2021: a focus on recovery in all senses

After a challenging year for treasurers with far-reaching consequences for all, Henk Potts looks at the economic impacts of COVID-19 and ventures some predictions for the remainder of 2021

It is reckoned that COVID-19 has had the most profound impact on society and the global economy since World War Two, with the momentous impacts that we are all familiar with. Surging unemployment, permanent output losses and dramatically slowed growth have all taken their toll. Estimates from the Organisation for Economic Co-operation and Development put the damage to the world’s major economies at four times greater than that of the Global Financial Crisis. 

Declining growth was temporarily reversed last year. The controlled lifting of restrictions helped to alleviate economic pressures, and a number of economies, including the UK and other European economies registered robust growth with the rebound in activity seen over the course of the summer. 

We are all familiar with the narrative from that point. Surges in infection rates triggered more restrictions, causing the global economy to shrink by around 3.3% by the end of last year - the deepest recorded contraction since the Great Depression.

Central banks and governments

We have seen a co-ordinated international response. Government and central bank support has been crucial, with central banks slashing interest rates to new lows and injecting unprecedented amounts of liquidity into the global financial system. Governments have embarked on an extraordinary fiscal response, such as allowing companies to furlough staff and pledging large sums in the form of loans, grants and credit guarantees. They have also proved willing to ramp up those measures. In fact, policymakers have demonstrated a willingness to gamble that doubling down on a bold fiscal response now will boost the trajectory of the recovery in due course.

While governments have stepped in with innovative fiscal solutions at unprecedented levels, we must recognise that these come at a price. In Global Prospects and Policies, the International Monetary Fund estimates sovereign debt in advanced economies will rise by a staggering 20% to 125% of GDP and more than 10% in emerging economies to 65% of GDP by the end of 2021. Higher taxes and substantial cuts in spending are inevitable, if public finances are to be put back on track. 

Growth ahead

In the short term, immediate prospects for growth remain closely linked to the lifespan and intensity of the coronavirus. 

Happily, the news on vaccines is encouraging. At the time of writing, eight vaccines have been approved globally and vaccination programmes have been rolled out in 153 countries, according to Bloomberg. There are still a number of unknowns in the form of the length of immunity, COVID-19 variants, vaccination hesitancy (which the World Health Organization lists as a major public health threat) and disparities in the efficacy of distribution channels in different parts of the world. Any reduction in the effectiveness of those vaccination programmes would, of course, adversely affect business recovery.

With all these factors in mind, Barclays’ predictions for the rest of 2021 are as follows:

• Vaccination programmes will create population immunity in the UK and the US by the end of Q2, according to life sciences analytics company Airfinity, allowing economic growth to accelerate. Our sense is that Europe will approach broad levels of population immunity during the course of Q3; 
• Growth in advanced economies will underperform that of emerging economies, as China and India bounce back. Manufacturing will very much lead the recovery – a feature of the global recovery that will continue to be the case while lockdown measures persist – hampering the potential for service economy businesses to begin their bounce back;
• Inflation in the short-term will remain subdued, but longer term we see some inflation risk;
• For the remainder of 2021, global unemployment rates will remain significantly elevated above pre-pandemic levels;
• Extraordinary monetary policy measures to ensure recovery and the sustainability of debt will be maintained, emergency fiscal measures will eventually taper off as we go through the year;
• We expect global growth to come in around 6.4% for 2021.

Treasurers will no doubt be keeping a weather eye on macro-economic conditions and the pressures they exert on their organisations in order to mitigate risk and address the continuing challenges within a recovering but certainly challenging global economy.

About the author

Henk Potts is director of investment strategy private bank at Barclays