This article first appeared in Capital, The Edge Malaysia Weekly on December 14, 2020 - December 20, 2020

NEWS about the arrival of Covid-19 vaccines has clearly helped boost the outlook for the world’s economy. The economy is likely to grow a solid 5.2% next year — with China being a strong contributor — after contracting 4% this year, says UK-based global investment manager Schroders, which recently upgraded its forecasts.

Four months ago, Schroders, which manages some US$649.6 billion (RM2.6 trillion) in assets, had expected the global economy to grow 5.1% next year after slumping 4.6% this year. The economy expanded 2.6% in 2019.

“There is, at last, some light at the end of the tunnel as the vaccine should eventually bring a return to normal social behaviour and an end to the restrictions which remain in place in many parts of the world,” chief economist Keith Wade said at Schroders’ “Crystal Ball 2021” webinar last Wednesday, which offered insights into what to expect on the macroeconomic front next year.

Nevertheless, Wade expects a bumpy ride in the short term given a new wave of Covid-19 infections in the US, Europe and some parts of Asia, which has forced a return of economic lockdowns. He believes the US and Europe will not be able to avoid a double-dip recession despite positive developments on the vaccine front.

“Our [global] forecasts factor in a difficult winter before the vaccine brings a stronger recovery in activity in the second half of 2021. We see the recovery extending into 2022 as fiscal and monetary policy remains loose whilst activity normalises. Growth is expected to continue at an above-trend rate throughout the forecast [period]. Meanwhile, inflation remains relatively contained with only a modest pick-up in response to higher commodity prices,” he said.

Most countries in Europe are “almost certain” to double-dip in 4Q2020, and possibly, 1Q2021 if lockdown restrictions remain.

“The good news is that restrictions are lighter than earlier in the year, and so disruption to activity should be reduced and temporary. In the US, a deal in Congress for the next fiscal package is likely to follow in early 2021, but the delay and smaller-than-previously-expected deal [of US$1 trillion compared with US$2 trillion to US$3 trillion before], alongside rising infection rates, mean there is a danger of following Europe into a double dip,” Wade said.

The strongest growth next year is expected to come from emerging markets, with China leading the way. China is seen by Schroders to expand a robust 9% after growing 2.1% this year.

According to Wade, with the exception of China, which is likely to experience a short bout of deflation, most emerging markets are likely to experience a transitory period of higher inflation, led by food. “But once this passes and growth settles to more normal rates, few central banks will be in a rush to tighten [monetary] policy, particularly if governments begin to repair fiscal positions.”

Schroders’ global economic forecasts are a little more optimistic than that of its peers. The consensus forecast is for growth of 4.9% next year after a contraction of 4.3% this year.

Schroders’ expectation of a 5.2% growth in 2021 implies that it would be the world’s strongest pace of growth since 2007 (5.5%). Growth is then expected to moderate to 4% in 2022.

“The recession that we expect this year (-4%) is a pretty significant one, much deeper than during the [2008/09] global financial crisis (GFC), where the economy fell 0.4% in 2009,” said Wade.

“But we expect to see pretty strong, above-trend global growth over the next two years, quite similar to the pattern that we saw in 2010, 2011 [after the GFC]. One of the differences, though, is that the growth will probably be more evenly balanced. The 2010/11 rebound was very much led by China and emerging markets, but this time around, China is important, but Europe and the US are also making more of a contribution,” he added.

In Europe, all eyes are on Brexit as the UK and the European Union have yet to agree on a trade deal as at press time last Thursday, despite a looming year-end deadline to do so.

“A lack of a trade deal would be disruptive for both sides, but would be a drop in the ocean compared to the impact from the Covid-19 lockdowns. It will be incredibly difficult to separate and distinguish the impact of each shock. Therefore, the incentive for the UK government to ensure a deal is in place is reduced. As there are good economic reasons behind a deal, and public support for one, there should be an acceptable solution to the impasse for both sides. We remain confident that both sides want to strike a deal,” Azad Zangana, Schroders’ senior economist for Europe, said.

Wade expects the world’s major central banks — namely, the US Federal Reserve, European Central Bank, Bank of Japan and Bank of England — to keep interest rates unchanged right through end-2022.

“We expect inflation to be low and stable and central bankers remain wary of the threat of deflation. As we have argued before, the US Fed’s new framework means that we will need to see a period of 2%-plus inflation to hit the average inflation target. That means zero interest rates and continued quantitative easing,” he said.

Wade believes that while low interest rates will help governments sustain the high debt levels created during the pandemic, it may well bring volatility to markets and will be a major challenge for investors.

Schroders sees a weaker US dollar as the most likely risk to its global economic forecasts.

“Our most likely risk scenario is now a weaker dollar. The US dollar [based on the US dollar index (DXY)] has already weakened 6% year to date, helped by Joe Biden’s presidential victory. But conventional currency valuation models suggest the currency is still overvalued, particularly versus emerging-market currencies, suggesting this has some room to run,” Wade said.

Schroders’ scenario has the dollar falling 10% against all currencies in 2020 and a further 10% the following year on a smooth trajectory. “This leads to improved exports for the US, at the cost of most other countries. However, world trade and risk assets are lifted in the scenario,” he added.

Meanwhile, Schroders senior emerging markets economist David Rees pointed out that China’s economy has managed to outperform the rest of the world in 2020 as the authorities handled the coronavirus outbreak relatively well.

“They were also able to deliver an effective economic support package. The lagged effects of these stimulus measures look set to drive a further recovery in growth into the first half of next year,” he said.

The dynamic for Asian economies, in general, should be pretty similar to China, in terms of trade.

“Export growth has been picking up in South Korea and is surprisingly strong in Taiwan as well, and this probably has a bit further to run. But the issue facing these economies would be that we’re probably going to see some kind of turn in this business cycle, this trade cycle, next year. So, short-term growth should be very good, but we’re looking for that turning point sometime next year because they are very trade-dependent,” Rees said.

According to him, the star performers in Asia in terms of economic growth next year are likely to be the Philippines and Indonesia. “But this is really from the fact that they are likely to contract much more [than others] this year,” he explained.

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