The Strong but Uneven Recovery
On the April PGIM Global Partners CIO call hosted by QMA, chief investment officers and senior investment professionals from PGIM's international businesses, PGIM Fixed Income and QMA discussed the factors driving potent economic recoveries in some countries and those that are undermining economic rebounds in others.
The global economic recovery remains on track, although the rebound remains uneven and continues to hit road bumps with periodic surges in COVID-19 cases and new strains emerging. The US and China are at the forefront of the recovery, with China on track to grow around 8.4% in 2021 and US growth expected to come in at around 6%, among the strongest growth rates in recent years.
Even the International Monetary Fund (IMF), whose growth estimates typically trail the market consensus, has upgraded its growth forecast in its April update. The IMF now projects 6% global growth, revised up from 5.2% in its October forecast, and growth moderating to a 4.4% pace in 2022. The IMF's upgrade reflects additional fiscal support and the anticipated vaccine-powered reopening and recovery in the second half of 2021. As the vulnerable population gets vaccinated, economic activities are expected to resume and drive a significant pickup in growth thanks to pent-up demand funded by accumulated savings in 2020. However, the outlook remains challenging, with a multi-speed recovery both across and within countries and the potential for persistent economic damage from the crisis.
According to the IMF, the uneven recovery has been shaped by the path of the pandemic, curbs to mobility imposed to slow the infection rate, and differentials in economic and fiscal policy measures. Output losses have been particularly large for countries that rely on tourism and commodity exports and for those with limited capacity for policy response. Countries that entered the crisis in a precarious fiscal situation had less capacity to mount major health care policy responses, forcing stricter lockdowns to contain the spread of the virus. Further, factors such as the proportion of "teleworkable" jobs, share of employment in small and medium enterprises, depth of capital markets, size of the informal sector,1 and quality of and access to digital infrastructure also played roles in both the downturn and the speed of the recovery.
Among developed economies, the United States is expected to surpass its pre-COVID-19 GDP level in 2021 and Japan in late 2021, while the Eurozone and UK lag and are likely to return to pre-COVID-19 levels only in 2022. The IMF cautioned that occasional lockdowns will likely be necessary at times due to new strains of the virus.
Among emerging economies, China's GDP had already returned to its pre-COVID-19 level in late 2020, but many others are not expected to fully recover until well into 2023. In emerging economies, vaccine procurement data suggest that effective protection will remain unavailable for most emerging markets populations in 2021. Lockdowns and other containment measures may be needed more frequently in 2021 and 2022 in the emerging markets than in developed economies. The IMF expects considerable differences between other emerging markets and China where effective containment measures, a forceful public investment response, and central bank liquidity support have facilitated a strong recovery. Tourism-based economies, such as Thailand's, face particularly difficult prospects considering the expected slow normalization of cross-border travel.
The US economy strengthened further in the first quarter of 2021 with fiscal stimulus boosting incomes in January and March and several states loosening COVID-19 restrictions as vaccine administration ramped up. GDP is expected to have grown at a strong pace, over 5% annualized in Q1, and appears on track to accelerate in Q2 and Q3 2021 thanks to the fresh $1.9 trillion fiscal stimulus package.
QMA Portfolio Manager Ed Keon expects the US to enjoy a booming economic recovery, as reflected in the April jobs report that showed the economy creating more than 900,000 jobs in March, with the biggest job gains in the industries hit hardest by the pandemic, such as leisure and hospitality. In Keon's view, the US could consistently add 1 million jobs per month through the rest of the year, eliminating the slack in the labor market. Business confidence has surged with the Institute of Supply Management manufacturing index surging to 64.7, its highest level since 1983, while the service index rose to 63.7, the highest in the survey’s history. Keon's one concern is that with wage pressures and base effects, inflation will likely run above 2% this year, but whether it will persist is likely to depend on the trajectory of the labor market. If the US uses up the remainder of labor slack, higher inflation could result. PGIM Fixed Income's Senior Multi-Sector Portfolio Manager Michael Collins agrees with Keon's optimistic view of the economic recovery and markets and notes that expectations for a robust economic recovery have become more widespread recently and have caught up with PGIM Fixed Income's expectations of a robust GDP rebound.
The Eurozone economy remains weak in early 2021, with Q1 GDP on track to contract around -3.6% annualized, after a -2.8% decline in Q4 2020, as renewed lockdowns in March disrupted the nascent recovery. However, improved vaccine administration is likely to contribute to a strong rebound in the second half of 2021, with double-digit growth, reflected in the rise in manufacturing PMIs. Japanese GDP is likely to have contracted in Q1, falling -4.2% annualized, as activity struggled due to some temporary and one-off factors. In addition, the shortage of semiconductors was a negative for production of cars and other machinery, though it boosted demand for Japanese chip-making equipment.
China's economy got off to a strong start to 2021 with industrial production, retail sales and fixed asset investment all growing more than 30% in January and February with favorable base effects and continued strength in economic activity. China's GDP is on track to grow more than 8% in 2021. Taiwan's GDP growth is expected to strengthen to 4.6% in 2021, from 3% in 2020, with strong semiconductor demand. In India, the fresh surge in COVID-19 cases put a speed bump in the economic recovery, with the government putting in new restrictions on economic activity. However, the recovery may be delayed but not derailed as the India team does not expect a repeat of the stringent lockdowns seen in 2020. India is on track to a double-digit GDP rebound in 2021.
The Bottom-line: The general consensus on the April CIO call was that the global economic recovery remains on track, though recovery remains uneven across countries, within countries and between sectors. Further, the recovery remains bumpy as periodic surges in COVID-19 cases and new strains force renewed lockdowns, interrupting the recovery. The US and China remain at the forefront of the recovery, with Europe Japan and emerging economies lagging. However, CIO call participants remain positive on the outlook for stock markets as the strong economic and earnings rebound and continued policy support are expected to fuel further gains. Bond yields, after surging on inflation concerns, have stabilized, for now, with central banks reassuring investors that monetary stimulus will remain in place for the foreseeable future. Inflation concerns and the risk of rising COVID-19 cases and new virus strains are likely to keep markets volatile. The upcoming earnings season also carries some risks, with markets likely to punish any earnings disappointment, given elevated expectations and rich valuations.
1 The informal sector, informal economy, or grey economy is the part of an economy that is neither taxed nor monitored by any form of government.
Source: Wikipedia