A patchwork pick up
The efficacy of the Covid-19 vaccines is providing some much-needed hope that we may finally be emerging from the crisis. Undoubtedly though, the near-term outlook for the global economy is dominated by the potential for further spikes in infection rates.Second waves of the virus have already hit the US, Europe and the UK hard, bringing further lockdowns and another blow to economic growth. Only now are we tentatively lifting restrictions in the UK. A third wave is developing in Europe and Latin America, which could derail their recoveries, while India is currently deeply mired in crisis. However, the UK and US will have vaccinated a sizeable portion of their populations by the middle of this year, and hopes are high that we should see a return to some form of normality over the course of 2021.
Of course, as tentative recovery from the pandemic takes hold, some countries will fare better than others. We saw China handle the pandemic quickly, thereby limiting the damage wreaked by the virus, while much of the US’s resilience is due to the sheer size of its financial support package. In Europe and Latin America though, the first economic shocks were greater, governments’ responses more tentative and recovery gradual. For these regions, there’s likely to be a lasting hit to economic growth. Many poorer economies, meanwhile, will take longer to roll out the vaccine and to achieve herd immunity, which will delay their progress.
Given these divergent paths, we expect global economic recovery to be patchy and uneven. However, we have revised up our forecasts for economic growth on the back of the vaccines’ success, as well as the large-scale government financial support we are seeing in the US. This leaves us expecting three years of above-trend economic growth, which will likely moderate towards the end of 2023.
Vaccines inject life into markets
Although volatile, most global equity markets have risen year-to-date and, as expected, those stocks most sensitive to economic recovery have been some of the strongest performers. Even in Europe and Japan, where vaccine programmes have lagged the rest of the developed world, their industry-heavy markets led global stocks during the first quarter of this year.
As we come out of lockdowns and economies begin to recover, we expect pent-up demand to be released fairly forcibly. But, unlike a ‘traditional’ economic recovery, which is usually goods led, we expect to see a sizeable boost to the service sector, as people flock to restaurants, bars and other leisure pursuits that have been off limits for so long.
Despite this optimism, fear has also influenced investor sentiment, particularly around rising inflation. Concerns have grown that the extraordinary level of government spending which has supported economies during the pandemic could lead to higher inflation. The scale of President Biden’s multi-year government spending, for example, has exacerbated worries that prices, and therefore inflation, will rise, which has negatively impacted global fixed income markets.
Politics and purse strings
And what of the political landscape? Geopolitically, a Biden presidency in the US, a Brexit trade deal agreed between the UK and European Union, and a new Italian government formed under Mario Draghi might suggest a calmer global political outlook this year. However, the deeper forces that have driven political risk over the past decade have not gone away, and may become more acute during the uneven recovery that we expect.
The US and China are still engaged in a strategic rivalry and trade tariffs won’t unwind anytime soon. The UK and Europe meanwhile have work to do in repairing their relationship, while the UK may soon face further referendum tensions in the form of a Scottish independence push. Finally, vaccine nationalism remains a potential geopolitical stress.
Another key consideration is how central banks will manage monetary policy from here. At the moment, we believe investors are a little too pessimistic and premature in expecting central banks to reduce monetary support soon. Indeed, the European Central Bank’s mantra of “maintaining favourable financing conditions” has already curbed market expectations of when it will reduce support.
Other smaller developed market central banks have done the same. And while the US Federal Reserve has been neutral so far, it will be keen to avoid an increase in market volatility or a sharp increase in the value of the dollar against other currencies – either of which could happen if it acts too soon.
Steering the course ahead
It seems clear that the economic recovery will occur at different speeds across different sectors and geographies. With our long-term perspective, we continue to focus on those companies that not only have the strength to grow as economies recover, but the resilience and adaptability to withstand any further unexpected shocks.