As vaccines are rolled out and lockdowns lifted, how long will it take companies and economies to recover? And what could it mean for markets? Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments, looks at the big forces he believes will determine the answers.
There are many variable factors in play as we all come to terms with the impact, short and long term, of the pandemic. And of course, other unexpected events could derail our tentative attempts to move forward. But based on what we can analyse, at Aberdeen Standard Investments we believe that two forces in particular will drive a strong improvement in the global economy over the next three years:
- the widespread vaccine rollout allowing a progressive easing of lockdowns
- additional large scale financial support in the US
Our views on both of these factors, among others, mean that we’ve revised up our forecasts for economic growth. This leaves us expecting three years of above-trend growth. However, we think that growth will moderate towards the end of 2023. And, ultimately, the pandemic will leave deep and long-lasting scars on parts of the global economy.
Some countries will do better than others. Damage in China may be limited due to its superior handling of the pandemic and in the US due to the sheer size of its financial support package – a point I cover below. But in regions such as Europe and Latin America, the first economic shocks have been greater, the initial responses from governments more tentative and recovery more gradual. For these regions, we think that a lasting hit to both the level and growth rate of potential gross domestic product (GDP) seems probable.
Vaccine rollouts – from vigorous to vexing
The rollout of vaccines has not been without its challenges. Intermittent supply and (especially in Europe) low take-up have hampered its progression, with the US and UK notable exceptions.
But we believe that we’ll see vaccine coverage in the major economies build rapidly over 2021 – meaning restrictions can be eased and people can get out and start spending again.
Unfortunately, many poorer economies will take much longer to roll out the vaccine and to achieve herd immunity. This will delay their recoveries and mean that international travel restrictions are likely to be in place well into 2022.
Big spending in the US could boost the rest of the world
The US has already invested a considerable amount in supporting its economy through the crisis. And now, with the Democrats in control of both the Presidency and Congress, we expect this to accelerate over the coming years. In my February outlook, I noted that we were factoring in an additional $1 trillion US Covid relief package in the short term, plus more support in subsequent years. But now, given recent legislation passed, we think this will be more like $1.9 trillion. This will boost US growth considerably – and what happens in the US spills over to the rest of the world.
One note of caution however; this beneficial ripple effect may be smaller than we’ve seen before. That’s because we expect demand to move from internationally traded goods towards services, which brings me onto my next point.
How we spend could mean a great deal
As we come out of lockdowns and economies begin to recover, how we all spend, and what we spend on, is likely to change. A ‘traditional’ economic recovery would be goods led. So as the economy picked up, we would start to buy or spend our money on more things that we hadn’t been able to before – white goods, cars, improvements to our homes etc. Many of these goods would be imported from around the world and these days particularly from the developing world.
However, this time we’re all looking forward to spending our money in all the places that have been shut during lockdowns, like restaurants and bars, or hopefully hopping on a plane for a week in the sun. In other words, the recovery may be more service led than goods led. This has important implications for how economies recover and which economies recover fastest. It also has implications for which companies might see the greatest initial boost – for instance, hotels versus fridge manufacturers or pub companies versus mining companies.
Politics and purse strings
Looking at global politics, several factors point to a calmer atmosphere – a Biden Presidency, a Brexit trade deal and a new Italian government under Mario Draghi.
However, the deeper forces which have driven political risk over the past decade haven’t gone away. And, they may become more acute during a potentially bumpy recovery from the crisis:
- The US and China are still engaged in a strategic rivalry – the recent meeting in Anchorage, Alaska, between representatives from the US and China was a reminder, if any were needed, of this
- Vaccine nationalism is a potential cause of global political tension – we’ve already seen an example of this in the discussions between the UK and the EU
- The UK may face the overhang of another referendum in the form of a Scottish independence vote
- A contentious debate about reform of the EU fiscal rules is looming
Politics could, as it always has done, cause markets to jump for joy or run for the hills.
Markets will also keep a keen eye on what central banks do about monetary policy. At the moment, we think that investors are too pessimistic here, expecting central banks to reduce monetary support earlier than will actually happen.
Indeed, the European Central Bank’s mantra of “maintaining favourable financing conditions” has already seen it push back against market expectations of when the bank will reduce support. Some other smaller developed market central banks have done the same.
And while the US Federal Reserve (the Fed) has been neutral so far, it will be keen to avoid an increase in market volatility or a sharp increase in the dollar – either of which could be caused if they act too soon. We don’t expect to see the Fed begin to reduce its monetary support (by increasing interest rates) until the second half of 2023. However, it should be noted that interest rates have been and are expected to rise in some emerging economies – with most recently Brazil increasing its core interest rate.
It’s all a reminder to take a step back and focus on quality
So in summary, if we look across social, economic and political factors, there are reasons for optimism but considerable uncertainty remains. For one thing, fast-spreading variants of the virus could yet escape the current crop of vaccines and lead to further restrictions. And, as mentioned above, the actions that central banks take could upset markets – if they pull back monetary support too quickly and the economy isn’t yet ready for it.
Signs of improving growth and surprisingly positive earnings announced by many companies (something I wrote about last month) should support equities. Some unloved areas of the market – those worst hit during the height of the pandemic – could enjoy the strongest pick-up in earnings, at least for a few quarters.
But investing is about the long term and as we’re regularly reminded the only constant in life is change. Which is why at Aberdeen Standard Investments 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. And to make sure we invest in a diversified mix of those ‘quality’ companies.
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your clients’ investments can go down as well as up and may be worth less than was paid in. Forecasts are offered as opinion and are not reflective of potential performance. Forecasts are not guaranteed and actual events or results may differ materially. Information is based on Aberdeen Standard Investments’ understanding in March 2021.