GLOBAL ECONOMY: Vaccines point to a sharper recovery
The news about vaccines has led us to believe that restrictions will be removed in advanced economies in Q2 next year, paving the way for a steeper recovery to a more normal level of activity.
Some Emerging Economies’ limited access to vaccines will cause them to lag but China will continue to experience strong growth as the recovery there broadens out to the consumer sector. Despite this more positive outlook, central banks will need to keep interest rates at rock-bottom levels for several years to come in order to tackle the legacy of the virus.
We continue to think that risky assets (equities) will gain more ground and that the US dollar will weaken against a backdrop of a recovering global economy and continued accommodative monetary policy. In our view, the outcome of the recent US election and news that a vaccine for COVID-19 may become available earlier and be more effective than previously anticipated has improved the distribution of potential outcomes for the economy and risky assets. We still think that government bond yields will remain at very low levels. The two key risks to these forecasts are i) that the pandemic takes another turn for the worse over the winter and a vaccine still takes a long time to develop, produce, and distribute; and ii) that policymakers withdraw support prematurely, undermining the economic recovery and the prospects for risky assets.
The Outlook for 2021 and 2022 is increasingly bright, but rates to remain near-zero
A renewed wave of restrictions will cause the economic rebound to slow further in the near-term, but the prospect of widely-available effective vaccines next year has caused us to revise our already above-consensus forecasts for the coming years higher. We now expect GDP growth to be 5.0% in 2021 and 4.5% in 2022. The election outcome means much of President-elect Joe Biden’s tax and spending plans are dead on arrival, but there is still a chance of more bipartisan fiscal stimulus being passed. Despite the stronger economic outlook, inflation still looks set to rise only modestly and the Fed’s recent changes to its policy framework means we expect rates to remain on hold for several years.
The new lockdowns across the region will cause the euro-zone economy to shrink by about 3% in Q4 and we have pencilled in only a small increase in Q1 next year. However, the rollout of a vaccine should allow restrictions to be lifted and GDP to recover quickly from Q2 2021 onwards. Budget deficits will remain very large throughout the region next year and the ECB will accommodate this by expanding its asset purchase programmes. We also expect the central bank to cut the interest rates on its targeted loans to banks. This extra monetary support will drive peripheral bond spreads even lower next year.
Economy and asset prices set to catch up
COVID-19 vaccines are a gamechanger for the UK economy and mean that by the middle of the decade GDP may not be much lower than if the COVID-19 crisis had never happened. This is a more positive outlook than the views of the Bank of England and the OBR and suggests that taxes won’t need to rise to reduce the budget deficit back to pre-pandemic levels. With interest rate hikes many years away too, the combination of a strong economic recovery and ultra-loose policy should buoy UK assets.
Recovery broadening out
China’s recovery will prove more durable over the next few quarters than many think. Domestic demand is no longer being propped up solely by stimulus. Households are spending more too and that should continue as worries about the labour market and about the risk of infection fade. A shift in spending patterns in major economies away from online shopping and back to services will sap some of the momentum of exports but not enough to derail broader growth. Beyond the near term, however, the leadership’s push to boost China’s capacities in cutting–edge technology is more likely to slow growth than accelerate it as many currently expect.
Oil demand to surge in mid-2021
The prospect of an effective COVID-19 vaccine has significantly improved the outlook for oil demand in 2021. We now expect oil consumption to bounce back strongly in the second half of the year as there will be considerable pent-up demand in the EU and US for travel and recreational activities. As a result, we have raised our end-2021 forecast for Brent to US$60 per barrel. Meanwhile, industrial metals prices will ride the wave of Chinese fiscal stimulus for a while longer, but we expect prices to ease back by end-2021 as China stimulus is withdrawn and China’s export growth slows. Elsewhere, we forecast that the price of gold will remain high next year, given that real yields are likely to remain low, even if risk appetite picks up.
UK Commercial Property
Capital values unlikely to return to growth until at least 2022
The near-term economic outlook remains weak and we expect that capital values will decline by around 10% y/y and returns will be negative this year. This weakness is expected to last well into next year and we don’t expect capital values to return to growth until at least 2022. Admittedly, there is an upside risk to our forecast with news of a COVID-19 vaccine performing well in phase three trials. But the bigger picture is that the economic legacy of the crisis will linger for a while and values will take several years to return to their pre-virus levels.
Housing market surge won’t be sustained
We doubt that the surge in house price growth to a five–year high can be sustained. Demand will soon cool as pent-up demand is expended and the end of the stamp duty holiday looms. And as other policy support such as the furlough scheme and mortgage holidays end next year, the rise in the unemployment rate to 9% that we anticipate will catch up with the housing market. Following the recent surge in house prices a strong outturn, perhaps of 4% y/y or so, is all but guaranteed in 2020. But the new lockdown, higher unemployment, and fading policy support mean there is a growing likelihood that house prices reverse some or all of their 2020 gains in 2021.
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