2021 January Economic Review

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.
  • Global stock markets went up as a result of positive news on COVID-19 vaccines.
  • Coronavirus cases surged in many parts of the world as the second wave of the pandemic took hold.
  • Central banks and governments continued to provide financial and monetary support to economies.

Over the past three months, rising COVID-19 cases in the UK, US and Europe were a major concern for governments, prompting tighter restrictions aimed at slowing down the spread of the virus. Many businesses were forced to close their doors once again, putting the economic recovery into doubt. However, this had little immediate effect on stock markets, as positive news of three successful Covid-19 vaccines raised hopes that the end of the pandemic is within sight.

Economic update

As the weather turned colder in the final few months of 2020, it became clear that many parts of the world were facing a second wave of the COVID-19 pandemic. That would have a negative economic impact. In the UK, business activity fell as new lockdown measures were introduced in the autumn. In November, gross domestic product (GDP) – the main measure of economic activity – fell by 2.6% compared with an increase of 0.4% in October.

It was not all bad news, however, as two significant events took place in December. First, the UK began its vaccine rollout, with the government aiming to vaccinate 15 million people by mid-February. Second, the UK and EU reached a last-minute trade agreement on Christmas Eve, preventing a so-called hard Brexit.

In Europe, surging COVID-19 cases caused business activity to fall sharply towards the end of the year. The eurozone economy has been particularly badly hit by the pandemic, with unemployment standing at 8.3% and the European Commission estimating that GDP shrank by 7.8% in 2020. In response, European Union leaders agreed on a €1.8 trillion package in December to help repair the economic and social damage caused by the pandemic.

For the US, the main story was Joe Biden’s victory in the presidential election and the rocky transfer of power that took place as Donald Trump refused to accept the result. Away from politics, the pandemic continued to be a major challenge in America and, with COVID-19 cases surging, US Congressional leaders passed a long-awaited $900bn fiscal relief package designed to help the economy survive the pandemic. The relief package was approved at a time when the unemployment rate was spiking, with 787,000 filing for benefits in the week before Christmas and the total number of people unemployed standing at 25.7 million.

Unlike much of the West, many Asian countries reported much lower rates of COVID-19 over the quarter. However, Japan saw the number of its daily reported infections surpass 3,000 for the first time in December and South Korea broke into new territory by recording more than 1,000 daily cases for the first time.

In China, the economy continued to improve as the world’s second-largest economy continued to recover from the pandemic. Another month of growth in its factory sector in December helped the Chinese economy return to pre-pandemic levels, although GDP growth for 2020 will be the weakest for 30 years.

Given that central banks are doing all they can to support economies, it is no surprise that interest rates have not changed. The Bank of England kept rates at 0.10% and the US Federal Reserve held its benchmark rate at 0.0-0.25%.

Market commentary

Over the past three months, stock markets in the US, UK, Europe, Japan and Asia Pacific were all broadly positive. While there was concerning news about rising infection rates, new variants of the virus and stricter lockdown measures, investors focused instead on the positive news about three successful COVID-19 vaccines.

In November, Pfizer/BioNTech, Moderna and Oxford/AstraZeneca each announced that their vaccines were highly effective. Stock markets surged as a result, with many of the sectors that were previously performing poorly during the pandemic – such as energy, traditional retail and travel and leisure – seeing strong share price growth.

While the best performing companies through the past year were tech companies and other areas of the market that cater for online retail and remote working, the vaccine news was good for companies that have struggled during the pandemic: traditional retailers, hotels, airlines and energy companies.

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