Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments, shares his thoughts on the outlook for economic growth and what it could mean for markets.
As the tense battle between virus strains and vaccines plays out, economies and companies are suffering the financial damage and uncertainty of yet more lockdown restrictions. We ask Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments, how different economies are coping and what it could mean for markets and investors.
Economies are now battling the persistence of the virus, allied with the emergence of several highly contagious variants of it, and subsequent lockdown restrictions. It’s not the start to 2021 any of us hoped for. And it does mean that some economies will undoubtedly plunge into double-dip recessions. By that, we mean a recession, followed by a short recovery, followed by another recession.
It’s the economic pattern that’s followed the path of the virus. We saw recessions during the first lockdowns last year. Then some signs of recovery as infection rates fell over the summer and governments lifted restrictions. Now we’re experiencing renewed economic pain, with the resurgence of the virus and tighter restrictions. A double-dip recession is certainly a risk we see for the UK and the Eurozone – but this is well-understood by investors.
The US, however, is a different story. Although it’s also been hit by new waves of the virus, there’s been less lockdown stringency, coupled with significant financial support from the government.
At Aberdeen Standard Investments, we changed our forecasts in January to reflect the opposing forces affecting economies. That is, the lockdown restrictions weighing on regional recoveries versus the promise of a return to ‘normal’ life with the roll-out of vaccines.
We’ve moved down our global gross domestic product (GDP) forecasts for 2021 to 5.1%. This is below wider market expectations, as we anticipate a larger hit to economic growth in the short term than many others are forecasting. However, we expect a stronger global recovery in 2022 than is generally being forecasted. But irrespective of whether our figure is a little higher or lower than consensus, this is a huge amount of global economic growth anticipated – two years of well above the long-term trend growth of the global economy.
In a nut shell, we believe the global economy faces more weakness in the first quarter of 2021. After that, we expect a renewed acceleration in activity later in the year, as a vaccine-driven recovery gets going and economies reopen.
If we look under the bonnet, we expect some quite big differences in the pace of recovery between countries. Compare the US to Europe for example.
The US is the only country for which we’ve revised up our 2021 economic growth forecast. This is on account of the economic stimulus we expect from President Biden, now the Democrats control both the Presidency and Congress. We’re factoring in at least an additional $1 trillion Covid-relief package in the US in the short term, plus more financial support over subsequent years. As a result, we also expect US GDP to rise more than has previously been forecast.
Europe, meanwhile, is heading for a double-dip recession and our 2021 growth forecast is well below what others are forecasting. This reflects the economic damage inflicted by the latest restrictions, in particular school, university and hospitality closures. And even within the Eurozone, there will be differences in economic growth between the ‘core’ countries, such as France and Germany, and the ‘peripheral’ countries, such Spain and Portugal. That’s down to factors like their different-sized manufacturing sectors, as well as the speed of the vaccine roll-out and take-up.
Yes, since we made our previous forecasts last year, we’ve seen some important developments.
Firstly, the manufacturing sector is showing remarkable resilience. Certainly, data for the end of last year indicated that the sector had been less affected by these latest lockdowns than in spring 2020. So that will provide a boost to economic growth around the world.
Secondly, and sadly, more infectious strains of the coronavirus are circulating in the UK, South Africa and Brazil. And as a result of more household mixing over the festive period, there’s been a sharp spike in Covid cases and deaths. This has necessitated more stringent lockdowns in many countries, which of course have economic consequences which we’ve had to take into account.
We still believe this crisis will inflict lasting economic damage to global GDP relative to the pre-crisis path that the world was on. Europe is likely to suffer the most damage, where, as I said, the economy is heading into a double-dip recession. China is likely to suffer the least economic pain, as its recovery has been rapid, though even this is now moderating.
The third development since our last economic forecast is of course that the vaccine roll-out has begun, although the early pace has fallen short of government promises in many countries. We have to consider issues like low levels of willingness to take the vaccine in some regions. There’s also the fact that, other than China, Russia and India, many emerging markets are yet to secure meaningful quantities of the vaccine. Equally, even though the US, UK and Israel have rapidly rolled out their vaccination programmes, we need to remember there are still hurdles.
Nevertheless, we expect the vaccines to provide an ‘escape hatch’ from the crisis and that a meaningful easing in restrictions and a sharp economic rebound will follow from Q2 2021 onwards. Emerging from lockdown may have to be cautious though, if there are more contagious variants of the virus in circulation.
Finally, as I mentioned, given the unified Democratic control of the US Presidency and Congress, we expect additional spending and stimulus coming from central government. Hence our more robust growth expectations there.
So bringing all this together with other existing assumptions, our new growth forecasts reflect a larger short-term hit from renewed lockdowns, followed by robust growth as economies reopen.
It’s worth reflecting that the global economy has performed much better than most expected when the virus struck last year. Part of that has been the extraordinary support from governments and central banks, including tax breaks, furlough schemes and low interest rates.
But another significant aspect is individuals, companies and countries being much more innovative and flexible than the economics community expected – taxi drivers becoming Amazon drivers, sit-in restaurants transforming into takeaways. This all makes forecasting difficult, but also gives reasons for optimism.
Riskier investments, such as equities, high-yield bonds, commodities and real estate have been supported by several factors since I last wrote to you. Mainly the mix of economic support from governments and central banks, the prospect of effective and widely available vaccines, the (related) recovery in the global economy and better-than-expected performance by the corporate sector.
Looking at equities, we exited 2020 not only with strong equity markets but, importantly, with a change in which sectors and industries were performing the best. Areas that had lagged the market (in some cases for years) took up leadership, as investors started to see light at the end of the pandemic tunnel, and anticipate and see further support from government support. So sectors such as technology and healthcare, which had prospered last year, gave way to airlines and leisure companies, which were hardest hit by the economic fallout from the virus.
Similarly, oil and mining companies’ share prices picked up as investors started to show more optimism about prospects for economic recovery. Some of these were further boosted by announcements about new investment in greener policies. We continue to believe that an overweight position in equities remains appropriate, but with the portfolio balanced between the more cyclical areas of the market and those areas with more secular growth.
When it comes to bond markets, we see little value in either government bond markets or investment-grade corporate bonds. These markets have benefitted from a bond-friendly economic environment and support from central banks. While these factors to varying degrees remain in place, we expect meagre returns from here. We do see a little more value in areas such as high-yield corporate bonds and emerging market debt, where return expectations are higher (as, of course, is risk).
And so, for careful investors willing and able to take advantage of the shifting composition of global activity and company earnings, 2021 should be seen as a year of opportunity. Nevertheless, it’s also worth noting that confidence about economic recovery, and therefore how markets will perform, is subject to many factors that could change. All our predictions are very dependent on the path of a virus that has, to put it mildly, been difficult to forecast.
It’s also worth bearing in mind that many of the questions we asked ourselves before Covid-19 (and ones that we’ve discussed previously) remain open. Examples include:
All of this should make investors suspicious of those that talk about certainty.
So, there are reasons for economic and market optimism. But the accompanying uncertainties argue for balanced, diversified portfolios. If the last year has taught us anything, it’s to be prepared for the unexpected, as well as the expected. Diversification is one of the tools we need in the investment tool box in order to make these preparations.
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 February 2021.