defaults and concerns for bank balance sheets. It gets worse from there, too. This would give the world economy another year of recession, with global growth somewhere below zero (they are oddly non-specific on this point) in 2021 and bouncing to just 2% in 2022.

The World Bank team also sees a much greater virus economic impact in developed countries, both upside and downside. This is partly because advanced economies are more service-intensive and the pandemic is striking those industries harder. But it’s also because the largest emerging market, China, is bouncing back while the virus has mostly spared Africa, at least so far (though the situation in South Africa is deteriorating quickly).

This handy Financial Times chart summarizes the World Bank’s two midrange scenarios.

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