May 2021

If all goes well the Olympics will be held this summer in Tokyo, Japan. One of the more spectacular sporting events during the games is the 400-metre hurdle race. And much like the athletic exercise, the road to economic recovery after Covid-19 will be a hurdle race.

Let’s start with the good news. The global recovery is on the right track. As a global insurance credit insurance company, we expect the global GDP to rebound by 5.1% in 2021 with one fourth of the recovery being driven by the US, while China should contribute less to growth by progressively adopting a less accommodative economic policy. In 2022, world GDP growth should reach +4.0%. Europe should recover its Covid-19 losses during 2022 while the US should achieve this in the second half of 2021. These are some of the findings in the most recent macroeconomic analysis from Euler Hermes Economic Research.
 

Vaccination campaigns are picking up steam at different pace

The global roll out of vaccinations is under way. However, the pace of the vaccination campaigns differ from country to country. At the current pace of vaccination, the US and UK will reach herd immunity in May. Europe will be able to vaccinate its vulnerable population by summer, but herd immunity is likely first to be achieved in the fall of 2021.

The pace is a bit slower than expected, agrees Kirsten Neergaard. »However, the vaccine and the reopening is providing general optimism all over. Continued success with the vaccination is important to stay optimistic«, says Kirsten Neergaard.

Excess savings will still hover above the pre-crisis level

Excess savings will still be around 40% above the pre-crisis level at the end of 2021. In a relatively optimistic scenario, excess savings from households should provide a tailwind to consumer spending to the tune of EUR180bn or +1.5% of GDP in Europe and more than +3% in the US in 2021. According to Euler Hermes this will mean that around EUR163bn could be transformed into private consumption in the Eurozone.

In the Nordic countries, excess savings are expected to be unleashed in this way (in 2021 percentage of GDP) according to the macroeconomic analysis from Euler Hermes:

Kirsten Neergaard explains that savings are relatively high and above pre-crisis in the Nordics, housing prices have generally increased, and interest rates are low.

»The cumulated savings have been boosting online shopping and sales towards construction materials, household items and not least electronic equipment. Overall the consumer confidence is relatively strong and the reopening will provide a boost to other businesses leading us to expect a positive GDP in 2021«, says Kirsten Neergaard.

Assistance mechanisms are phasing out

The “whatever it takes” consensus and approach to fiscal policy in 2020 will be giving way to more diversified policy prospects.

If we stick with the Olympic lingo, the global demand torch will pass to the US, with its gigantic USD1.9trn fiscal stimulus (9% of GDP). Euler Hermes expects most EU flagship fiscal policies to be phased out no sooner than fall 2021, which is bound to trigger a rise in unemployment and insolvencies.

Most countries will continue to inject liquidity and support companies and jobs to avoid the sanitary and economic crisis morphing into a financial and social crisis. However, 2022 will bring an economic reality check for companies.

Economy policies and support schemes have played a key role in the Nordic countries fencing off or delaying insolvencies. The phasing out of these policies will result in an increased risk of bankruptcies, says Kirsten Neergaard.

»How big an increase and how fast depends on factors such as the speed of the reopening, the success and speed of the vaccination campaigns and how people choose to spend their money. It might be too late for some companies«, says Kirsten Neergaard.

For some companies it will be a reality check and for some it might be difficult to obtain financing.

»Generally, we have seen a number of Nordic companies adapt to the changed business environment and many companies did surprisingly well in 2020 even under difficult circumstances. However, it’s a fact that some companies in the most impacted sectors might run out of money due to lower or almost no sales, and if they’re not able to adapt their businesses, it might be a challenge going forward«, says Kirsten Neergaard.

Effects of investment are not yet resolved

The huge investment packages in the pipeline in the US, the EU and in China will all contribute to support demand and the global economy’s growth potential over the medium term. However, their success depends on whether governments can channel excess savings to productive projects and boost the private sector.

»This can be a huge possibility for Nordic exporting companies, especially those who are already exporting to those markets«, says Kirsten Neergaard.

Bottlenecks in the global supply chain

Global trade growth will rebound to 7.9% in 2021 in volume terms, but excluding the positive base effects from 2020 growth, will stand at 5.4%. More importantly, Euler Hermes expects a temporary slowdown in Q2 2021 due to prevailing supply-chain disruption. In addition, trade in services will remain impaired by the delayed reopening of sectors most impacted by Covid-19.

Bottlenecks in the global supply chain could, according to Kirsten Neergaard, push global trade into a borderline recession starting in Q2 as the supply chain disruptions could cut global trade growth in volume.

»Nordic companies need to know their suppliers and customers well and overall have a strong knowledge of the whole supply chain. A shortage can have a huge impact on sales. You cannot sell even if the need is there, if you don’t have the goods«, says Kirsten Neergaard.

Temporary overshoot of inflation

Inflationary pressures will continue to increase notably in 2021, thanks to the recent input cost bonanza, we have recently experienced, driven above all by strained supply chains and the oil price recovery, higher inflation in service sectors along with the economic reopening in the second half of 2021 and strong pandemic-related roller coaster effects.

However, Euler Hermes don’t expect central banks to stage a policy U-turn as a reaction to inflation temporarily overshooting in the US at 3.5% by mid-2021 and hitting the 2% target for a few months in the Eurozone.

»Investments might be slowing down a bit and the terms of investment might be tougher, raw material prices might increase and we might see supply shortage, and this might overall lead to price increases. However, we believe the increase will stay low and marginal - it will likely be temporary and we don’t expect strong reactions from the banks.«