The Economic Outlook for 2021

Panelists discuss the economic outlook for 2021, including post-pandemic global recovery expectations and the potential economic priorities of an incoming Joe Biden administration. 
 

JOYCE: Good morning and good afternoon to everyone. Thank you for joining us. My name is Tom Joyce. I'm a capital markets strategist at MUFG. I'm going to lead our discussion today on the economic outlook for 2021.

Absolutely no question that we entered 2021 with political risk, economic risk, and public health risk elevated. And to navigate that discussion I'm very pleased today to introduce our two panelists, Elga Bartsch, who is the head of macro research at BlackRock, as well as Jay Bryson, who is the chief economist for Wells Fargo here in the United States.

In the course of this discussion, we're going to cover the global economy, we're going to cover the U.S. economy, the virus and the vaccine, the Biden policy agenda, and other such topics. I'm going to ask questions for approximately thirty minutes and then we'll turn it over to audience Q&A.

Elga, let's start with you. Let's start really high-level, macro, the global economy, before we get into more details on specific issues. I think we all know that the recovery this year is exceptionally likely to be an uneven one, with huge differentiation across geographies, across industries, and across business. What is your assessment of the global economy for 2021? And what are the key drivers of this view?

BARTSCH: Yes, thank you very much, Tom. That's a very good question. So to start out with, I'm not even sure that we should call it a recovery, because calling it a recovery would imply that the normal business cycle logic applies. And that's the starting point of my thinking about the global economic outlook is that this isn't a regular business cycle and therefore the normal dynamics are suspended. What this is, is a natural catastrophe where economic activity was deliberately stopped in order to protect public health.

That natural catastrophe is to some extent still ongoing. We have seen a relief in the course of last year. But now it's intensifying again. And so that means that economic activity everywhere in the world is mostly driven by virus activity, the vaccine rollout, and mobility and the restrictions that governments put around this. So crucially, economic data doesn't really convey much information at this stage, because it's the consequence of other actions or other dynamics. And so that's why I prefer to speak of a restart, rather than a recovery, to also make clear with the choice of words that we're dealing with something very different.

It's a stop-go economy to some extent. I think eventually, in the course of this year, we will see an accelerated restart of economic activity. At the moment in a number of places it seems to be disrupted, at least temporarily, by the spike in virus infections that we are seeing, by the spike in hospitalizations that we're seeing. But eventually, we will get back to pre-COVID activity levels. And, more importantly, we will also get back to the pre-COVID growth trend. And that is important because that means that this isn't a replay of the global financial crisis, which saw a material decline in long-term growth trends in the following ten years. That means that the cumulative loss in activity, even though sizable, will just be a fraction of that of the global financial crisis. And depending on virus activities, vaccine rollout, and governments’ policies around that, that will be the main driver of the restart this year.

JOYCE: Elga, if I could take us back two months to mid-November, we had this extraordinary event, and that is the breakthroughs on the vaccine. And I think we were expecting the vaccine breakthrough back in November, but we weren't expecting this 90 to 95 percent efficacy. And so we became perhaps quite optimistic. And rightly so, that was a remarkable scientific achievement. But we stand here today now realizing that implementing this vaccine is going to be difficult and administering the doses. So far, since December, we basically have thirty-five million people in the world across fifty countries have received doses. That's not even half a percent of the global population. Has the slow vaccine rollout changed your view on the year ahead? Or are you substantively in a pretty similar place in terms of how you're looking at 2021?

BARTSCH: Yeah, let me say at the outset that I think the vaccine breakthrough is a game-changer. And it's a game-changer from a qualitative point of view because it gives us and everybody in the private and the public sector greater visibility about what a post-COVID world will look like. And that's very important because it anchors private sector expectations for long-term growth, long-term revenues, long-term income streams, and that will materially affect behavior today.

More importantly, for policymakers, it makes clear that they are building a bridge to somewhere as they're trying to support households and corporates through the disruptions caused by COVID-19. And that's another very important aspect of the vaccines being available. It strengthens the argument for policy support, whether it's fiscal or monetary, because you know that it's likely to be temporary.

And you're absolutely right. It was an amazing breakthrough of science. These vaccines are very innovative. And yes, there are some initial bottlenecks in terms of production capacities, in terms of the administration of the vaccine rollout. But to be honest, I don't think that that is the main new development. I think the main new development is the presence of new virus versions that are a lot more easily transmitted between people. And we are obviously in a race between these faster viruses and the vaccine rollout.

I think the emergence of those virus mutations are the really new development. And they will temporarily force us to keep a distance from each other, work from home, shop online, refrain from going to restaurants, maybe splurge on a takeout. But I think it's the new virus mutation more than the vaccine that is at the moment where the marginal news flow is.

JOYCE: Well, that's a very good point. And let's bring Jay Bryson into the discussion here. Jay, the consensus view for 2021 in the United States, but I think beyond the United States, is this notion that virus resurgence, and of course amplified by mutation risk, is going to weigh heavily on Q1 activity but that as we get to mid-year we could have a significant pivot to above-trend growth actually finishing the year with pretty impressive growth numbers. Do you agree with that consensus view–a year in two halves, so to speak? And are the risks here to the upside or the downside in your view?

BRYSON: Well–

JOYCE: The preponderance of risks I should say, are they to the upside or downside in your view?

BRYSON: Right. Tom, to start with your question, yes, we share that consensus view. In what we know right now, just looking at the data coming into the first part of the year, it's pretty weak. And so we're gonna clearly have a weak first quarter, not only in the United States, but if you look at the United Kingdom, you look at parts of the eurozone, it's all going to be very, very weak there. But under the assumption that the vaccines really start to accelerate here and the service sector starts to reopen you should get much stronger growth in the second half of the year.

Now, there's two caveats to that. The first, and Elga already mentioned this, are these new mutations of the virus. God forbid those happen to be not affected at all by the vaccine, or they're resistant to the vaccine. That's going to delay that recovery. So we'll have to wait and see there.

The other caveat to keep in mind here is we're talking about the developed world right now, you mentioned fifty countries. There's lots of parts of the emerging world where vaccines have not started to roll out yet. It's going to be quite some time before that happens. So you could have very, very strong recoveries in the United States and in the eurozone, etc. But many parts of the emerging world could potentially lag here as well.

And then in terms of upside. Are there upside risks here? Yeah, the vaccines could be deployed much faster than we currently expect. And these mutations could also be put down by the vaccine. So there's just a lot of unknowns right now as it relates to COVID. And not being an epidemiologist, it's hard for me to know exactly which way the risks are balanced at this point.

JOYCE: Jay, one of my lessons from last year when you look to that May to August timeframe, I think this is true in the U.S. in particular, is the speed with which the consumer reengaged the economy. Now let's put aside that we had a bit of a sloppy reopen in the U.S. for sure from a virus perspective. But the speed of reengagement was fairly impressive. As we progress, whether it be April, whether it be June, as we progress on this timeline of vaccine implementation, do you think we could see something even more powerful this year in terms of reengagement of the economy, pent up demand, and so forth?

BRYSON: I don't think, Tom, it's going to be quite as strong as it was last year. And last year, you essentially shut down the entire economy and then it came roaring back. In the third quarter here in the United States, growth was at an annualized rate over 30 percent. And in many European countries you also had very, very strong growth rates. Are you going to have the same sort of thing this year? No, probably not, not 30 percent. I mean, when I look at our third quarter estimates, or projection at this point, it's 9 percent annualized. That's very, very strong. But again, it's not 30-some percent.

The thing that brought about that really strong recovery, not only United States but in other countries as well, was the fiscal relief packages that were put in place, the income support that was done. So you know, in mid-March and April, people had nowhere to spend their money because everything was shut down. But they were getting checks from the government, either through unemployment benefits, or here in the United States direct payments as well. And so when May and June came around, the economy was open, people had a lot of excess savings pent up and that's part of what came roaring back, or brought about that big roaring back. We've had this second round of fiscal relief here in the United States and that will certainly help as we go forward. But again, I wouldn't expect the 30 percent growth rates later this year.

JOYCE: Elga, I'm gonna come to you in a moment about the type of government stimulus and support in Europe. But Jay, let me just stick with you. President-elect Biden announced last night plans for a $1.9 trillion stimulus. In December, we had a $900 billion stimulus announcement. If you added it all up, you're talking about a $6 trillion type of number. Now, I think the real number we all know is a little lower, because some of the funds from the Cares Act are perhaps being reused. But suffice it to say, we've got some big numbers here, $1.9 trillion, the most recent announcement. As you look into 2021, what are your expectations for how much of this stimulus is put in place and when, and the impact that it has on your forecast? We talked about the consumer, let's talk about the role that the government is playing in supporting this economy.

BRYSON: Right, so let's talk about what's in that package. So the first thing would be $1,400 checks on top of the $600 checks that were in December. Another thing that's in there is extended unemployment benefits, $400 a week through September. There’s money in there to help fight the pandemic, there's money in there to reopen schools, and there's money in there for state and local government. How much of that survives? I'm certainly going to take the under on $1.9 trillion. Now, how much of it actually makes it through? I don't know, that's a political question at the end of the day. But I could see broad support for more money to fight the pandemic. I could see broad support for money to open up schools.

Are some senators going to sign on to $1,400 checks? Just last week, Senator Joe Manchin, Democrat from West Virginia, was skeptical about that notion. They're gonna need his vote because right now the Democrats have fifty in the Senate with Kamala Harris breaking the tie. And if he's skeptical about that notion, maybe that doesn't survive. Putting unemployment benefits out through September? I don't think that's gonna happen, frankly. So how big is this number? I think it's going to be significantly less than $1.9 trillion. There will be something, but I think it's going to be more targeted towards measures to fight the pandemic and aid to schools and things of that nature.

JOYCE: So more relief, really, than fiscal stimulus so to speak.

BRYSON: Yeah, well, things like reopening schools is relief. And there probably will be some sort of check. But I don't think it's going to be a $1,400 sort of thing. So most of this, and most of the Cares Act, and the act that was passed back in December, I would put in the bucket of relief rather than actual stimulus itself. It helps to prop the economy up, it eliminates downside risk, but it's not so much actual new stimulus per se.

JOYCE: Elga, can you characterize for us where we are on the fiscal support and stimulus out of Europe? We're well aware of where the ECB is on monetary policy, but talk to us about the status of fiscal support across Europe, an economy in aggregate that is just as large as the United States.

BARTSCH: Yes, I'm happy to. So, first of all, roughly the amount of fiscal relief that is provided in the euro area by individual governments is roughly on par with what they did last year. So it's roughly the same size fiscal stimulus. As you probably are aware, the pretty strict fiscal rules in Europe are suspended at the moment. They are still suspended until next year. And I think that already tells you how Europe is rethinking fiscal policy. And I think this would be a great opportunity to actually use this hiatus in the stability and growth plan to actually think about it a little bit more broadly.

In addition, we have seen a very important initiative for Europe. The Recovery and Resilience [Facility] which is basically the pan-European response to the pandemic, which will allow individual countries to draw down significant grants that are jointly financed by the European Union countries. And that for the first time really is a very sizable joint response to what is, at the end of the day, an asymmetric shock to economies given which ones were hit harder by the virus than others. And so this is just getting underway.

As you probably have seen this plan, which is part of the multi-annual budget process in Europe, was just approved before Christmas. And it's now on its way through ratification, also in the individual member states. And while that is happening, the different member states who want to and need to put together some recovery and resilience plans that are then going to be discussed with the European partners, before the fund starts to disperse funds in the second half of this year. So this is the pooling of the fiscal response in a pretty sizable way, is another very important qualitative change that we have seen in the way that Europe responds to this crisis, versus the global financial crisis or indeed the Europe crisis that followed.

JOYCE: Elga, I think we need to discuss China as well. China, of course, being the world's second largest economy. They have outperformed in recent months on virus suppression, having achieved virus suppression in a way that Western economies have not. As we enter 2021, is this Chinese economy one that continues to have significant momentum? Or is it an economy that is slowing down and being dragged a touch lower by the virus resurgence that is taking place in the West?

BARTSCH: So you're absolutely right. China was most successful in suppressing the virus by taking very radical restrictions to mobility and thus already last year saw a swift restart in its activity. As a result, the economy has not just moved back to the pre-COVID level of activity, but also converged back towards trend. So in that sense, China is leading the rest of the world and much of Asia is benefiting from this strength in economic growth as well as their own virus control measures. But this optimistic outlook on Asia also relies on continued effective virus control, and also on the vaccine programs being rolled out.

And one aspect that already shows how different the situation is, is that China, if anything, is not really discussing about additional policy stimulus or additional policy support. If anything, [they’re] thinking about normalization, a very cautious and gradual normalization of policy. So there is a sort of strong economic performance and that will likely continue this year, despite a number of challenges that come from the rest of the world. Not least with the rest of the world struggling more with the renewed acceleration in infections, but also from the rewiring of globalization that we are seeing being accelerated by COVID-19.

JOYCE: Jay, when I think about the risks for the year ahead—we've certainly spent quite a bit of time on the virus and the vaccine—but I would say the question I've been getting asked the most is inflation. What is your view on the upward pressures on inflation that we're seeing? Are they likely to be temporary? Or is there something going on here that we ought to pay more attention to? And what are the implications for Fed policy?

BRYSON: Right. So right now, just to kind of level set, we got the December CPI out just the other day. On a year over year basis the core rate of inflation—I think that's kind of what you want to look at, that eliminates some of the volatility by oil and food prices— the core rate in December was up to about 1.6 percent.

Now in coming months, we're going to see that go over 2 percent, just because of base effect. We got a collapse in prices last March and April when the pandemic really hit, and so you'll see that core rate go up above 2 percent. But it could probably get as high as two and a half percent as well. I mean, goods prices have come up here, there's been a lot of demand for goods. People are buying goods. They're not buying services. That's the part of the economy that's shut down. So again, you'll probably see that come up to about two and a half percent.

Now we view this as more as a one-off price adjustment, rather than a continuance spiraling higher in the rate of inflation. I mean for that to happen, you have to really start to change people's expectations of what will happen with inflation. And so far, if you look at survey measures of inflation expectations, they remain very, very muted at this point. So we do believe you're going to get this one-time level effect on the price level that brings the inflation rate up marginally here, but we don't see it spiraling out of control.

And I think what that means for the Fed then is, the Fed knows this as well, they know you're going to get this upwards creep in inflation in the near term. I don't think they'll be spooked by higher inflation numbers in the next few months. And so I would expect them, obviously, to keep the Fed funds rate, the Fed Funds target at zero for the foreseeable future. We also think they will continue their bond buying program through most of the year as well.

And if anything, if the Fed's going to make a mistake here, they're going to tolerate a higher rate of inflation than they historically have. They want to get the inflation rate. And now we're not talking 1979-like inflation, but they would be happy with an inflation rate at two and a half percent. So we don't think they will be spooked by a little bit higher inflation rates later this year.

JOYCE: We have seen a reset higher in the ten-year Treasury, 20-25 point move in recent weeks. The consensus view on the street is one and a half percent area. We don't have to get specific on where you think the ten-year is going, but are you concerned, given inflation risk, temporary as it may be, or other market dynamics, are you concerned that rates can get away from us a little bit here? Or do you think that the Fed will succeed in keeping them as low as they would like to?

BRYSON: Well, certainly the Fed will have a have a role here. As I mentioned, we think they'll continue to buy Treasury securities at the pace of $80 billion per month, in coming months. But it's the private sector, as well. And we've seen this before, when you have a dislocation in the Treasury markets, rates snap higher. They may snap higher for a while, then they start to stabilize. And at that point, money floods back in again. And so, could we go from where we're sitting right now on the ten-year Treasury about 110 basis points, two weeks from now, can we be at 150 basis points? Sure. But if you get that dislocation, I do believe then that sets up more buyers coming in. Again I think what you have to worry about is inflation expectations getting out of control. And within an economy that still remains, I'll use the word–rather depressed–it's hard to see inflation getting really out of control in that sort of situation.

JOYCE: Elga, certainly another topic high on the list of questions from clients, and this existed pre-COVID and it certainly has accelerated post-COVID, and that is this notion of elevated global debt. The United States has arguably, for example, done a full decade of debt build in one year when you think about where the CBO projections were, just a year ago, prior to COVID. We've done a full decade in a year, and many other geographies globally have done something similar. What is your assessment of elevated debt risk? Does debt matter in today's global economy?

BARTSCH: It matters, but it probably matters less than it has done in the past. For the reason that real interest rates remain very low and could potentially fall even further. So I think the first thing to note is, it's not the level of debt that matters, but whether you can finance it. So something like debt service costs is probably something to look at. They are at near record lows, if not at record lows, depending on which country you're looking at, given the very low level of yields that we are having. And we have had a significant period of time now during which growth rates were above real interest rates. Which actually means that expansionary fiscal policy, if done correctly, and enhancing long-term activity and growth are actually leading to a lower, not a higher, level of debt over the medium-term. So in that sense, I think there are a number of important secular shifts that we need to take into account when we look at the debt dynamics.

And of course, we also need to be aware that there were no alternatives but to provide the policy support and potentially to provide more policy support in the current juncture, because otherwise, you would really have seen some very serious harm to productive capacities globally, making things considerably worse. So I think especially what we have seen happening in the last twelve months, or a little bit less than that, which is obviously unprecedented in terms of speed, in terms of extent of coordination with monetary policy, was required. And what I think you can see now in amongst policymakers is that there is a very different mindset compared to what we saw, let's say, in the aftermath of the global financial crisis. There seems to be very little appetite to immediately tilt back towards austerity.

And we've seen Christine Lagarde, we've seen Lael Brainard and also Jay Powell, sort of warning against a premature withdrawal of policy stimulus, whether it's monetary or fiscal. And I think that we really have to recognize that we are in a completely different situation today. That I think means that the traditional concerns about debt, for instance, in Europe that you shouldn't have more than 60 percent of GDP in terms of government debt, they're probably outdated.

JOYCE: Well, before I shift it over to our audience questions, I feel compelled to pivot in a slightly more positive direction. We've been talking about the vaccine and elevated debt and inflation and risks and risks and risks.

Jay, are we ignoring the potential for significant upside risk here in 2021? What is your assessment of that? We have a vaccine rollout that is likely to accelerate. We arguably have an improved global trade regime in 2021 than we've had in recent years. We certainly have an abundance of stimulus. And we have markets that are functioning quite well, albeit with maybe some valuation bubbles here or there. But our credit markets are very much available to middle and large cap companies in particular. Are we paying enough attention to the upside here in 2021?

BRYSON: There certainly are upside risks that I can think of. I would start, if I'm just focusing on the United States, I would start with the elevated savings rates among households right now. And so once the service sector does start to open up again, many households have the financial wherewithal to start going out to restaurants and bars and start to travel again. And so that can be very, very positive.

The other underlying fundamental here, which is good, is when this pandemic hit there were not a lot of major imbalances in the U.S. economy. It's not like it was back fifteen years ago, when we had a housing bubble. And when that collapsed, that put the financial system flat on its back, and many parts of the household system as well. And that deleveraging by the household sector, and by the financial sector, is one of the reasons why growth was so slow coming out of the last recession. We don't have those imbalances today.

And so given the fact that you have a lot of pent up demand, given the fact that you have a very high savings rate, with not a lot of imbalances out there, growth in the second half of the year and heading into 2022 could be quite strong, certainly. Even stronger than the above average, with a bit above consensus forecast that we have for the second half of the year. I acknowledge, there certainly are some upside risks.

JOYCE: And Elga, very quickly because we want to get to audience questions, areas of optimism that you would point to?

BARTSCH: Yeah, I would sort of echo what Jay just said. But in addition also point to the turbocharged transformations that COVID-19 has brought on, whether it's towards digitalization, ecommerce, towards sustainability. And I think this is a period of accelerated structural change. And that could be very transformational, not just in terms of growth, but also in terms of the structure of the economy.

I mean, one, I think, amazing feature of the current environment is the fast pace at which new businesses are founded, new businesses are created. Obviously, this is often out of dire need to earn a living. But the fact that we see these trends that were in play at a much slower pace before, now accelerated and really recharged. I think it's also reason to be optimistic, especially for the long run.

JOYCE: Okay, well, I think that's a good note to end our prepared remarks on. I think you raised some very good points here on how COVID has accelerated a whole host of preexisting trends. Let me turn it back over to the Council to guide us through some questions from our participants.

STAFF: We will take our first question from Mark McLaughlin.

Q: Okay, can you hear me?

BRYSON: Yes.

Q: Great. Mark McLaughlin, lead strategist for the insurance industry for IBM. I was struck by Tom's comments about debt potential, or I'm sorry, interest rates potentially getting away from us a little bit. And just noting, obviously, the level of indebtedness of the U.S. is starting to reach World War Two levels. I don't think Europe is a whole lot farther behind.

You know, the wild card in my view is sort of China and their economic might. Their much more opaque finances and their much more centrally controlled economy. Is there a potential for Chinese policy to upset the applecart a little bit and force either the EU or the United States into an environment where they've got a lot of bad policy choices, right? It's tough to raise rates for that level of debt without potentially destabilizing matters. It's tough to retire the debt, given the levels of debt relative to the economy. Is there a foreign policy risk that the U.S. and EU should be considering regarding Chinese activity and potential for forcing economic decisions on the U.S. and EU?

JOYCE: Elga, should we pivot to you, given your global focus?

BARTSCH: Sure. Thank you for the question. I'm less concerned in the context of debt dynamics in the U.S. or in Europe, partially because we're talking about reserve currencies, we're talking about currencies or government bonds that have the implicit backing and support of the central bank and where developed market economies borrowing in domestic currency. I do think where China comes in is the tensions or the rivalry between the U.S. and China in the technology space. And so we like to think of it in the context of the rewiring of the global trading system. Moving towards a more bipolar system, with one pole being the U.S. and the other being China, and tensions not so much playing out in trade anymore, or maybe capital flows into the developed market, government bond markets, but more in the technology space.

And so, this rivalry is something that is here to stay. Even if with the change in the administration in the U.S., we are likely to get a different approach to global trade policies and also to China in terms of some of the communication around it. But the fundamental technology rivalry is here to stay. And that, I think, is where the tension is likely to lie, not so much on the interest rate side, because of the potential role of central banks in the U.S. or in Europe.

BRYSON: Tom, can I chime in there just to offer a thought?

JOYCE: Please.

BRYSON: So there is a debt issue in China today. And it's largely in the non-financial corporate sector. Now, some of that is government, state owned enterprises and everything. But if there is going to be a debt problem in China, that's where it's going to show up. I don't think that if there was a debt crisis in China, knock on wood, that it would have the same effect as the debt crisis in the United States a decade ago, because most of that debt is held internally in China. European investors, American investors hold very, very little of that debt. Now, if there were a debt crisis in China, it would be an economic event for the world. The second largest economy slowing sharply would have a negative effect on growth in the world. But I don't think we'd be in a financial crisis for the rest of the world.

And then Mark, to get back to your question, how that relates to government debt here in the United States and in Europe. If you were to have that, I think you would see a flood of investment buying U.S. Treasury securities. That is a huge risk-off move that money would flow into U.S. Treasury securities, German bunds would clearly benefit from that. It's an open question, what would happen to Italian bonds or Spanish bonds. But in general, there would be a flight to quality and I think in that situation, U.S. Treasury yields would come down even further.

JOYCE: All very good points, the difference between an open and a closed financial system. Council, any further questions?

STAFF: We do have another question from Yves Istel.

Q: Hello, thank you all. Yves Istel, advisor at Rothchild. Could you just comment on what you see as the growth trend in global trade over the next years? Will it be the more restrained growth rate we've seen in recent years? Or will we have a shot at returning to the higher rates of global trade, which in turn, was a significant contributor to our domestic growth rate?

JOYCE: I think that's an excellent question. This notion of deglobalization. And trade is certainly an important part of that. Elga, why don't we start with you? And, Jay, if you have anything you want to add on as well, but let's start with Elga on this question.

BARTSCH: Yeah. So we think that global trade growth will normalize. But I don't think we're going to get back to the strong growth rates that were consistently and materially outpacing global GDP growth that we saw up and including to the global financial crisis, essentially. So already about ten years ago has that deepening in the international division of labor started to stall. So you by and large start to see trade growth broadly in line with GDP growth, maybe a little bit higher, but not at a pace that consistently and materially outpaced global GDP growth. And there are a number of reasons for that. One is obviously, the initial push of Central Eastern Europe, Asia, notably China, into the WTO and sort of opening up to trade was a major pivot, and we have seen no further opening of material size in the last ten years.

In addition, you see countries such as China becoming increasingly reliant domestically in terms of capital goods. They also are having a rapidly increasing consumer sector that is increasingly focused on services. So again, in the course of their economic development, these countries become less reliant on global goods trade. And then of course, overall, there are a number of factors that I think have slowed this down.

But I wouldn't talk about deglobalization. I think it's more the rewiring of globalization. Because it's not just trade that matters in this context. I mean, that's the one that we usually talk about and think about. But there is the flow of workers, of physical capital, of financial capital, across borders. And so we think it's not that there is no disengagement, but it's just that things are rewired a bit differently.

Let me give you one example. I think COVID-19 has really driven the point home that you need to assess, every company needs to carefully assess, the resilience of its own supply chain against a whole host of different risks, whether it's trade protectionism, whether it's health emergencies, or natural catastrophes, or in the future could be climate risk. And so as a result, I think you see more diversification, a move away from the lowest cost producer in a very tight just-in-time production chain towards something that is more resilient and can better withstand major shocks.

JOYCE: Jay, as you comment, maybe you could overlay some additional commentary on your expectations for the Biden administration on global trade policy. I know my view is that we're likely to see a significant change in tone. Probably not an unwind of tariffs with China. A return to multilateralism on the one hand, but at the same time, perhaps a reticence of getting involved in multilateral global free trade agreements. How do you think about Biden on trade? He's hardly a pure free-trader, so to speak. But what type of normalization are you expecting? And how does it impact your view of U.S. and global growth?

BRYSON: Right, so I expect a more multilateral approach, if you will vis-à-vis our European allies. I think the Biden administration will quickly bury the hatchet there and ramp down trade tensions with our European allies. If for no other reason, to use that as leverage as it relates to China. We don't expect the Biden administration to reduce the tariffs when it comes into office. We think they will keep those in place as negotiating leverage. Now, certainly the rhetoric will get toned down vis-à-vis China. But, again, I think if you see more of a multilateral approach, at least initially, it'll be towards Europe. But I think the Biden administration does want to pursue, to use a term from the Trump years, a “Phase Two” trade agreement with China. And one way to do that is not to unilaterally get rid of the tariffs, keep them on in terms of negotiating leverage, and also do it in concert with our European allies.

JOYCE: Any additional questions from our audience members dialing in today?

STAFF: Yes, we have another question from Ryan Hill.

Q: Hi, thank you. For wealthy Americans, they seem to be doing very well in the U.S. economy and housing prices and sales have gone up. But for less wealthy Americans the economy has been much more difficult. I believe the CDC moratorium on evictions, I think it ends this month. And many single family mortgages that are backed by the Federal Housing Administration have been delinquent of late. How do you see that affecting the economy and the sector? I mean, do you see a wave of foreclosures coming? Or how would that affect the larger U.S. economy?

JOYCE: Jay, can you take that one? Thank you.

BRYSON: Yeah, sure. Could you see some more foreclosures coming this year? Yes, absolutely. Because of the two points that you just pointed out. Most of the job losses have been concentrated in the lower-paying parts of the economy. Most of the job losses have been in the leisure and the hospitality sector, bars, restaurants, things of that nature. And that's the lowest paying sector in the economy.

And then secondly many of these mortgages that these folks have, have been put on hold for a moratorium. So you could potentially see some of those defaults ramping up. Is this going to be another financial crisis a la 2007, 2009? Or to rephrase another burst in the housing bubble? No, I don't think so. And again you talk about the overall macroeconomic effects on the U.S. economy. If you look at the top 10 percent of income earners in the country, and these people have been largely [un]affected by the pandemic because they can work from home, etc. That top 10 percent accounts for 46 percent of the spending in the economy. If you look at the bottom 80 percent, they account for 40 percent of the spending in the economy. So in other words, the top 10 spend more than the bottom 80 combined.

Now, that says something about the income distribution in the economy and I'm not going to opine on that. But the point is that if some of those people at the lower end part of the spectrum start losing their houses and start ramping back on their spending. Is that a drag on the macro economy? Yes. But we're talking a few tenths of a percentage point rather than something that would probably bring the economy to its knees because again, most of the spending is done, or a big part of the spending is done by the top 10 percent, or even the top 20 percent, account for more than half of the spending in the U.S. economy. So it's more of a micro effect in my view than it is a huge macro effect.

JOYCE: I think we have time for one or two more questions.

STAFF: At this time, we don't have any other questions in the queue. Oh, we just had a hand go up. Brandon Archuleta.

Q: Hi. Thank you all for doing this. This is terrific. My name is Brandon Archuleta. I'm a Council on Foreign Relations international affairs fellow for 2020–2021 and I'm currently at the Treasury Department.

I want to come back to Elga and this question of China vis-à-vis the debt sustainability initiative. The DSSI has really opened our eyes to Chinese bilateral lending and given us a sense of how much external PPG debt some of these countries owe to China, and it's pretty significant, especially in African countries. Do you anticipate the question of debt trap diplomacy? Perhaps vaccine diplomacy? Are the Chinese going to be slowing down their Belt and Road spending going into 2021? Or are they going to find a way to leverage the current state of play with vaccine distribution in the pandemic to flood the zone with additional Chinese economic policy? Thank you.

BARTSCH: Yeah, that's I think, a very nuanced topic, because there is some indication that lending around the Belt and Road Initiative is slowing. The question is whether that's temporarily or something that is a more conscious slowdown. I think there are two aspects to it. One aspect is that it speaks to China's ambitions, especially on the technology side, and to ensure the appropriate access to raw materials. And it potentially also speaks to the fact that the Western world has not given enough attention to some of these continents, such as Africa, for instance.

So there clearly, and this is not unique to China I think the Western world does this as well. We're using multilateral organizations typically rather than bilateral organizations, including sort of relief measures, health care support, and so on, to support countries, to stabilize them, and to make them allies, and functioning members of the international community and the international economy. So I think it just speaks to the longer-term ambitions of China to become a serious global player on a whole host of different dimensions that they also go down this route. And the difference maybe with Western efforts of development aid or development landing is that most of it is multilateral and there is more transparency around it. But I think it just speaks to the rivalry that I mentioned earlier, and the sort of bipolar nature of the geopolitical landscape that I already talked about.

JOYCE: Do we have one final question? Otherwise, I'll wrap it up here.

STAFF: We do not have any more hands raised.

JOYCE: Okay. Well, we're at fifty-five minutes now. We've had an excellent discussion. Thank you, Elga. Thank you, Jay. Your many years of experience have brought quite a bit to this conversation. I would also like to thank the Council on Foreign Relations very sincerely for the fantastic programming that you've done through this entire COVID crisis. Everything from politics, to economics, to public health, and so forth. You're doing a great service for all of us. So thank you. Hope everybody enjoys the weekend. Thank you.