Economy Q4 2020

Major economies around the globe contracted sharply in March as the pandemic worsened, leading to a sudden drop in output and sharp rise in unemployment. It seemed the world stood still in March as we entered lockdown at home and abroad. As we turn the page on a difficult year, we look ahead to a brighter future. As always, risk and uncertainty remain, yet we have high confidence that the most challenging days are behind us and that the nascent recovery will continue in the year ahead.

First, we believe economic growth will continue to be supported by a combination of aggressive fiscal
and monetary policy. The groundwork for this approach was laid last Spring and we expect it will remain in place for an extended period. On the monetary policy side, central banks have moved aggressively to stabilize and support global economies and the financial markets with a mix of interest rate cuts, lending programs, and direct asset purchases. These actions translate into lower borrowing costs, better liquidity in financial markets, and ultra-low yields on government bonds. Though long-term risks remain, particularly with regard to rising debt levels and deficits, the positive economic impact from this monetary stimulus will continue during the year ahead.

On the fiscal side, Congress passed sweeping measures to support business owners and consumers directly. Under the CARES Act, business owners were granted forgivable Payroll Protection Plan loans and unemployment benefits were greatly expanded. Lenders offered forbearance to allow homeowners to delay mortgage payments without triggering default on loans. In the closing days of the year, Congress passed additional relief with a $900 billion bill that provides more direct relief payments to many Americans.

Taken together, these fiscal and monetary efforts provide a “bridge” to keep the economy stable until social and business activities can resume more fully. The benefit is evident in the data; after plummeting 31.4% in the second quarter, GDP growth rose 33.1% in the third quarter. Though output still remains below pre-pandemic levels, we expect growth to continue at a moderate pace. We expect growth of 3.8% for the last quarter of 2020 and 2.0% for all of 2021.

To be sure, future economic growth will be tied to progress in combatting the pandemic. The vaccination
efforts underway cannot come soon enough as the virus tightens its grip. The data here is less encouraging, as both new cases and fatalities rise above the peak from last April. Still, we see reasons for
hope. The incoming Biden Administration has indicated that vaccine distribution will be a top priority, and we expect most Americans who want it will have access to it in the coming year. In time, we are hopeful for a reversal in the viral spread, which will allow businesses to reopen and increase consumers’ inclinations to travel and spend more freely.

In summary, we envision a fragile recovery taking firmer hold in 2021. Though it may not be until 2022 that we reach the same level of economic output as before the pandemic, the economy is making progress on the road to recovery, and we envision a more stable and resilient economy in the months ahead.

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