The coronavirus pandemic is far from over but recent vaccine developments have provided much-needed light at the end of the tunnel. A number of vaccines that proved highly effective in clinical trials are working their way through the approval process and inoculations have begun (or are about to) in several countries. Manufacturing and distribution will take time but in the economies we track it looks increasingly likely that vaccines will be widely available enough to ease containment measures more substantially over the summer. So while a second wave and associated restrictions are sapping economic momentum heading into 2021, we’re now expecting the recovery will pick up steam as the year progresses. <\/p>\n
A gradual return to a new normal should help hard-hit services industries stage a more substantial comeback than they managed over the summer when restrictions were only partially eased. Central banks have committed to keeping interest rates low well into the recovery, and QE programs are reinforcing that guidance. Fiscal support remains robust\u2014and where stimulus is set to be scaled back, we don’t expect fiscal drag on the scale seen following the 2008-09 recession. Limited spending opportunities and generous government transfer programs have left some households with extra savings that should assist the recovery process. The outlook isn’t entirely rosy\u2014the coming months still present serious challenges, and 2020’s economic damage will leave scars\u2014but on net, growth prospects have improved.<\/p>\n
With economic slack\u2014particularly in Canada and the US\u2014likely being absorbed sooner than central banks have assumed, we think investors will eventually begin to contemplate an exit from highly accommodative monetary policy. Stronger growth and more two-sided inflation risks should also contribute to government bond yields drifting higher in 2021. Brightening economic prospects should give risky assets a bit more room to run\u2014the S&P 500 is already up 14% year-to-date\u2014before rate hikes come into view. We think the US dollar’s losing streak will come to an end as that country leads the recovery and investors see the Fed as first out of the gate with rate hikes as early as 2022.<\/p>\n