NEW YORK: Global insurance sector rating agency, AM Best expects modest economic growth for the first half of 2021, as signs for U.S. economic rebound are encouraging despite lingering uncertainty.
In its Best’s Special Report, “2021: Transitioning to a New Normal,” AM Best states that risks to the economic forecast are related mainly to the persisting uncertainty about issues associated with the virus, such as new mutations; and whether enough people will take the vaccine to reach herd immunity.
Other risk factors related to the pandemic include lingering damages to the economy and public sentiments—how quickly consumer and business behaviors will revert back to their pre-pandemic state once the United States returns to more-normal conditions remains to be seen.
According to the report, consumer spending has been the main driver of economic growth over the last decade, but the pandemic quickly reversed this as a lack of spending opportunities due to lockdown measures, job losses and a general bunker mentality suppressed spending.
Consumer spending, which accounts for approximately 70% of economic activity in the United States, plummeted in the first and second quarters of 2020.
The post-COVID environment may see the release of pent-up demand, and many consumers will be well-positioned to start spending again due to low levels of debt, a high savings rate and low interest rates.
Other highlights in the report include:
- The housing market was the bright star in the U.S. economy last year and will likely stay strong in 2021. However, the lack of inventory and housing affordability remain a concern, as housing appreciation continues to outpace wage growth;
- Monetary policy will remain ultra-accommodative, and will likely keep bond yields muted, even against the backdrop of a second-half 2021 economic recovery;
- The unemployment rate recovered from a high of 14.5% in April, ending the year at 6.7%. Despite job gains through 2020 payrolls are still more than 10 million below their pre-pandemic levels.. However, the employment situation should continue to improve modestly throughout 2021 as virus uncertainty wanes; and
- Inflation may rise toward the second half of 2021 and rise further in 2022. The potential for higher inflation exists today more than in the last decade due to the Fed’s new inflation targeting plan, government stimulus efforts, and to the disruption to supply chains.