-
""

Recovery prospects: hopes and risks

05 March 2021

9 minute read

By Henk Potts, London UK, Market Strategist EMEA

With high hopes of a strong, vaccine-driven bounce this year, what risks might dash a quick return to normal, whether health-related or otherwise?

Last year was truly traumatic as the pandemic-induced slump resulted in the worst economic contraction since the Great Depression. Nonetheless, with vaccination rates rapidly rising, economies reopening and policymakers maintaining their accommodative stance, this looks set to be a year of recovery with global growth of 6.0%.

Herd immunity is the key

The speed and shape of the recovery will inevitably be dependent on arresting the coronavirus pandemic. While lockdown measures have helped to reduce infections, hospital admissions, intensive care occupancy levels and coronavirus deaths in a number of countries, the effectiveness of vaccination programmes will be key to normalising activity. Achieving herd immunity status should quickly translate into accelerating activity as economies fully reopen, consumption rises and employment prospects improve.

Early data shows that the vaccine rollout in advanced economies has been outpacing those in developing economies. We believe that both the UK and US may be able to achieve herd immunity in the second quarter of the year, with Europe achieving that status by the end of the third quarter. While certain countries have achieved impressive vaccination rates, namely Israel and the United Arab Emirates, there are also some noticeable laggards in Africa and Latin America.

Policy support

Economic conditions this year should be supported by policymakers to help ensure the recovery. In most major regions we would predict that central banks will keep interest rates down at historically low levels over the next couple of years. If the speed of the recovery allows, a tapering of asset purchase programmes might start in 2022, but this should only occur in a targeted and controlled way to avoid any “tantrums” playing out.

On the fiscal side, a number of countries, most notably the US, are embarking upon additional packages aimed at controlling the virus and supporting growth. That said, we would expect some of the emergency measures, such as furlough programmes, to be scaled back as the recovery develops.

Emerging market growth to outperform

We expect emerging markets to grow and outperform advanced economies this year. China’s latest figures provide further evidence of a V-shaped recovery. Its strong growth profile has been driven by encouraging export demand, robust factory output, rising domestic retail sales and steady fixed asset investment. As such, we expect China to grow at 8.4% this year.

Beyond China we think that India will register impressive growth of 10.4% this year as consumer spending increases, credit availability improves and labour markets stabilise as the rural recovery broadens out to urban centres.

Advanced economies to bounce

This should be a positive year for the US with growth coming in at 6.4%. The acceleration of the vaccine rollout should reduce new cases and help revive the all-important service sector. Furthermore, President Joe Biden’s additional stimulus programme is likely to boost consumption and provide support for low paid workers, small businesses and state services.

In the UK, the recovery is likely to be a little more subdued than in America this year, although the economy is still likely to grow by 4.0%. The rapid vaccination programme should encourage a rebound in household spending through the summer, but growth prospects may be held back by Brexit friction weighing on supply chains and exports.

For Europe, the bloc looks set to officially register a double-dip recession in the first three months of the year as lockdowns weigh on household consumption and bottlenecks in global supply chains risk disrupting the so far resilient manufacturing sector. There should be a mild improvement in the second quarter as vaccinations and the warmer weather eases restrictions. The second half of the year looks stronger; as the region inches towards herd immunity and benefits from higher public investment. For Europe we forecast full-year growth of 3.8%.

Potential risks

While remaining optimistic about growth prospects for this year, a range of factors could infringe on short and long-term growth prospects. These include a significant deterioration in the healthcare environment, forced policy reversal and unemployment remaining at elevated levels.

Health warning

The immediate risk to our forecasts stems from how well the pandemic is controlled. Our positive outlook is primarily based on the vaccination programme being progressively effective in halting the transmission of the virus.

However, it is important to recognise that there are still a number of vaccine unknowns including, the length of immunity, efficacy against future mutations and possible side effects. A reduction in efficacy rates would impede the road to normalisation and hit business and consumer confidence; delaying the recovery.

Early policy withdrawal

Continued fiscal policy support is a vital element of our projected robust growth forecasts. The distribution of the European Recovery Fund is essential for the region’s growth prospects. However, political infighting, poorly coordinated investment priorities and slow progress on commitments to economic reforms risk disbursement delays.

That said, government debt levels have risen substantially as a result of the fiscal response. Fiscally conservative lawmakers may demand that future stimulus packages are scaled back. Longer term, nations’ finances will eventually need to be put back onto a sustainable path. To achieve this, governments may be forced to raise taxes and reduce spending, thereby diminishing growth potential.

Balancing act for central banks

A robust recovery, rising commodity prices and ultra- accommodative policy could be a perfect recipe for higher inflation levels. If sustainable inflation projections begin to spike above central bank targets, it will increase pressure on them to exit their “emergency” policy posture. The resulting tightening of financial conditions would quickly filter through to a weaker growth profile.

In view of the recovery, along with concerns over creating asset bubbles and financial imbalances, China is expected to be the first major country to consider withdrawing its stimulus, albeit only gradually. Conversely, a worsening of growth prospects may force central banks to introduce negative rates, which could lead to a broad range of unintended negative consequences.

Elevated unemployment

Labour markets have been particularly hit by the pandemic, particularly in the service sector. Its recovery will have a significant impact on consumption levels. Countries with the most flexible labour markets are likely to benefit from a relatively quick return to pre-pandemic employment levels, while those with stringent labour laws and powerful unions could see unemployment rates elevated for some time.

While the outlook remains positive, there are many dangers that could derail the global economy. Health officials and financial policymakers will need to balance protecting the public, ensuring the recovery and averting future imbalances to achieve long-term sustainable growth.

""

Market Perspectives March 2021

Encouraging hopes of a vaccine-driven recovery are keeping investors in good spirits.

""

We give you versatility and a choice of services

Barclays Private Bank provides discretionary and advisory investment services, investments to help plan your wealth and for professionals, access to market.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This communication:

  • Has been prepared by Barclays Private Bank and is provided for information purposes only
  • Is not research nor a product of the Barclays Research department. Any views expressed in this communication may differ from those of the Barclays Research department
  • All opinions and estimates are given as of the date of this communication and are subject to change. Barclays Private Bank is not obliged to inform recipients of this communication of any change to such opinions or estimates
  • Is general in nature and does not take into account any specific investment objectives, financial situation or particular needs of any particular person
  • Does not constitute an offer, an invitation or a recommendation to enter into any product or service and does not constitute investment advice, solicitation to buy or sell securities and/or a personal recommendation.  Any entry into any product or service requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding documents
  • Is confidential and is for the benefit of the recipient. No part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays Private Bank
  • Has not been reviewed or approved by any regulatory authority.

Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.

Barclays is a full service bank.  In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.

Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. Law or regulation in certain countries may restrict the manner of distribution of this communication and the availability of the products and services, and persons who come into possession of this publication are required to inform themselves of and observe such restrictions.

You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain independent tax and legal advice tailored to your individual circumstances.

THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.