Coface Quarterly Barometer: US leads the global recovery, emerging economies lag behind

HONG KONG SAR – Media
OutReach – 6 May 2021 – More
than a year after the start of the pandemic, global economic trends are uneven
due to lingering uncertainties around the spread of COVID-19. The acceleration
of the vaccination process, as well as its effectiveness, are key to an
economic recovery. In
this context, the prospects for a return to normalcy are both uneven and
uncertain across sectors of activity and geography, according to the latest barometer from Coface, a
leading player in the credit insurance industry.

 

As outlined in the barometer, Coface assumes that the
economic recovery will gain momentum from the summer of 2021, when a large
enough share of the population in the United States and Europe will be
vaccinated. However, there is a risk of delay in the vaccine roll-out, notably
due to supply constraints for manufacturers, resulting from shortages of
certain components and export restrictions.

 

Nevertheless, Coface’s global growth forecast has been revised upwards
by half a point (+5.1% for 2021), thanks to stronger than expected growth in
the United States. In this more
favourable macroeconomic outlook, Coface is upgrading 35 sectors of activity
against only 3 downgrades.

 

In addition to the United States, several other sectors of the world
economy – industry and global trade – are likely to return to their pre-crisis
level of activity by the summer. Nevertheless, other sectors are lagging
behind, notably in services and especially those that involve physical contact
with customers, and across the European economies. Finally, in some major
emerging economies, the recovery is also being held back by rising inflation,
which is forcing central banks to tighten monetary policy.

 

US economy goes into “high
pressure” mode

Since the beginning of 2021, the balance of surprises is tilting to the
positive side, despite the many health uncertainties.

 

The expected growth gap between the eurozone and the United States is
usual, particularly in a recovery phase.
This is partly due to weaker automatic stabilizers in the US, which accelerate
adjustments in employment and income.

 

But this time, the reasons for the for the US growth gap are different:
less restrictive mobility restrictions than in the eurozone, both in 2020 and
early 2021, and a more rapid vaccine deployment.

Differences
in economic policy may also explain US outperformance. The US Federal Reserve
(Fed) has increased the size of its balance sheet. Its asset purchase program
rose by about 13% of GDP in 2020, compared with 9% for the European Central
Bank (ECB). Finally, and most importantly, greater fiscal support will allow
the US economy to return to its pre-crisis GDP level more quickly.

 

Adopted
in March 2021, the new US support plan amounts to 1.9 trillion dollars
(USD), and will bring the total fiscal response to the crisis to an amount
equivalent to 27% of US GDP, more than any other mature economy. Coface expects that the public deficit could be up to 56 billion
dollars higher than it would have been without the stimulus package.

 

The aim of this strategy is to put the US economy under “high
pressure”, i.e. to implement expansionary
monetary and fiscal policies that encourage a return to work for the least
employable people (long-term unemployed or inactive due to discouragement,
low-skilled people and categories of the population suffering from
discrimination in hiring).

 

Eurozone:
corporate insolvencies remain hidden

The eurozone is unlikely to return to its pre-crisis GDP level before
2022. If the main mobility restrictions are lifted by the
end of the summer, this will go hand in hand with a gradual halt to business
support measures, which could cause unemployment to rise. In addition, the
increase in corporate debt – made possible by government-guaranteed loans – is
likely to limit their investment capacity.

 

Until
now, the main government support measures implemented in 2020 have not yet been
withdrawn. Despite the stabilizing effect of government aid, the financial
health of companies has deteriorated significantly in 2020, which should
normally lead to an increase in insolvencies. According to Coface, insolvencies
in 2020 should have increased by 19% in Spain, 7% in Italy and 6% in France and
Germany. Coface estimates the number of hidden insolvencies at 44% of those
recorded in France in 2019, 39% for Italy, 34% for Spain and 21% for Germany.

 

Emerging
economies: rising inflation forces central banks to tighten monetary policy

According to the International Monetary Fund’s April 2021 forecasts, emerging
economies will be more permanently affected by the current crisis than mature
economies.

 

In 2024, GDP in emerging economies will be 4% lower than it would have
been had it not been for the COVID crisis. For mature economies, the gap would
be only 1% (compared to 10% following the global financial crisis). There are
several reasons for this expected lag between the recovery of mature and
emerging economies.

 

First,
the vaccination process is more advanced in mature countries, even if
some emerging economies are well on track, such as the United Arab Emirates,
Chile and, to a lesser extent, Turkey and Morocco, where at least 10% of the
population had been fully vaccinated by April 8. But apart from these few
cases, the fact that the United States and Europe have acquired the majority
of vaccinations means fewer doses for other countries. Among the four main
vaccine-producing areas (China, the United States, Western Europe and India),
the temptation to implement protectionist measures is increasingly strong. For
example, India has already announced a temporary halt to the export of vaccines
to prioritize vaccine deployment in India, where the number of cases has risen
significantly since the beginning of March.

 

In
addition to these uncertainties, many emerging economies are doubly hit by
their exposure to economic sectors hardest hit by the crisis (tourism and
transport in particular).

 

On
the positive side, however, the rise in the price of oil and agricultural
commodities is good news for economies that suffered from the opposite trend
last year. In addition, the positive outlook for US consumption should fuel
strong export volumes, especially among consumer goods producers.

 

On
the other hand, the widening of the US budget deficit is encouraging capital
outflows from emerging markets, as upward revisions of the US GDP growth
outlook push up long-term US interest rates, narrowing the gap with its
emerging market counterparts, and making the latter less attractive to
financial investors. This has resulted in a depreciation of emerging
currencies, notably in Turkey and Brazil.

 

The complete barometer is available here.