Beyond COVID-19 related concerns, the outlook is vulnerable to four key downside risks discussed below.
Insufficient or premature withdrawal of policy support
Public consumption is expected to make an important contribution to the recovery next year (Chart). However, financial and political constraints could curb the scope for further stimulus and income support that has so far enabled demand for consumer goods and services to rebound.
In particular, a longer fiscal impasse in the US would weigh on the recovery. While bipartisan support may secure a circa US$900 billion COVID-19 relief package this month, the scale and contents of further US policy support depends on which party wrests control of the Senate following two Georgia run-off elections on January 5. The Republicans need to win only one seat in order to secure a majority, which would challenge President-elect Biden’s ability to implement the Democrats’ proposed US$2.2 trillion HEROES Act.
Even China and other Asian economies will face pressure to curb spending in order to preserve financial stability. While 13 major emerging market central banks have adopted forms of quantitative easing, further stimulus may stoke fears of inflation and capital outflows, forcing central banks to tighten policy and thereby derailing recoveries.