Global economic outlook: the rise of macro disruptors

Key takeaways

  • Global growth could stumble in the first half of 2021 before regaining pace in the second half of the year, as recovery in the services sector continues to lag the manufacturing sector. 
  • The simultaneous deployment of fiscal and monetary packages to cushion the economic impact of COVID-19 is laudable, but it might have blurred the lines between two sets of policies, a development that could have important implications. 
  • The pandemic has accelerated certain trends and sowed the seeds for new ones that could reframe the way we think about the economy and investments—investors should monitor these changes closely.

The year ahead—four themes

  • Four weeks into the new year, it’s fair to say that the global economic outlook certainly seems more stable than it was last March amid the COVID-19 pandemic: Vaccines are gradually being made available around the world, central banks have brought stability and liquidity to global markets, and governments worldwide have introduced some of the largest fiscal stimulus packages in modern history.
  • And yet, tremendous uncertainty persists: The strength of the global economic recovery depends on the speed at which COVID-19 vaccines can be distributed, the scope for further fiscal spending depends on the outcome of delicate political negotiations in each country, while the resilience that we’re seeing in the financial markets may be limited by when investors believe central banks might start to roll back quantitative easing (QE).
  • What, then, constitutes a reasonable base case for 2021? Our outlook, which has been laid out in detail in the most recent edition of our Global Macro Outlook, comprises four key themes: a year of two halves, a K-shaped recovery, a temporary spike in inflation, and the continued search for yield.
Four pillars to our 2021 outlook
Table summarizing the macroeconomic strategy team’s global economic outlook for 2021 – four key themes. First, it’ll be a year of two halves, where the first half’s likely to carry downside risk, defined by weak demand and persistent supply disruptions; however, the second half carries upside risk as growth reaccelerates on the back of pent-up demand and inventory rebuilds. Second, the k-shaped nature of the recovery will likely become more prominent as manufacturing activities continue to recover before services. By this logic, manufacturing-based economies will likely outperform, and the disconnect between the stock market and real economy will continue, given stock indexes’ bias toward the manufacturing and technology sectors. Third, inflation is likely to spike temporarily in the United States as a result of base effects, a weaker U.S. dollar, and higher commodity prices. However, this inflationary pressure should fade in the second half of the year, and downside pressure on inflation should persist. Finally, extraordinary policy support, both fiscal and monetary, is likely to continue for some time (with China being the only major exception). But as fiscal spending rises, so will government issuance, particularly at the long end, potentially driving up long-term rates and steepening the yield curve.
Source: Manulife Investment Management, as of December 22, 2020. Projections or other forward-looking statements regarding future events and expectations are only current as of the date indicated. There is no assurance that such events will occur.

And yet, within this very reasonable consensus, and, dare we say it, uninspired base case, we find ourselves monitoring a number of nonstandard themes and ideas—macro disruptors that were either borne out of—or came into prominence as a result of—the COVID-19 outbreak. Although we’re confident about our forecast, we also expect the way markets think about the macro environment to shift away from traditional premises and gravitate toward nascent and unconventional macro trends in 2021. While these new normal ideas may not be directly investable just yet, they’re areas that we expect to devote special time and attention to this year.

Macro disruptors to monitor

1   Monetary and fiscal policy coordination and the blurring of policy roles

The simultaneous implementation of both monetary policy and fiscal policy stimulus in 2020 has been cheered as a successful example of coordinated policy. It likely saved the global economy from a persistent depression and should no doubt be lauded; however, this coordination on a multitude of levels is, in our view, also blurring the line of central bank independence and the traditional roles and goals of each type of policy.

Primarily, the extent of central bank purchases of government bonds—particularly those issued after March 2020—and the share of the government bond market held by central banks is eye-catching and has generated discussions about whether central banks have been financing government debt. While we don’t necessarily agree with that view, it’s clear to us that the amount of government debt issued has been facilitated by historically low interest-rate policy that most central banks are committed to maintaining. It’s also clear that government dependence on low rates and QE programs will add more fuel to the ongoing discussion about debt monetization and modern monetary theory as well as common trade ideas associated with them, such as inflation protection and yield curve steepeners. 

Central bank holdings of government debt
Chart of central bank holdings of government debt in Japan, the United States, and Canada, from January 2003 to November 2020. The chart shows that central bank holdings of government debt in these three markets have surged since the COVID-19 outbreak, with the Bank of Japan’s holding of government representing around 44% of the domestic government debt market as of November 2020. The equivalent metric for the Fed and the Bank of Canada are around 17% and 34% respectively.Chart of central bank holdings of government debt in Japan, the United States, and Canada, from January 2003 to November 2020. The chart shows that central bank holdings of government debt in these three markets have surged since the COVID-19 outbreak, with the Bank of Japan’s holding of government representing around 44% of the domestic government debt market as of November 2020. The equivalent metric for the Fed and the Bank of Canada are around 17% and 34% respectively.Chart of central bank holdings of government debt in Japan, the United States, and Canada, from January 2003 to November 2020. The chart shows that central bank holdings of government debt in these three markets have surged since the COVID-19 outbreak, with the Bank of Japan’s holding of government representing around 44% of the domestic government debt market as of November 2020. The equivalent metric for the Fed and the Bank of Canada are around 17% and 34% respectively.
Source: U.S. Federal Reserve, Bank of Japan, Macrobond, Manulife Investment Management, as of January 6, 2021. Gray areas represent recessions.

Meanwhile, central banks have stepped up their research efforts on topics beyond their typical scope, including income inequality, climate change, and digital currency transfers. Notably, the U.S. Federal Reserve’s (Fed’s) transition to average inflation targeting will give the central bank more flexibility to address varied issues because the new framework allows for an overshoot of inflationary pressures when the economy runs hot. The appointment of former Fed Chair Janet Yellen as U.S. Treasury secretary is also likely to strengthen the interaction and application of both forms of policies.

Crucially, we believe the cross-pollination of goals and focus between fiscal and monetary policy suggests central banks could be motivated to keep interest rates very low as they tackle issues beyond inflation. It also implies that global money supply could continue to expand and that government debt and deficits will be persistent. This may seem subtle but, in our view, the development could affect many macro areas and interact in unexpected ways with other emerging macro disruptors. 

2   A growing thirst for alternative investments, including cryptocurrencies

The search for yield has been an important strategic investment theme for us over the past several years and informs our asset allocation perspective. Massive central bank balance sheet expansion and the surge in government debt/deficit will likely encourage investors to venture further into alternative asset classes. While it’s likely that investors will increasingly focus on traditional alternative assets such as private assets, emerging markets, and infrastructure and agriculture funds, we believe there’ll also be a growing demand for assets whose value cannot be distorted by central bank purchases, specifically those that may be subject to less regulation and taxation, since governments may be seeking additional revenue to fund expected future deficits. Against this backdrop, cryptocurrencies will likely be viewed as an alternative investment that offers a solution to investor fears that ongoing extraordinary policy support could lead to resource misallocation. This doesn’t necessarily imply that investments in cryptocurrencies are appropriate, but it does suggest that cryptoassets such as bitcoin will increasingly become a standard point of reference for investors and policymakers alike.

3   A shift away from traditional data, including GDP and CPI, pivoting toward private and alternative data

In 2020, economists and investors alike were forced to eschew traditional economic indicators as they raced to understand how the pandemic was affecting the economy. Indeed, traditional data sets—most of which are lagging indicators—proved to be too lagged and distorted to be meaningful in a rapidly changing environment. Wild swings in traditional data points didn’t help—the month-over-month, year-over-year changes were of such a huge magnitude that the extent to which they missed expectations was borderline irrelevant. Crucially, swings in widely monitored headline data contained precious little insight to explain the massive disruptions that were taking place in the real economy.

“We also expect markets to have more muted reactions to traditional economic data releases than they might have historically.”

To compensate for that, we turned to new, seemingly unorthodox, and, occasionally, private sector data such as OpenTable restaurant reservations, Google’s mobility indexes, and cross-border visitor arrival data for a read on the economy. These aren’t without faults, but they proved to be useful—timely, nuanced, and ultimately highly correlated with the traditional monthly data points we had grown so accustomed to.

We believe investors will continue to demand more timely data that can provide an instant read on economic conditions, and this private sector data will become a critical building block of macro views from here on. We also expect markets to have more muted reactions to traditional economic data releases than they might have historically. In other words, investors have identified the need for new informational tools in a post-COVID-19 landscape that can enable them to understand the macroeconomic environment better and stay ahead of the markets. 

4   Central bank digital currencies will receive more attention

We suspect central banks will intensify existing efforts to better understand digital currencies, specifically central bank digital currencies (CBDCs), which refer to the system in which a digital currency is distributed, one that’s backed and controlled by central banks (i.e., it doesn’t rely on blockchain technology and isn’t a cryptocurrency). The construction of a CBDC system could take a lot of forms, but the idea is often associated with the concept of a digital wallet held by end users, which could include households or businesses.

“Crucially, CBDCs could enable the disbursement of helicopter money should it be necessary.”

While the idea might seem farfetched, central banks are already immersed in the research—at least 36 central banks have published on the subject,¹ and we expect work in this area to intensify. In our view, the ongoing cross-collaboration between the world’s largest central banks and the Bank for International Settlements to develop common foundational principles and core features of a CBDC could be seen as a sign of things to come.² Interestingly, China has already trialed a central bank-backed digital yuan.³

CBDCs would—in theory—improve the effectiveness and transmission of monetary policy by targeting money to those who most need it, as opposed to the indirect nature of QE (and potentially free central banks from worrying about the asset bubbles QE may or may not create). Crucially, CBDCs could enable the disbursement of helicopter money should it be necessary. They aren’t, however, without major obstacles—they run the risk of disintermediating banks, a development that could have important consequences. But as the effectiveness of monetary policy hits its limits, particularly at a time when policymakers are looking for ways to target inequalities more effectively, CBDCs could be the logical next step.

5   An accelerated focus on ESG investing that expands into the macro universe

2021 could well be the year that environmental, social, and governance (ESG) factors extend their reach into the broader macro universe. For one, we expect investors who are increasingly ESG aware to move beyond examining how individual companies are tackling these issues and focus on how economies are approaching sustainability, equality, and diversity challenges. This will likely create additional pressure on governments—and central bankersto focus on topics such as climate change and how to transition to a low-carbon environment.

In a sense, the current macro backdrop should incentivize policymakers to do so. Interest rates are low, and the general view is that higher government spending is appropriate at this moment in time. This will likely accelerate the development of financial instruments that are designed to support broad economy transitions, such as green bonds, and have important implications for fiscal spending, monetary policy decisions, and, from an investment perspective, asset allocation.

6   Labor market scarring

With COVID-19 vaccines already being distributed and unemployment rates having bounced off historic lows, it’s tempting to think that life could return to normal in short order. While that’s true for many pockets of the economy, the full picture is more complex.

One area that bears careful monitoring is the relatively substantial drop in the labor force participation rate (LFPR) in many countries that occurred in 2020, which points to potential longer-term scarring of the labor market. Major central banks have extensively studied the concept of hysteresis, or the persistent economic harm, particularly among disadvantaged groups

U.S. labor force participation rate has suffered a severe drop (%)
Chart of labor force participation rate among men and women in the United States, from January 1995 to December 2020. The chart shows that labor force participation rate for both genders fell after the dotcom crash 2000 and the global financial crisis, and on both occasions, stayed lower.
Source: U.S. Bureau of Labor Statistics, Macrobond, Manulife Investment Management, as of January 6, 2021. Gray areas represent recessions.

Research suggests that falls in LFPR in industrial economies after severe economic downturns can last for up to a decade.⁴ Crucially, an economy’s long-term potential growth rate is deeply tied to its LFPR. Notably, structurally declining LFPR is often cited as a key reason why interest rates have declined.⁵ If the labor market shock of 2020 persists over the coming years, it’s likely that interest rates will remain lower than they would have pre-COVID-19, even if most of the broader economy appears to have healed.

7   Populism and the demand for redistributive policies

As economists and strategists, we typically shy away from political analysis at all costs. But as we head into 2021, it appears to us that few are paying attention to the risks of a surge in the populist movement. In our view, there’s scope for the movement to grow, particularly since COVID-19 turned the spotlight on the extent of racial, gender, and wealth inequalities that were somehow hidden in plain sight—pressure to address this imbalance will likely grow. In Europe, we’re keeping an eye on the upcoming German federal election in September, along with the Italian and French elections of 2022, during which populist parties could win a bigger share of the electorate’s vote. But Europe isn’t alone—we believe demands for redistributive policies will grow in many major economies, with implications for the size, scope, and effectiveness of fiscal policy. 


The list of possible macro disruptors may seem long, but it could yet grow. We’re also keeping an eye on seemingly innocuous trends—such as the expected rise in mergers and acquisitions and initial public offerings, the shift from the millennial consumer to the Generation Z consumer, and likely disruptions in healthcare and education—that could have important implications for worker mobility, cost of living, and inflation. While the bulk of investor focus in 2021 will be on a return to our previous way of life, we believe it’s even more important to probe beneath the surface, which, in many ways, will look very different than it did before COVID-19.

Rise of the central bank digital currencies: drivers, approaches and technology,” Bank for International Settlement, August 13, 2020. Central bank digital currencies: foundational principles and core features,” Bank for International Settlement, October 9, 2020. “Explainer: How does China’s digital yuan work?” Reuters, October 19, 2020. Labour Force Participation Hysteresis in Industrial Countries: Evidence and Causes,” OECD, 2010. Labor Force Participation and Monetary Policy in the Wake of the Great Recession,” International Monetary Fund, December 16, 2013.

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Frances Donald

Frances Donald, 

Global Chief Economist and Global Head of Macroeconomic Strategy, Multi-Asset Solutions Team, Manulife Investment Management

Manulife Investment Management

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