INSIGHT - Opening up... or not? - QUARTERLY MARKET REVIEW - EFG Bank (Monaco)
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INSIGHT Q U A R T E R LY M A R K E T R E V I E W Q1 2021 Opening up... or not? OVERVIEW US ASIA SPECIAL FOCUS Synchronised global Exceptional policy China: more chips Pandemics and recovery and virus easing than oil inflation containment
OVERVIEW
We expect a synchronised global economic recovery in 2021, with inflation and
interest rates staying low. Progress will be largely dependent on the success
with bringing Covid-19 under control.
2021 synchronised rebound 2. Global trend in new Covid-19 cases per day
We expect a broadly synchronised global economic recovery
700
in 2021. We see overall global GDP growth of around 5% for
2021, broadly matching the size of the decline in 2020 (see
Thousands, 14 day moving average
600
Figure 1, which shows IMF forecasts, with which we broadly 500
concur). Economic recovery is, however, unlikely to be a
400
smooth process. The experience of those countries which
have successfully brought Covid-19 under control and 300
reopened their economies provides encouragement. Pool
200
parties in Wuhan, Auckland’s packed Eden Park rugby stadium
and Caribbean beaches show that a rebound can come 100
quickly, especially in the badly-hit leisure, sport and 0
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
hospitality sectors.
US Middle East and Africa Asia World
Europe Latin America Rest of the world
1. Contributions to world growth Source: Refinitiv. Data as at 1 January 2021.
6.0
mortality rate 400 times higher and a GDP contraction which
4.0 the IMF sees at 11% (but we think will be around 9%). However,
especially when the analysis is extended from the largest
2.0 economies to a broader range, the relationship is not a
% 0.0
particularly close one. Singapore, for example, has seen just 23
deaths in its population of five million whereas US deaths now
-2.0 exceed 300,000. Yet, Singapore’s real GDP contraction in 2020
(6%) is set to have been more severe than that in the US (4.5%).
-4.0
-6.0 3. Covid and GDP growth, 2020
2000s pre-crisis GFC 2010-2019 2020 2021
US Other advanced eonomies Overall global real GDP growth 4
China Other developing economies (based on market exchange rates)
2020 IMF forecast for real GDP growth
Sources: IMF, Refinitiv and EFGAM calculations. Data as at 1 January 2021.
2 China
0
Indonesia
-2 Korea
But that prospect still lies some way in the future for many
economies. Late 2020 and early 2021 saw a surge in Covid-19 -4 Australia Turkey
Japan
Russia US
infections, especially in the US and the UK. Curbing Covid-19 -6 Saudi Arabia Germany Brazil
Canada
relies on a speedy deployment of vaccines coupled with -8 South africa Euro area
Mexico
continued restraints on mobility. On a global scale, there is -10 India France UK
Italy
some tentative indication that the rate of new infections is -12 Argentina
levelling out (see Figure 2). This could mark the end of the -14
0 200 400 600 800 1000 1200 1400
third global wave of infections. However, some economies
Covid-19 deaths per 1m population
(such as Hong Kong) have seen a fourth wave; the virus has
mutated; and the World Health Organisation has cautioned Sources: IMF, Oxford Economics, WHO, Refinitiv and EFGAM calculations. Data as at 1 January 2021.
that there may be worse to come. As 2020 demonstrated so
clearly, calling an end to a pandemic can be a hazardous and Government debt and borrowing costs
humbling experience. One lasting effect of the pandemic is the build-up of
government debt. This exceeds previous levels in advanced
Covid-19 and growth and developing economies alike (see Figure 4). Many are
Across the G20 economies, countries with a greater severity concerned that this will lead to tax increases, new forms of
of Covid-19 saw weaker economic growth (see Figure 3) in taxation (such as wealth taxes in those countries that do not
2020. China, where the outbreak started, saw just 3 deaths per have them) or government spending cuts. We think such
100,000 population for the year and is set to register 2% real measures are unlikely. In many respects, the austerity policies
GDP growth. Italy, the second country to be hit badly, saw a which followed the global financial crisis are now seen to
2 | Insight Q1 2021OVERVIEW
4. Government debt in advanced and developing economies In 1665, Isaac Newton walked for three days to go home from
140
Trinity College, Cambridge to avoid the plague. Self-isolating
Forecast there for 20 months, he developed calculus, the laws of
120
motion and much we now know about optics. He changed our
100 way of looking at the world.2
80
% Electrification, green technology and digitalisation, all
60 accelerated by the pandemic, have changed, and will continue
40 to change our world view. Pandemics can bring paradigm
shifts.
20
0 US dollar prospects
1880 1900 1920 1940 1960 1980 2000 2020
The strong recovery in global stock markets from their March
Advanced economies Developing economies
2020 nadir, propelled by companies which are leaders in new
Sources: IMF Public Debt Database and IMF Fiscal Monitor Database via Refinitiv. Data as at 1 January 2021.
technology, is indicative that such changes are being reflected
in financial markets.
have been misguided. In some countries, they led to much
reduced government investment spending and a consequent Some see this as a bubble, not unlike that of the early 2000s,
impairment of the supply side of the economy. In others they which is destined to burst. Although overexuberance followed
led to a squeeze on the pay and working conditions of by correction are common features of financial markets, we
lower-paid workers, many of whom (healthcare workers, care doubt that they are correct in their current assessment. Many
staff and delivery drivers) played vital roles in the pandemic. large technology companies have strong balance sheets, are
Attitudes have generally shifted to favour support for the profitable, have high levels of liquidity and the ability to
poorest, less well-educated sectors of society. finance new innovations. Although under some pressure from
greater regulation, we see them consolidating their position
Furthermore, we expect that, with inflation rates staying low, in 2021. Meanwhile, small companies, where innovation is
government borrowing costs will remain low. Financing often incubated, currently find it relatively easy to obtain
government debt looks set to remain cheap. Ten-year finance at a low cost.
government bond yields are around 1% in the US (see Figure
5), close to zero in Japan and negative in Germany and other In a world which might return to a ‘new, new, normal’ in 2021,
eurozone economies. In Ireland, an economy which, ten years the US dollar may be set to fall further. It is moderately
ago, was at the epicentre of the eurozone crisis borrowing overvalued on our estimates of its PPP (Purchasing Power
costs turned negative in late 2020.1 Parity) rate (see Figure 6) and demand for its safe haven may
wane as other economies recover their economic momentum.
5. 10-year government bond yields
6. US Dollar Index and PPP estimates
14
12 130
10 120
8
110
% 6
100
Index
4
90
2
80
0
-2 70
1990 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
60
UK US Germany Japan 1998 00 02 04 06 08 10 12 14 16 18 20
Source: Refinitiv. Data as at 1 January 2021. US Dollar Index PPP estimate +/- 1 SD +/- 2 SD
SD = Standard Deviation. Sources: Refinitiv and EFGAM calculations. Data as at 1 January 2021.
Pandemics and paradigm shifts
Two more fundamental effects of pandemics are noteworthy. We return to these themes after a discussion of recent asset
First, as discussed in our Special Focus section on page 11, market performance.
historically they have tended to be deflationary. Second, they
can result in a flourishing of innovation, new technology and
new ways of thinking and working.
1
The peak in Irish 10-year government bond yields was 13.9% on 18 July 2011. Source: Refinitiv; 1 January 2021.
2
See Thomas Levenson, Money for Nothing, Random House (2020).
Insight Q1 2021 | 3ASSET MARKET PERFORMANCE
After the sharp sell-off in March, global equities, led by Asia and the US, recovered
strongly. The US dollar’s weakness was evident against all major currencies. Global
bonds registered positive returns for the year.
Asset market performance 8. Bond market returns
World equity markets saw gains of 16.5% in 2020 (see Figure 7)
20
on the basis of the MSCI World Index in US$ terms. Those
gains reflected a sustained recovery after the sharp
15
weakness in the first quarter. Global bond market returns
were also strong, at 9.2% on the basis of the Bloomberg 10
Barclays Global Aggregate Index. 3 Returns from the US bond %
market, propelled by the capital appreciation which resulted 5
from a decline in yields, were 7.5% (measured by the
Bloomberg Barclays US Aggregate Index in US dollar terms). 0
Such a decline in yields and capital appreciation was a
-5
global phenomenon. In Europe total returns in US dollar Japan UK Germany Australia Italy
Switzerland US Spain New Zealand Greece
terms were as high as 13.4%. Emerging market bonds,
Local currency terms US dollar terms
recovering after their poor performance in the first quarter, Source: Refinitiv. 10-year benchmark bond total returns. Data for twelve months to 31 December 2020.
recorded 6.5% returns in US dollar terms. Past performance is not necessarily a guide to the future.
7. Asset market returns Equity markets
Across global equity markets, the strongest performance in
25
2020 came from the US and three Asian markets - China,
South Korea and Taiwan (see Figure 9). In Asia, that reflected
20
the export-led recovery in economic growth, which in turn
15
was underpinned by the relative success in containing
% Covid-19. In the US, the strength of the market owed much to
10 the performance of large technology companies, but by the
end of the year there were also strong gains in small cap
5 companies.
0
US Europe Japan Emerging World Brazil and Russia, both hit hard by Covid-19, saw relatively
Bonds, US dollar terms Equities, US dollar terms
weak local currency equity market performance and
Sources: Barclays Bloomberg (bonds); MSCI (equities). Data for total returns in the twelve months to
currency weakness against the US dollar. The UK equity
31 December 2020. Past performance is not necessarily a guide to the future.
market was adversely affected by a perceived poor response
to Covid-19 and concerns about Brexit, which persisted up
Bond markets until 24 December, when a Brexit deal was agreed.
With the general decline in yields across bond maturities,
longer dated bonds produced higher total returns than 9. Equity market returns
those with shorter maturities. The total return from US
50
10-year government bonds was as high as 12.6%, for example
(see Figure 8). In the eurozone, local currency returns from 40
10-year maturity bonds ranged from 4% in Germany to 30
almost 10% in Italy and Greece. The euro’s appreciation
20
against the US dollar meant that returns in US dollar terms %
were well above 10% in all eurozone markets and almost 10
20% in Italy. 0
-10
10-year UK government bond yields fell to just 0.24% at the
end of the year, despite a substantial increase in the UK -20
Brazil UK Switzerland US Taiwan
government’s new bond issuance. In normal circumstances Russia Germany Japan China South
Korea
Local currency terms US dollar terms
this would be expected to raise financing costs, but it was Source: MSCI. Data for twelve months to 31 December 2020.
almost completely offset by Bank of England bond purchases. Past performance is not necessarily a guide to the future.
3
The Bloomberg Barclays Global Aggregate Bond Index is a benchmark of government and investment grade corporate debt from developed and emerging markets
issuers in 24 countries.
4 | Insight Q1 2021UNITED STATES
The recovery in the US economy, which slowed in late 2020, will receive a boost in
2021 from the latest US$900bn stimulus. Meanwhile, broader policy changes are
expected under President Biden.
Losing momentum in late 2020 Looking ahead, the fiscal measures agreed in late 2020 will
The US economy lost momentum in late 2020. One of the provide a stimulus amounting to around US$900bn. Although
best indications of this is the slowing of employment gains smaller than the US$2.2 trillion in April 2020 – and the further
(see Figure 10). Data on employment trends is, we think, measures which took total fiscal support to US$2.7 trillion in
probably more useful in judging the path of the economy the year – this will certainly help boost spending and
than traditional measures such as GDP growth. This is economic growth in 2021. It is unrealistic to expect policy
because there are always difficulties in measuring the support in 2021 to be as substantial as in 2020, when the
output of the services sector of the economy, particularly so degree of combined monetary and fiscal stimulus far
in a pandemic. exceeded anything experienced since 1970 (see Figure 12).
10. US: non-farm payroll employment 12. US: exceptional policy easing
155 4
Tighter
Standard deviations from average
150 2
145 0
over 1970-2019
Nov: +245k
Feb-Apr: -22.1m Oct: +638k
Millions
140 Sep: +672k -2
Aug: +1.4m
Jul: +1.8m
135 -4
Jun: +4.8m
May: +2.7m Easier
130 -6
125 -8
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 1970 1980 1990 2000 2010 2020
Fiscal conditions Financial conditions
Non-farm payroll employment
Note: Fiscal conditions: one year change in budget deficit. Financial conditions: Federal Reserve Bank of
Source: Refinitiv. Data as at 1 January 2021. Chicago (FRBC) Financial Conditions Index. Sources: IMF; Refinitiv; FRBC. Data as at 1 January 2021.
GDP growth will certainly prove somewhat volatile in the Sugar rush and genuine improvement
coming year, especially on the basis of the quarter-on-quarter In a sense, of course, such stimulus measures provide a
annualised growth rate, the conventionally used measure temporary ‘sugar-rush’ to offset the Covid-related declines in
(see Figure 11). Even for the fourth quarter of 2020, the range activity. The direct mailing of support payments, signed by
of forecasts for this measure is especially wide – from close President Trump, provided an effective but transitory boost.
to zero to almost 10%.4 These payments, which were means tested, were directed at
the lower paid; higher paid workers who kept their jobs,
11. US GDP growth path meanwhile, reacted to the pandemic by spending less and
saving more. It is their behaviour that will be particularly
40 12
Forecast important in determining the type of recovery seen in 2021.
30 9
20 6 If the virus is contained effectively, then discretionary spending
10 3 on activities that have been closed could rebound quickly.
% 0 0 %
Longer-term, we broadly welcome President Biden’s likely
-10 -3
more consensual, cross-party, multilateral approach.
-20 -6 Although there will be constraints on his actions (especially
-30 -9 as, in the Senate, achieving the required ‘supermajority’ vote
-40 -12 on finance-related bills may still be hard to achieve) we think
2020 2021
much can be achieved by Executive Orders and measures
Quarter-on-quarter, annualised Change on a year earlier (rh axis) with cross-party support. In particular, an emphasis on
Sources: Refinitiv (actual data) and Conference Board (forecasts). Data as at 1 January 2021. greening the economy could stimulate activity and generate
many new jobs; and more settled trade relations with the rest
of the world should be beneficial.
4
The Federal Reserve Bank of Atlanta’s 7 January 2021 GDPNow forecast is for 8.9% annualised growth. https://www.frbatlanta.org/cqer/research/gdpnow
Insight Q1 2021 | 5UNITED KINGDOM
The UK economic recovery was progressing well until it was hit by a renewed
surge in Covid-19 in late 2020. Even so, there are three reasons to be optimistic
about recovery as 2021 progresses.
Rebound interrupted those of the bank bailout in 2007-09 (see Figure 14). That cost
The UK economy was recovering well up until late 2020 reflects higher spending on public services (particularly the
when, in response to a surge in Covid-19 cases, particularly National Health Service) and measures including the furlough
driven by a new strain of the virus, lockdown restrictions scheme, other income support schemes, lost or delayed tax
were intensified. With lockdowns likely to remain in place for revenue, the ‘Eat Out to Help Out’ scheme and the extension
much or all of the first quarter of 2021, there is little doubt of free school meals. Added to higher government spending
that there will be a setback to what was a “V-shaped” and lower tax revenues as a result of weaker growth, the
recovery (see Figure 13). overall government budget deficit is set to reach £400bn (20%
of GDP) in the fiscal year ending March 2021.
13. UK monthly GDP
14. UK cost of Covid compared
160
150
Index, January 1997 = 100
140
Bank bail-out
130
Covid-19 in 2007-09
120
HS2
£284bn
110
Channel
100 Tunnel
1997 99 01 03 05 07 09 11 13 15 17 19 21 £180bn
Monthly GDP index Concorde
£106bn
Source: Refinitiv. Data as at 1 January 2021. £18bn
Figures shown are approximate and in 2020 prices. Circles are to scale. £8bn
Sources: Spending Review 2020 and The Times. Data as at December 2020.
However, there are three grounds for optimism about the UK
recovery as 2021 evolves. Most important, the UK is set to That deficit has been financed by increased government bond
have one of the fastest rollouts of Covid-19 vaccines in the issuance. Although the Bank of England cannot purchase such
world. Second, household savings were built up in 2020 and bonds directly from the government, it has bought gilts in the
could be run down quite quickly as confidence returns. The secondary market. That has taken its balance sheet to
savings ratio — savings as a proportion of disposable income £895bn, 45% of GDP (see Figure 15). Broadly, for the moment,
— was as high as 26.5% in mid-2020, a level never seen in the markets remain relaxed about this.
post-war British economy. In the UK, savings have generally
risen during periods of recession and economic uncertainty. 15. Bank of England balance sheet
In the way memorably described by Keynes as the ‘paradox of
50
thrift’, such increased saving exacerbates the downturn. Yet,
45
once conditions improve savings are typically quickly run
40
down. Third, although the Brexit agreement with the EU was
35
relatively ‘thin’, as we expected, with further details
30
(especially for the services sector) needing clarification, the % 25
feared disruption to goods trade has been avoided. The UK is 20
now in a position to build new trading relationships with the 15
rest of the world; whilst maintaining good links with the 27 10
remaining EU countries. 5
0
Covid costs 1700 1750 1800 1850 1900 1950 2000
The one major concern is the impact of Covid-19 on the public Bank of England balance sheet as a % of nominal GDP
finances. The direct costs, £284bn, are already higher than Sources: Bank of England and Refinitiv. Data as at 1 January 2021.
6 | Insight Q1 2021EUROZONE
Across the eurozone, there has been a diverse experience with Covid-19, but
lockdown measures were tightened across all member states in late 2020.
Looking ahead, there are three challenges: on debt, inflation and demographics.
Diverse experience Low inflation
Across the eurozone, lockdown restrictions have been Second, the headline eurozone inflation rate is negative (see
tightened since summer 2020; in early 2021 they were as tight Figure 18). Partly, this represents errors in measurement:
as they had ever been in Germany, Greece, Lithuania and changing patterns of consumer spending and difficulties
Luxembourg.5 Since the outbreak of the pandemic, four with price collection are estimated to have reduced the
economies have death rates higher than 1000 per one million inflation rate by 0.2 percentage points since summer 2020.6
population, amongst the very highest rates in the world; but Even correcting for that, the eurozone is experiencing very
in three others the rate is less than a tenth of that (see Figure low inflation or deflation. Concerns that the eurozone, like
16). Vaccine rollouts remain a source of optimism and we Japan, may become embroiled in a long fight against
expect activity to rebound later in 2021. But as that happens, deflation have resurfaced.
three longer-term challenges for the eurozone will become
more evident. 18. Eurozone headline and underlying inflation
4.5
16. Covid and GDP growth, 2020 4.0
Target "less than, but close to, 2%"
3.5
0
3.0
-2 Lithuania 2.5
Ireland
Finland 2.0
-4 %
Estonia 1.5
Real GDP growth
Netherlands
Latvia
-6 Germany Luxembourg 1.0
Cyprus
Slovakia Austria Slovenia 0.5
-8 Malta Euro area
Belgium 0.0
-10 Greece Portugal France -0.5
Italy -1.0
-12 1999 01 03 05 07 09 11 13 15 17 19 21
Spain Headline inflation (% change on year)
-14 Underlying inflation (excluding energy and unprocessed food)
0 200 400 600 800 1000 1200 1400 1600 1800 Source: Refinitiv. Data as at 1 January 2021.
Covid-19 deaths per 1m population
Sources: IMF, Oxford Economics, WHO, Refinitiv and EFGAM calculations. Data as at 1 January 2021. Demographics
Such a concern is exacerbated by eurozone demographic
Government debt levels trends. Looking ahead ten years, the trajectory for the
First, government debt levels have surged. Notably, in the population of working age is close to that seen in Japan since
former crisis countries (see Figure 17) debt levels exceed its workforce peaked in the mid-1990s (see Figure 19). That is
those in 2009/12. However, for now at least, financial markets despite a further projected migration from several central
are taking a relaxed attitude to this, with very low financing and eastern European countries to northern Europe.
costs across all eurozone economies.
17. Eurozone government debt levels 19. Eurozone demographic projections
160 6
140 4
Change in the population of
working age from 2020, %
120 2
100 0
% of GDP
-2
80
-4
60
-6
40
-8
20 0 1 2 3 4 5 6 7 8 9 10
Years
0 Japan (10 years from 1995) United Kingdom
Pre-GFC Peak in eurozone crisis 2021
Euro area Denmark, Sweden and Norway
Germany France Eurozone crisis countries
(Portugal, Ireland, Italy, Greece and Spain) Bulgaria, Romania and Hungary Switzerland
Source: OECD Economic Outlook, December 2020. Source: Refinitiv. Data as at 1 January 2021.
5
Source: Oxford Blavatnik Stringency Measure via Refinitiv; 4 January 2021.
6
See ECB Economic Bulletin, Issue 7/2020.
Insight Q1 2021 | 7SWITZERLAND
The US has recently labelled Switzerland a currency manipulator. We think the
designation is questionable and that it is unlikely to change the course taken by the
Swiss National Bank.
Switzerland and Covid-19 21. Swiss external balances
The Swiss economy has proved relatively robust in the face
35 21
of the pandemic. It is expected to see a smaller hit to GDP
in 2020 than, notably, the eurozone. However, the economy 30 18
lost momentum in late 2020 (see Figure 20), particularly 25 15
because of renewed lockdowns in Switzerland itself and the
USD billions
12
% of GDP
20
rest of Europe. Against this background, the US Treasury’s
designation of Switzerland as a currency manipulator came as 15 9
an unwelcome surprise. 10 6
5 3
20. Swiss economy lost momentum in late 2020
0 0
2 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Swiss trade surplus with the US
0 Swiss overall current account surplus (rh axis)
Source: Refinitiv. Data as at 1 January 2021.
% change on year
-2
-4 As far as the currency is concerned, it cannot be argued that
the Swiss franc is unwarrantedly weak. The Swiss franc has
-6 appreciated strongly against the US dollar since mid-2019 and
-8
is overvalued against it based on our Purchasing Power Parity
(PPP) estimates (see Figure 22).
-10
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2020 22. USD/CHF exchange rate and PPP
SECO Weekly Economic Activity Index GDP
Sources: SECO and Refinitiv. Data as at 1 January 2021. 1.85
1.75
1.65
Switzerland as a currency manipulator 1.55
The three criteria the Treasury use for assessing whether any 1.45
country is a currency manipulator are: whether it has a trade
USD/CHF
1.35
surplus with the US of more than USD20bn; a current account 1.25
surplus of more than 2% of GDP; and whether there has been 1.15
1.05
persistent one-sided currency intervention, amounting to
0.95
more than 2% of GDP in the previous 6-12 months. 0.85
0.75
Switzerland undoubtedly met all three quantitative criteria. 200001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
Its trade surplus with the US was USD29bn in the 12 months USD/CHF exchange rate PPP estimate +/- 1 SD
to October; its current account surplus was 8.8% of GDP in Source: Refinitiv. Data as at 1 January 2021.
the 12 months to June (see Figure 21); and we estimate that in
the 12 months to end-November the SNB purchased foreign With respect to monetary policy, the SNB, in common with
currencies amounting to around CHF120 bn (nearly 17% of GDP). other central banks in developed economies, uses asset
In that narrow sense, Switzerland is guilty as charged. purchases to inject liquidity into the economy. Given the
small size of the Swiss domestic bond market, however, the
Mitigating factors SNB’s only option is to buy foreign assets. Hence, the SNB’s
However, the US Omnibus Trade and Competitiveness Act of currency interventions are targeted at meeting its monetary
1988 requires that, when considering if a country is a currency policy mandate rather than gaining a competitive advantage
manipulator, a broader range of factors, including currency in international trade.
developments and monetary policy, should be considered.
Although there is a risk that the US Treasury decision could
The broader range of factors should, we think, include the fact hit Swiss companies, for example by leading to their exclusion
that Switzerland’s bilateral surplus with the US is mainly due from US government procurement contracts, we think
to its export of pharmaceutical goods. This is a sector in which President Biden is unlikely to argue strongly for such action.
Switzerland is among the world’s leaders: it satisfies growing
US demand, especially linked to its ageing population.
8 | Insight Q1 2021ASIA
Trade tensions between Asia and the US are unlikely to ease quickly under the new
US administration. Indeed, the US recently labelled Vietnam a currency manipulator.
The reality is that the US and Asia are closely intertwined.
Asian trade More chips than oil
Trade tensions between Asia and the US are unlikely to ease In 2020, electronic integrated circuits were the largest
quickly under President Biden. Indeed, after his victory, the category of China’s imports, well in excess of crude oil (see
US Treasury labelled Vietnam a currency manipulator, a Figure 25). Many of these electronic imports are part of the
description it had previously applied to China.7 Meanwhile, the Asian supply chain, but also often incorporate US technology.
renminbi has recently tended to appreciate (see Figure 23), That is also the case for software, especially in mobile devices.
without any notable pressure on China from the US. Any US restrictions on exports to China that incorporate US
technology could clearly have a substantial effect.
23. USD/RMB exchange rate and key events
25. China’s top ten imports in 2020 (to November)
3.0
China
China moves devalues
4.0 Nasdaq peak:
dot com bust
to RMB basket renminbi #9
#10
Fertiliser: $2bn
Lehman Wuhan
bankruptcy Trump
lockdown
Aircraft: $3bn #8
Coal: $13bn
USD/RMB exchange rate
9/11 condemns
attack strong dollar #7
5.0 Steel: $13bn #6
China revalues
Copper Ore: $25bn
Asian Financial Crisis
renminbi #5
Iron Ore: $91bn
6.0 #4 Farm products:
$129bn
7.0 #3
Crude oil: $164bn #2 Other electronic
equipment: $180bn
8.0 Electronic Integrated #1
Circuits: $317bn
9.0
1995 97 99 01 03 05 07 09 11 13 15 17 19 21
US dollar/renminbi exchange rate
Source: Refinitiv. Data as at 1 January 2021.
Source: Refinitiv. Data as at 1 January 2021.
This may reflect the fact that China has recovered well from
the Covid-19 pandemic, although the role for market forces Asian growth
in what is still a tightly controlled exchange rate regime Tourism, important for several countries, was very adversely
must surely be limited. China now looks set to have recorded hit in 2020 but is now recovering. In other economies, growth
GDP growth of around 2% in 2020 and the IMF forecasts is more solidly based on domestic demand, which will further
growth at over 8% in 2021. Across Asia, exports are once benefit from interest rate reductions (see Figure 26). Real GDP
again driving growth (see Figure 24). It would be wrong, growth of 7% or more is expected this year in India, the
however, to characterise this simply as cheap Asian exports Philippines, Vietnam, Myanmar and Bangladesh. Asia is set to
satisfying western consumer demand. Trade inter- remain the driver of global growth in 2021.
relationships are much more nuanced.
24. Asian exports picking up 26. Policy interest rates in selected ASEAN countries
50 7
% change on year, 3-month moving average
40 6
30
5
20
4
10 %
3
0
2
-10
-20 1
-30 0
2006 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21
Exports from China, South Korea, Taiwan and Vietnam (value in USD terms) Indonesia Vietnam Philippines Malaysia Thailand
Source: Refinitiv. Data as at 1 January 2021. Source: Refinitiv. Data as at 1 January 2021.
7
From August 2019 to January 2020
Insight Q1 2021 | 9LATIN AMERICA
Latin America has been hit hard by Covid-19 and the recovery in 2021 is expected
to be slow. A high reliance on contact-dependent industries and structural
weaknesses are concerns, but the policy response has been substantial.
Covid-19 cases and response 28. LatAm: inflation rates
Latin America has been hit harder by the Covid-19 pandemic
12
than other parts of the world. While the region contains
only 8% of the global population, it represents around 20% 10
of the infections and 30% of the deaths from the virus.8 The 8
region’s economy is projected to have shrunk by 8% in 2020,
6
almost double the contraction expected worldwide. In 2021,
%
the rebound is expected to be slower than needed to recover 4
from 2020’s setback (see Figure 27).
2
27. LatAm real GDP growth: subdued rebound 0
-2
6 2008 09 10 11 2012 13 14 15 16 17 18 19 20 21f
4 Chile Brazil Peru Mexico Colombia
2 Source: IMF World Economic Outlook database. Data as at 1 January 2021.
0
%
-2 Response and recovery
-4 The policy response has, however, been substantial. The
-6 direct fiscal response (tax cuts and expenditure increases)
-8 has amounted to 4.5% of GDP, with indirect measures taking
-10 the total to 8%. Meanwhile, facilitated by low inflation
-12 rates (see Figure 28) policy interest rates have been cut
Chile Brazil Peru Mexico Colombia
substantially (see Figure 29). The four economies which the
2020 2021 IMF describes as having ‘platinum quality policies’ - Chile,
Source: IMF World Economic Outlook database. Data as at 1 January 2021. Colombia, Mexico and Peru – are also able to access IMF
emergency credit lines, if required.
Three reasons for Latin America’s weakness
There are three main reasons for the severity of the hit to 29. Latin America: Policy interest rates
the region’s economy and the expected slow recovery. First,
9
healthcare systems have clearly been overwhelmed in many
8
economies. This reflects historic underinvestment in physical
infrastructure and in people. Across the region there are half 7
the number of healthcare professionals relative to the size of 6
population than in high income countries.9 5
%
4
Second, a large proportion of workers (45%, compared to a 3
world average of 30%)10 are employed in contact-dependent 2
industries, such as agriculture, mining and tourism. High 1
skilled and digitally-focused workers have a relatively smaller 0
role than in advanced economies. This raises the prospect of Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20
a ‘K-shaped’ recovery, whereby high-skilled, digitally-focused Chile Brazil Peru Mexico Colombia
parts of the economy can recover whereas those in contact Sources: Bank of England and Refinitiv. Data as at 1 January 2021.
industries are left behind.
Opening up trade within the region and forging closer links
Third, the region has trailed the rest of the world for some with the rest of the world will, however, need to be the key
time, indicating that fundamental structural weakness also elements of a robust, longer-term recovery.
plays a role. Per capita incomes are one quarter of the US level,
the same relative size as in the 1990s; Asia has seen rapid
growth over the same period (from 5% to 25% of the US level).
8
Source: IMF Live event with IMF Managing Director Kristalina Georgieva and Council of the Americas CEO Susan Segal; 15 December 2020.
9
Source: Worldometers; 1 January 2021. Doctors, nurses and midwives per 1000 population.
10
Source: IMF Live event (n 8).
10 | Insight Q1 2021SPECIAL FOCUS – PANDEMICS AND INFLATION
The effect of the pandemic on inflation looks set to come into sharper focus in
2021. We still see low inflation persisting; but past experience also suggests that
workers will benefit.
The pandemic has been both a supply and demand shock. 31. Global experience of inflation and pandemics*
Production for some goods and services has been disrupted
4
or impossible, while demand for many items has evaporated. *Across 8 countries: US, UK, Italy, Germany, France, Netherlands, Spain and Japan
How might the demand and supply shifts balance out as the 2
pandemic abates and recovery takes place? And, in particular,
0
Percentage points
what will be the effect on inflation?
-2
The UK has a long history of consumer price inflation – from
-4
the thirteenth century – and ten experiences with pandemics:
from the Black Death in the fourteenth century, plagues in the -6
sixteenth and seventeenth centuries; cholera in the industrial
-8
revolution; and three episodes of flu, not just after World War 1 0 1 2 3 4 5 6 7 8
but also in 1889 and 1958 (see Figure 30). Years since pandemic started
Inflation response 90% confidence interval
Sources: Silvana Tenreyro, Bank of England (15 July speech) and Bank Underground post by Bonciani
In general, consumer price inflation fell during these periods. and Braun (2021, forthcoming).
The biggest decline was seen 4-5 years after the start of the
outbreak, with inflation falling by an average of 4 percentage shortage of agricultural workers. The average UK experience
points. Ten years after the start of the outbreak (the red is that real wages rise quite strongly (by 7% after 5 years and
shaded areas in Figure 30) inflation had broadly returned to its more than 10% after ten years) as a result of pandemic.
previous rate. The international evidence that is available (see
Figure 31) suggests a broadly similar pattern has been seen in Of course, this historic evidence needs to be treated very
other countries. carefully. Activist monetary and fiscal policy was not a feature
of those previous episodes. International travel was limited.
Workers, however, typically do well, especially as pandemics Vaccines were not available. But, in the words of Edmund
normally lead to labour shortages. That was particularly the Burke, “those who do not learn from history are doomed to
case after the Black Death, when there was a widespread repeat its mistakes”.
30. UK CPI inflation and pandemics
1 2 3 4 5 6,7 8 9 10
20
1. 1348 Black Death
15 2. 1563 London Plague
3. 1592 London Plague
10 4. 1665 Great Plague
5. 1832 First London cholera epidemic
% 5
6. 1848 Second London cholera epidemic
0 7. 1853 Third London cholera epidemic
8. 1889 Flu pandemic
-5
9. 1918 Flu pandemic
10. 1958 Flu pandemic
-10
1250 1300 1350 1400 1450 1500 1550 1600 1650 1700 1750 1800 1850 1900 1950 2000
CPI inflation, 5-year average Pandemics, epidemics and plagues from start to 10 years later
Sources: Silvana Tenreyro, Bank of England (15 July 2020 speech) and Bank of England Millennium database, 1 January 2021.
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