Coface Announces Risk Barometer Q2 2021: A Two-Speed World

HONG KONG SAR – Media OutReach – 14 July 2021 -
18 months after the start of the pandemic, access to vaccination is now the
main factor setting the pace of people’s daily lives and the global economy.
GDP growth forecasts for 2021 have been revised upwards (+5.6%), but this is
mainly the result of positive surprises from the United States. These improved
growth prospects are reflected in world trade: after a 5% decline in volume
last year, Coface forecasts an 11% increase for 2021.

 

In
this context of growth in international trade, countries exporting raw
materials are benefiting from an improvement in their terms of trade. At the
same time, the slow progress of vaccination campaigns in emerging countries
makes it unlikely that herd immunity will be achieved in the next twelve
months. This suggests that stop-go processes will persist, and continue to
constrain domestic demand in most emerging economies.

Finally,
Coface notes an increase in political risk linked to the health crisis and the
acceleration of inflation.

 

Europe and North
America in 2022: towards the end of stop-go and new infrastructure investments

The
major health trends have accelerated since Coface published
its last Barometer in April, with the vaccination process progressing faster
in North America and Europe than in the rest of the world. The acceleration
of these vaccination campaigns, combined with the effects of mobility
restrictions in the spring, led to a drop in the number of new infections in
these areas. Local authorities were therefore able to reopen parts of the
economy before the summer. However, two risks make the continuation of this
positive trend uncertain:

• The
  slowdown in the rate of vaccination which, if confirmed in the coming months,
  will delay the achievement of herd immunity.
• The
  threshold for achieving herd immunity is all the higher as the virus is rapidly
  transmitted between people. However, the appearance of new variants that are
  more rapidly transmissible raises fears of possible new waves of contamination
  in the coming months.

Provided
that these two risks do not materialise, the European and North American
economies should be back to near-normal functioning by the end of the summer.

Few
changes are to be noted in the growth forecasts. The upward revision of global growth
expected in 2021 (+5.6%, +0.5 point compared to the last Coface Barometer) is
largely attributable to the United States (+6.5% this year), whose economy has
continued to surprise favourably since last summer. These improved growth
prospects are reflected in world trade: the Coface model indicates a growth of11%
this year.

On
the positive side, the implementation of the infrastructure plan
announced by Joe Biden will benefit many sectors of activity if it is adopted.
In Europe, the release of the stimulus funds announced in July 2020 will have a
differentiated impact on economies and will serve multiple purposes: supporting
demand, accelerating recovery and promoting development in growth sectors.

For
companies, however, an increase in production costs is to be expected:
in addition to a persistent shortage of certain electronic components, it also
affects transport costs, as well as raw material prices which are expected to
remain high.

Emerging
economies: domestic demand constrained by stop-go and inflation

Since
the beginning of April, the health situation has remained difficult in several
Latin American countries (notably Brazil and Argentina), and in India. Further
increases in the number of infections have also been observed in several Asian
countries (e.g. Malaysia, Thailand, Korea and Singapore), with high-frequency
mobility indicators pointing to lower economic activity in these areas. The
number of people infected with the virus also increased rapidly in Africa and
Russia in early summer. The trend is more positive in Central and Eastern
Europe, the Middle East, and Turkey.

 

Besides
the health context, the rise in inflation (+8.1% year-on-year in Brazil,
a 5-year high) and the subsequent tightening of certain monetary policies
are likely to limit the extent of the recovery in domestic demand. Countries
whose materials account for a large share of imports will be penalised by a
significant rise in their import prices. This is the case for China, whose
imports of raw materials represent more than 30% of its total purchases of
foreign goods. While consumer inflation remains contained in China at this
stage (+1.3% over one year), the sharp rise in producer prices (+9% YOY, a
12-year high) argues for its acceleration in the months to come.

 

Strong increase
in political risk linked to accelerating inflation in the context of the health
crisis

 

Inflationary
risks have been in the news in recent months. In this context, the annual
update of the Coface Political Risk Index shows a strong rise in political risk
across the world, and particularly in the emerging countries. Indeed, figures
show a deterioration in living standards and purchasing power, as well as a rise
in inequalities observed following the COVID-19 crisis. At this stage, these
conditions are not necessarily leading to popular uprisings, which remain limited
by people’s capacity to mobilise.

 

In
2020, the social risk index rose sharply (+5 points) to 51% at the
global level, reached its highest-ever level. Despite the numerous fiscal and
monetary support measures, 140 of the 160 countries assessed saw their GDP
decline last year. At the same time, the unemployment rate has increased in 145
of these 160 countries. The increase in this risk is more marked in high-income
economies, which have a lower initial risk level. However, despite these
developments, the countries with the highest level of social risk remain Yemen,
Syria, Iraq, Venezuela, Libya, Lebanon, Sudan, Iran, Algeria, and Saudi Arabia.

 

The
conflict index, the second component of the Coface Political Risk Index, is
calculated according to the number of conflicts, their intensity, the number of
victims and their duration. In 2020, Azerbaijan and Ethiopia saw an increase in
this index due to the conflicts observed on their territories. They are
followed by countries fighting terrorism or in civil war, such as the Central
African Republic, Sudan and Mali.

 

The complete Barometer is available here.