Mixed signals on 2021 recovery

Monday 4th of January 2021

After a horrific year like 2020, what almost everyone wants to hear is that 2021 will be a year in which the world will gradually return to something like normality. That may very well be the story that develops over the course of the next twelve months, but no one should assume that a positive outcome is guaranteed.

The main grounds for optimism lay in the fact that several Covid-19 vaccines have been produced and are already beginning to be rolled out in some countries.

According to the prevailing narrative, as doses of these vaccines begin to reach more deeply into the global population, beginning with the most critical and vulnerable groups, the threat of the pandemic will gradually be brought under control. Perhaps by the second half of this year, recovery will be well underway, and life as we used to know it will become possible once again.

That is certainly a highly plausible scenario for how the year 2021 plays out, but we shouldn’t kid ourselves into believing that no other scenarios are possible. Analysts must always firmly separate what they want to be the truth from what is the truth.

More concretely, let us sketch out here two darker scenarios which are also perfectly plausible outcomes for 2021.

First, we should be put on notice by the more infectious Covid variant emerging from the United Kingdom that the coronavirus may yet throw up some nasty surprises for us. Having spread all across the world to tens of millions of human hosts, there is adequate possibility that additional mutations will occur that will throw our current expectations out the window.

For example, we could learn with dismay later this year or next year that new strains of the coronavirus have developed that are more resistant to the currently effective vaccines. The vaccine rollouts that are starting now may not prove to be the silver bullet that kills the pandemic, but only the beginning of an “arms race” between our scientists and a highly resilient bug impacting the world for years to come.

Another dark, but plausible, scenario is that the economic impact from the pandemic proves to be deeper and more fundamental than is currently appreciated. Our global financial system just barely avoided a complete meltdown in 2008. It could turn out that the accumulation of economic losses from pandemic-related burdens once again exposes the fragility of global finance, leading to a worse economic crisis than what we have already been experiencing.

The point here is not to make you feel gloomy on a Monday morning, but only to point out that we should avoid the temptation of engaging in irrational optimism. The old adage says “hope for the best, prepare for the worst.” That’s not the worst advice to follow as we begin the year 2021.