This research was published on December 9, 2020​

Against a backdrop of the continuous health crisis, the economic recovery has decisively outperformed expectations globally. Now facing setbacks as the pandemic accelerates once more, will the recovery resume its vigorous path in 2021?

​We think so. Looking past the intense dataflow that spread too much economic gloom this year, we have emphasized the nature, drivers, and context of the shock in analyzing the recovery. Though uniquely intense, the Covid recession lacks the structural overhangs from excesses in prior years — and policy audaciously prevented the shock from creating its own structural downside. Instead of structural scarring, which weighs down recoveries, we have seen tight V-shapes in capex which lays the foundation for subsequent growth.

​All of this amounts to predisposition for continued bounce growth, particularly as service sectors have yet to follow other sectors back to pre-Covid levels. And vaccines — another area of outperformance — are set to remove many obstacles in the service economy in 2021. Fiscal policy, though prospects of the supersized version have dimmed, is unlikely to become a crippling headwind. Still, risks abound. Hidden vulnerabilities may yet surface as tapered policy support may reveal credit losses in the real economy. Yet, our 2021 base case is both strong and unusually broad, owing to the structural narratives we have stressed.

​We also look past 2021 and sketch the contours of the post-Covid cycle: the pathway to a tight labor market will be much shorter than in prior cycles, which, together with easy policy, points to the risk of financial imbalances. Before long, we expect a young expansion with an old-cycle risk profile. For now, however, we take comfort that these are concerns beyond 2021 and look with optimism to a strong 2021.

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