Global economic outlook: Welcome, vaccines!

The launch of the COVID-19 vaccines has improved the global economic outlook and decreased the downside risks longer out. The sooner we can return to a normal environment, the smaller the negative long-term impacts of the crisis will be. In the meantime, however, we have to survive the coming months – with substantial help from the central banks and governments.

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The global outlook has improved, and downside risks have declined substantially since Nordea’s September Economic Outlook thanks to the launch of COVID-19 vaccines. Even if the first months of 2021 will be very challenging in many countries, we assume that the vaccines will allow us to return to normal conditions faster than we previously expected.

Nordea Economic Outlook January 2021 cover showing COVID-19 vaccine vialWe now assume that the vaccinations will be carried out for the majority of adults in the western economies by the autumn 2021 and the economies will take gigantic leaps towards normal conditions from the spring 2021 onwards, given the seasonality that has been attached to COVID-19. As a result, the annual growth rates will be high both in 2021 and 2022.

Recovery expected to be fast

Many factors speak for a rapid recovery from the coronavirus crisis compared to earlier downturns. First, the expectation that most service sectors will return close to normal already during the summer 2021 implies that employment recovers quickly and the permanent scars on the labour market remain limited.

The recovery is also supported by the extra savings that households accumulated in 2020. The savings were boosted by both the COVID-19 restrictions but also by the generous unemployment benefits and wage compensation schemes which supported income development. When the virus is gone, a significant share of those savings may be consumed.

In addition, we believe that the needs to reallocate both capital and labour are now smaller than after a financial crisis, which is typically a symptom of a false resource allocation and followed by a painful and slow recovery. Certainly there will be some structural shifts this time too due to, for example, an increase in remote work, but we think that in total the need for the time-consuming reallocation is limited. The recovery is supported also by the unprecedented fiscal and monetary easing, which has limited the number of bankruptcies and preserved favourable financial conditions. The easing policies, together with a rapid economic recovery, should, of course, also boost inflation. However, the excess capacity in the labour market is likely to keep general price pressures limited in most countries.

Self-evidently, the biggest downside risks to our view stem from a possible delay in vaccinations or new virus mutations. The longer the COVID-19 crisis lasts, the bigger the long-term negative consequences will be.

GDP Growth Forecast, % y/y

World US Euro area China
New Old New Old New Old New Old
2019 2.9 2.9 2.2 2.2 1.3 1.3 6.1 6.1
2020E -3.5 -3.5 -3.5 -5.5 -7.2 -8.0 2.1 1.5
2021E 5.0 5.3 4.0 3.6 4.5 5.0 8.0 8.0
2022E 4.5 3.7 3.1 3.0 4.0 3.0 5.5 5.0

Many factors speak for a rapid recovery from the corona crisis compared to earlier downturns.

Tuuli Koivu, Chief Economist, Finland

Sectoral differences are vast

COVID-19 crisis has been an exceptional economic downturn in how differently it has treated different sectors. In some service sectors, the virus has ruined the whole business, while certain industries have benefited from the increased goods consumption. This division has been evident for example in our Nordic card transaction data.

The impact has also varied in different parts of labour markets. The low-paid service sector jobs have been the most vulnerable. However, even if the negative shock to the labour market has been dramatic and, for example, in the US around 10 million jobs are still missing, the housing market has been surprisingly resilient in most countries. In the Nordics, development has been particularly positive. The most likely explanation is that the shock in the labour market has hit those whose role in the housing market is small, while the COVID-19 crisis has actually encouraged the less affected households to invest in housing.

Charts showing: A) Companies now more optimistic than in the spring and B) Households have accumulated a large amount of savings

China among the winners

In addition countries have survived the crisis very differently. Out of the large economies, China’s track record in containing the virus has so far been the best. This, together with China’s support to the economy and the orientation of its export sector towards electronics and other consumer goods as well as materials needed to contain the COVID-19 crisis, has boosted the Chinese economy. China’s growth prospects are good also for 2021, despite the fact that the crisis has probably worsened the long-term challenges – a high level of debt, challenging foreign relations and tight domestic control.

The US and the Euro area are facing a difficult winter 2021 but we expect that the vaccines will pave the way for a strong recovery from the late spring onwards in both areas. In the EU, the biggest uncertainty related to Brexit is now over, and the easing policies by the ECB and the EU and national governments are expected to support the recovery. However, those countries most dependent on tourism are of course the most vulnerable if vaccinations are delayed. Furthermore, Europe’s long-term challenges – low productivity growth and an ageing population – are still there.

In the US, the Democrats’ election victory paves the way for Biden’s agenda, but it is likely to be hollowed out as the narrow control of Congress hangs by a thread. While a new round of fiscal stimulus provides temporary relief to the US economy, a successful rollout of the vaccine is crucial in order to approach normality. Household savings surged in 2020 as spending decreased. Hence, once restrictions are relaxed, pent-up demand and a broad recovery of jobs in the service sector will serve as a growth booster.

The Fed could hike next year, but not the ECB

The Fed is not as dovish as anticipated by many. Various indicators already hint at >2% core inflation prints during the spring. We think a combination of high growth and rising inflation will push the Fed to start to decrease its asset purchases already this summer, and expect the central bank to start to raise rates next year.

The ECB has pledged to continue net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) at least until the end of March 2022. We do not expect the PEPP to be extended further, but asset purchases will likely continue also beyond March 2022 via other programmes. The pace of net purchases will gradually fall, reflecting the proceeding economic recovery but also a compromise between the more dovish and hawkish members of the Governing Council. No ECB deposit rate changes look likely during the forecast horizon.

Regarding the market rates, the expected rapid economic recovery leaves plenty of steepening potential on yields curves, especially in the US. With the expectation of a Fed hike in 2022, we expect the US curve to reach its peak steepness later this year and start to flatten in 2022. In the Euro area, any monetary policy normalization will be much farther away than in the US. The ECB will tolerate slightly higher bond yields, as long as the rise takes place gradually and reflects an improving economic and inflation outlook.

Charts showing: C) ECB asset purchases have peaked and D) EURUSD could reverse

EURUSD trend could reverse

In recent quarters we have warned about the risk of a much weaker USD alongside the rebound in the global economy that would follow the malaise in Q2-2020. The story has unfolded, broadly speaking, with a weakening USD against EUR, EM and Scandis, as we had anticipated. The consensus surrounding further USD weakness is now striking and most, if not all, expect the USD to weaken further. There are sound arguments behind such a view, most notably the massive double deficit of the United States, but it also seems as if everyone is already positioned for the USD weakness, which could mean that the story is already mostly baked in to market prices. In 2017/2018, EUR/USD rose towards 1.25 before reversing lower because of the US once again outpacing the Euro area on growth and interest rates.

We are starting to see the contours of a similar development in to the second half of 2021. A too strong EUR will turn into a slight headache for European exports, while the US looks ripe for a solid economic comeback. Accordingly we adjust our forecast to reflect this, and expect a peak in EURUSD during first half of 2021 around the 1.25-1.27 area before a reversal longer out, alongside higher spreads between USD and EUR interest rates. We expect continued EM FX performance during the first half of this year, while we also find that high-beta currencies such as NOK, SEK,  NZD and AUD will continue to perform against both EUR and USD until a reversal of the USD trend occurs alongside higher USD interest rates.

Foreign exchange rates, monetary policy rates and bond yields, end of period

          ECB Fed US Germany
  EUR/USD EUR/GBP USD/JPY EUR/SEK Deposit rate Fed funds

target rate (upper end)

10Y benchmark yield 10Y benchmark yield
2019 1.12 0.85 109 10.5 -0.50 1.75 1.92 -0.19
2020 1.22 0.90 103.20 10.05 -0.50 0.25 0.93 -0.56
2021E 1.22 0.86 110.00 9.75 -0.50 0.25 1.70 -0.15
2022E 1.18 0.84 110.00 9.70 -0.50 0.50 2.00 0.00

Download the full January 2021 Nordea Economic Outlook: The growth booster.


Authors from Nordea Research:

Tuuli Koivu, Chief Economist, Finland
Jan von Gerich, Chief Analyst
Andreas Steno Larsen, Global Chief Strategist
Gustav Helgesson, Analyst

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