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Global Economic Recovery Led by Stimulus and Vaccine Rollouts

The global economy has bounced back sharply from a historic contraction caused by COVID-19. Economies which led the recovery in 2020 are likely to grow more moderately in H2 2021 while those that are still struggling from the pandemic will take a longer time to recover.

Progress on vaccinations is instrumental to economic reopening. Countries with faster vaccine rollouts have recovered more quickly and have seen a rise in consumer spending arising from pent-up demand.

Strong economic rebound but growth momentum to moderate

The global economy was thrust into one of the steepest recessions in history by the pandemic but it is also staging one of the swiftest recoveries. Massive stimulus has fuelled the rebound and this could lead to the global economy achieving pre-COVID growth levels by end-2021 or early-2022.

The blistering pace of growth seen in H1 2021 (due to a low base) is expected to moderate towards the year-end. A multi-speed recovery has seen some regions and sectors sprinting ahead while others are slower off the block.

China, the United States and the technology sector led the way out of the recession in 2020, bouncing back strongly from the pandemic. Their growth momentum will continue at a steadier pace in H2 2021.

Meanwhile, Japan and Emerging Markets such as Latin America and India, are still struggling to contain the pandemic. We expect their recovery and growth to pick up at a later stage.

Figure M1a. 2021 GDP Growth Forecast

2021 GDP Growth Forecast 2021 GDP Growth Forecast

Sources: UOB Global Economics and Markets Research (June 2021), IMF World Economic Outlook (April 2021).

Figure M1b. Unemployment Rate Projections by the End of 2021

Unemployment Rate Projections by the End of 2021 Unemployment Rate Projections by the End of 2021

Source: UOB Global Economics and Markets Research (June 2021).

Vaccine rollouts instrumental in economic reopening

The pace of vaccinations is vital to economic reopening. Countries that have implemented large-scale vaccination programmes have returned to normalisation earlier, while those with lagging vaccination rates are recovering at a slower pace.

With reopenings, consumer spending has picked up and pent-up demand is expected to further spur economic growth.

The US and Europe have been leading vaccine rollouts (Figure M2) while Asian markets such as China, South Korea, Taiwan and Singapore, have already embarked on vaccination programmes. Consumers have ramped up spending in these countries, particularly in China. We expect these regions to continue to lead the post-pandemic recovery.

In the meantime, India, Japan, and Emerging Markets such as Latin America are still struggling to bring COVID-19 cases under control as sluggish vaccine rollouts delay their economic recovery.

Figure M2. Global COVID-19 Vaccine Rollout

Global COVID-19 Vaccine Rollout Global COVID-19 Vaccine Rollout

Source: Our World in Data, 14 June 2021

Loose monetary conditions and large fiscal measures to continue fuelling recovery

Ongoing unprecedented stimulus measures by most countries have cushioned the impact of COVID-19 and helped lift economies out of recession. With the exception of China, loose monetary policies will remain for now to ensure ample liquidity. However, the tapering of quantitative easing by the Fed could start by early next year.

Heavy fiscal stimulus is unlikely to spark prolonged inflation. The yield curve could steepen gradually, as short-term yields remain low and long-term yields rise at a gradual pace. The 10-year US Treasury yield could hit 2.0% by year-end.

Many governments have unleashed unprecedented fiscal and monetary responses to mitigate the COVID-19 pandemic’s deep economic impact. These outsized stimulus packages will continue to stabilise the global economy and support its recovery. We expect most central banks to maintain loose monetary policies this year to keep liquidity flowing and to provide cheap capital to spur economic growth.

Interest rates in the US are likely to remain low until 2023. The US Federal Reserve (Fed) is expected to begin an eventual scale-back of bond purchases (i.e. the tapering of quantitative easing) towards end-2021 or early-2022, before raising rates sometime in 2023. Other central banks are likely to explore gradually paring bond buy-backs at about the same timeline.

The People’s Bank of China (PBoC) remains the exception, having already started tightening liquidity conditions since early 2021. Being the first to be hit by the pandemic, China has been the first to recover and has resumed its growth trajectory since last year. Despite China’s more constrained monetary policy stance, it is on track to achieving one of the highest growth rates for 2021, surpassing the US.

Most nations have also injected heavy fiscal stimulus into their economies to revitalise growth. The US has unveiled a US$2.3 trillion infrastructure package and a US$1.8 trillion social security plan, which will likely be funded by a raise in wealth taxes and/or a global minimum corporate tax. Europe’s Next Generation EU (NGEU) fund will focus on green-related initiatives and digital transformation, while China’s 14th Five-Year Plan will invest heavily in technological innovation.

Figure M1c. 2021 Fiscal Balance Forecast (Note: Negative implies deficit)

2021 Fiscal Balance Forecast 2021 Fiscal Balance Forecast

Source: UOB Global Economics and Markets Research (June 2021).

Inflation fears unfounded despite strong fiscal measures

The huge pandemic relief spending has sparked concerns of inflationary pressures as capital spending – an example is decarbonisation projects – has increased substantially.

However, we believe that any inflation is likely to be transitory as economic growth momentum moderates in H2 2021. Eventually, this could draw attention back to growth equity sectors, which tend to perform better when the economy slows.

While the Fed is likely to intervene to keep short-term yields low, long-term yields should rise albeit at a slower pace. With the Fed expected to begin tapering bond purchases as soon as end-2021, and economic recovery staying on track, we expect the yield curve to steepen gradually, with the 10-year US Treasury yield reaching 2.0% by year-end.

Higher commodity prices are in store, but we do not expect this to signal the start of a commodity supercycle, which is characterised by a prolonged period of elevated prices. Commodity prices will likely be reined in after the current early-cycle rebound in manufacturing shifts towards the Services sector, which has been lagging.

Figure M1d. 2021 Inflation Forecast

2021 Inflation Forecast 2021 Inflation Forecast

Sources: UOB Global Economics and Markets Research (June 2021), IMF World Economic Outlook (April 2021).

Strong Corporate Earnings Growth Justifies Current Valuations

Global equity valuations have risen substantially in the new cycle. But as earnings growth moderates in H2 2021, equity prices will narrow the gap with the high valuations. In the near term, value stocks are likely to outperform after lagging growth stocks for most of 2020.

Valuations expected to moderate in H2 2021 as earnings rise

We have entered a new cycle characterised by unusually high valuations across major asset classes. This is supported by historically low bond yields and inflation.

Since the COVID-19 pandemic began more than a year ago, global equity valuations have surged, climbing 2 standard deviations above their average1 as markets priced-in an economic recovery.

The strong earnings momentum in H1 2021 should enable equity prices to narrow the gap with the currently-high valuations in H2 2021. However, US corporate tax increases to finance President Biden’s spending plans and/or a global minimum corporate tax can pose risks to earnings recovery.

Figure M1e. 2021 Earnings (EPS) Growth Forecast

2021 Earnings (EPS) Growth Forecast 2021 Earnings (EPS) Growth Forecast

Source: Bloomberg (15 June 2021)

Value has gained but a rotation back to growth is on the cards

Since the global financial crisis of 2008, growth equities have consistently outperformed value equities. This has widened the valuation gap between value and growth equities.

While the current environment favours value equities; which have staged a rally from an unusually low base, the moderating economic growth momentum and a gentler rise in bond yields could spark a rotation back to growth equities as the year progresses.

Decarbonisation to dominate the current earnings growth cycle

Following digitalisation, decarbonisation is an investing theme that will dominate the current earnings growth cycle as COVID-19 shifts the spotlight to environmental issues.

Growth momentum in the new cycle will remain robust. Innovation and technology will continue to drive business growth and support equity returns in the near term as well as over the longer term.

Digitalisation has been an ongoing investing trend, but COVID-19 has shifted the spotlight to environmental issues and solutions. Decarbonisation, part of the Sustainability Megatrend, will increasingly dominate the current earnings growth cycle.

Companies focusing on decarbonisation tend to be value-oriented because of their greater asset requirements (e.g. new power plants and infrastructure). As the world transitions towards a lower carbon footprint, companies and institutions are now stepping up much-needed capital spending which will result in a strong source for growth but could also lead to higher inflation over time.

Economic growth momentum remains strong

We have just entered a new economic cycle. Although growth momentum may relax slightly after hitting record territory, it will remain robust for some time.

Companies that continue to leverage on innovation and technology to drive business growth, will see support in equity returns, especially in growth sectors in H2 2021.

In the long run, technological innovation remains a Megatrend that will have a profound impact on economic growth.

With the moderating economic growth momentum in H2 2021, this can be a good opportunity to rotate out of value and back into growth equities.

1 Bloomberg. The forward price-to-equity ratio of the MSCI World Index had risen to 2 standard deviations above its 10-year average on 29 May 2020.