Financial Markets Monthly - December 2020

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.

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—and 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—the coming months still present serious challenges, and 2020’s economic damage will leave scars—but on net, growth prospects have improved.

With economic slack—particularly in Canada and the US—likely 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—the S&P 500 is already up 14% year-to-date—before 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.


  • After a very difficult 2020, positive vaccine developments are brightening growth prospects in 2021. The near-term outlook is still challenging, but we’re now expecting a stronger recovery than we were a few months ago, helped by ongoing policy stimulus.
  • Despite sharply rising US case counts and unfortunately record hospitalizations and deaths, recent indicators suggest the US economy continued to grow in Q4. Vaccine rollout should help GDP eclipse pre-pandemic levels in the second half of 2021.
  • Canada’s economy has lost a bit more momentum than in the US amid heightened restrictions—growth should be closer to flat in Q4. Earlier-than-expected vaccines should mean a stronger recovery in 2021, which we think will give the BoC more cause for optimism in January.
  • The UK economy saw a particularly steep decline in the first half of this year and lockdown measures should see a renewed decline in Q4 GDP. The recovery is expected to pick up next year but will face Brexit headwinds—the UK’s future trading relationship with the EU is still unresolved.
  • Containment measures in the euro area will also push Q4 GDP lower, and we don’t see activity returning to pre-pandemic levels until 2022. That should keep the ECB in stimulus mode for the foreseeable future.


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    Josh Nye is a senior economist at RBC. His focus is on macroeconomic outlook and monetary policy in Canada and the United States. His comments on economic data and policy developments provide valuable insights to clients and colleagues, and are often featured in the media.

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