Uneven recovery for 2021: A look at the prospects for certain markets
The new year also marks the beginning of a new era, comprising several factors: the Biden administration and its return to a committed approach to the global agenda and multilateralism; a reinforced European Union, but one that is much-changed from five years ago (European Commission leadership and renewed ECB mandate, Angela Merkel stepping down, mobilization of the multimillion-euro EU recovery fund, Brexit and renewed Atlantic entente). What’s more, all of this is taking place against the backdrop of the continued rise of the new global superpower — China. The latest developments in Washington in recent days serve to demonstrate the level of tension and uncertainty the world is experiencing.
Amid so much uncertainty, there is a consensus that the world will emerge from the crisis at some point in 2021, and that the global economy will gradually recover economic growth. According to the latest MAPFRE Economics Outlook report, “not all countries will perform in the same way and emergence from the crisis will be uneven. Recovery to 2019 GDP levels will happen sooner in countries with more income support in 2020 and 2021. The USA will emerge first, followed by Brazil. The European Union and LATAM will lag further behind due to their production structure and the nature of the stimuli received.”
Here, we take a look at the prospects for some of the major markets in 2021, as reflected in the MAPFRE Economics report:
This is the region that has been worst affected by COVID, due to both the lukewarm economic response (limited fiscal space) and the insufficient availability of healthcare resources, as well as existing imbalances and vulnerabilities (low savings, external vulnerability and dependence on the commodity cycle and the tourism sector). According to MAPFRE Economics experts, Latin America “has suffered permanent impairment in growth expectations, from the 3 percent we proposed a year ago to the current forecast of -8.1 percent. Poverty has soared from 23 percent to 30 percent among the population, nearly 3 million SMEs have gone bankrupt and nearly 9 million jobs have been lost. LATAM’s per capita growth has stagnated since 2015, with per capita income expected to return to 2015 levels in 2025 after the current crisis. We are facing another lost decade.”
In Brazil, the short-term risks lie in the inevitable reduction of aid to families due to the country’s unsustainable fiscal stance and the subsequent implications for credibility in this area. Bolsonaro’s team will have to find a solution to avoid an abrupt interruption that will have a major impact on the economy. According to MAPFRE Economics’ central scenario, Brazil’s GDP growth forecast for 2021 is 3.2 percent, after an estimated -4.7 percent decline in 2020.
The downside risks to Mexico’s economy are mainly concentrated on a delay in overcoming the pandemic, and the resulting impact on consumption, as well as the limited size of the public aid package that is being implemented, which will slow the recovery. The recovery of its external surroundings, especially the USA, and the upturn of oil prices will also be key. “The risk that investment will take time to recover must also be considered, given that it has already been shrinking since 2019. Our new GDP forecast is -8.9 percent for 2020 and +5.3 percent for 2021.”
The risks to the US economy in the short-term are focused on further waves of the pandemic forcing recurrent shutdowns. The deployment of mass vaccinations will mean we begin to see benefits toward the second half of the year. At the fiscal level, “we don’t believe that the new administration has much capacity to reverse Trump’s tax cuts and will instead reach agreements with the Republicans to continue to approve new stimulus packages as long as the economy continues to need them. Our baseline scenario points to a 3.9 percent annualized GDP recovery in 2021, which is higher than we previously forecast (3.3 percent).”
Despite recent new outbreaks of the virus, MAPFRE Economics’ Outlook report predicts a major growth rebound in 2021 “but we will not reach pre-crisis levels before mid-2022 and the output gap will not close before 2024. The next upturn in economic activity will have implications for the rate curve, inflation and exchange rates. Despite economic decline, the European Union is emerging “institutionally strengthened.” Two key elements have triggered this: the renewal of the ECB and all of the European Union’s bodies (Council, Commission, Parliament), which has led to a new cast of strong leaders and less room for Euroskepticism; and the effective departure of the United Kingdom from the European Union along with its ability to block and veto aspects of the common project.
Germany will hold a super election cycle in 2021, with federal and state elections in several regions. It will be an eventful year on the political front, and debate will arise over who will bear the costs of fiscal stimulus, among other matters. The risks are concentrated in the persistence of weak domestic demand, at least until a large part of the population can return to normal life, and in whether export activity recovers to a greater or lesser extent, depending on external demand.
Risks in the Italian economy are now centered on a possible surge in financial defaults in 2021. Furthermore, Italy’s routine political instability and the country’s capacity to take full advantage of the funds allocated to it by the European Recovery Fund must be taken into consideration.
In Turkey, the risks to the economy stem mainly from a sharp shift in foreign investment flows, given that banks and companies alike are highly dependent on external financing in dollars. The return to free-market policies after a more interventionist period will continue to put the currency under pressure.
Here is a breakdown of the 2021 forecasts for some of the major markets in the two central scenarios—baseline and stressed—according to the Outlook report by MAPFRE Economics.