Five forces for economic recovery in 2021; why inflation, deficit in India may shoot up?

The virus, policy, inflation, equity valuations and, the dollar will be the determinants of economic recovery.

India has struggled well to balance the virus containment, however, the full economic recovery will ultimately depend on a globally available vaccine. India will likely try to ease policy, which could stoke inflation higher and deficits wider, said the “Outlook 2021” report by JP Morgan. As the economies have started to heal from the coronavirus wound, the contours of the healing process will likely be defined by five big forces in 2021. The virus, policy, inflation, equity valuations and, the dollar will be the determinants, the report added. 

Near-term benefits of providing additional support outweigh long-term costs

Apart from the economy, three key risks also mount over the markets. A failure to provide enough policy support; a tech war between the United States and China; and certain geopolitical flashpoints may weigh on the markets. While some of the policymakers may hesitate to provide more policy support due to the fear of increased government debt levels, it is expected that most of them will conclude that the near-term benefits of providing additional support outweigh the potential long-term costs.

Long-term effect of US-China war

As the cold war between the United States and China is simmering and unlikely to stop even if a Biden administration lowers the heat by adopting a more traditional tone, the ramifications of this will take years to play out. However, the choices each country makes today will impact companies, sectors, and even regional economies, the report said.

At present, both nations are focusing on reallocating their supply chains to less volatile trading partners and innovating to create new domestic production. For policymakers, that adds impetus to invest in fundamental research and commercial R&D. The report underlined that the focus on innovation may create opportunity in accelerated technological progress.

Meanwhile, there are other factors too that can affect the recovery of the global economy in the year ahead. For instance, military tensions between China and the United States are rising as China presses its territorial claims in the South China Sea and elsewhere in Asia.

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