Saturday, January 02, 2021

Question #1 for 2021: How much will the economy grow in 2021?

by Calculated Risk on 1/02/2021 12:03:00 PM

Earlier I posted some questions for the new year: Ten Economic Questions for 2021. I'm adding some thoughts, and maybe some predictions for each question.

1) Economic growth: Economic growth was probably around negative 3% in 2020 due to the pandemic (maybe 2.5% Q4 over Q4). The FOMC is expecting growth of 3.7% to 5.0% Q4-over-Q4 in 2021. How much will the economy grow in 2021?

Here is a table of the annual change in real GDP since 2005.  Prior to the pandemic, economic activity was mostly in the 2% range since 2010.  Given current demographics, that is about what we'd expect: See: 2% is the new 4%., although demographics are improving somewhat (more prime age workers).

Note: This table includes both annual change and q4 over the previous q4 (two slightly different measures).   For 2020, I used a 5.0% annual growth rate in Q4 2020 (this gives -2.2% Q4 over Q4 or -3.4% real annual growth).

Real GDP Growth
YearAnnual
GDP
Q4 / Q4
20053.5%3.1%
20062.9%2.6%
20071.9%2.0%
2008-0.1%-2.8%
2009-2.5%0.2%
20102.6%2.6%
20111.6%1.6%
20122.2%1.5%
20131.8%2.6%
20142.5%2.9%
20153.1%2.2%
20161.7%2.1%
20172.3%2.7%
20183.0%2.5%
20192.2%2.3%
20201-3.4%-2.2%
1 2020 estimate based on 5.0% Q4 SAAR
annualized real growth rate

The FOMC is projecting real GDP growth of 3.7% to 5.0% in 2021 (Q4 over Q4).

Goldman Sachs recently projected real "GDP growth of +5.9% in 2021".

Merrill Lynch recently projected 4.6% real GDP growth in 2021.

GDP growth in 2021 depends on how quickly the pandemic subsides (I'm assuming mid-year), and how much economic scarring has occurred (permanent job losses, business closings, commercial real estate issues).  With minimal scarring, GDP could return to path growth (about 2.3% per year real GDP growth).   That would put GDP up 7% or so in 2021 (Q4 over Q4).

My guess is there are certain sectors that will be slow to recover, and some - like some sectors of commercial real estate - that will barely contribute to growth in 2021.  These factors suggest real GDP growth probably in the 4.5% to 5.5% range in 2021, with some upside potential (and downside risk if the pandemic persists).

Here are the Ten Economic Questions for 2021 and a few predictions:

Question #1 for 2021: How much will the economy grow in 2021?
Question #2 for 2021: Will all the jobs lost in 2020 return in 2021, or will job growth be sluggish?
Question #3 for 2021: What will the unemployment rate be in December 2021?
Question #4 for 2021: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020) , or will it will only partially recover in 2021?
Question #5 for 2021: Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?
Question #6 for 2021: Will the Fed raise rates in 2021? What about the asset purchase program?
Question #7 for 2021: How much will RI increase in 2021? How about housing starts and new home sales in 2021?
Question #8 for 2021: What will happen with house prices in 2021?
Question #9 for 2021: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?
Question #10 for 2021: How much damage did the pandemic do to certain sectors?