2021 Outlook: what will happen after coronavirus? - AG Employee Benefits
2021 Outlook Olivier Colsoul has the floor

Published on 15/12/2020


2021 Outlook: Review of the Year of the Coronavirus and a look ahead at a post-COVID world

​​2020 will be remembered in history as the Year of the Coronavirus. Rarely has an event dominated world news as Covid-19 has. The impact on people, health and the economy has been huge. At the same time, we are now experiencing an unprecedented recovery. A memorable year demands an extensive review. And an outlook with regard to 2021 and the years thereafter. Olivier Colsoul, Senior Strategist at AG, creates an overall picture of everything for you. ​

Ther​e is no getting round it: COVID-19 was omnipresent in 2020. What was the impact on the macroeconomic environment?

In the spring, the economy came to a halt because of lockdowns in large areas of the world. The PMI index that indicates the confidence of purchasing managers in the economy improving and where a value higher than 50 represents expected economic growth even dropped in April from 55 to 15. The eurozone was hit especially hard. There has, however, also been a first and second wave in other regions of the world, and in the U.S. even a third wave​.

Fortunately, the damage at the end of this year has turned out to be less serious.The GDP will drop by 8% this year in the eurozone. Unprecedented, but still a lot better than what we feared after the initial coronavirus wave. Losses in the U.S. will be limited to 4%, and we are still expecting an increase of 2% in China despite the coronavirus crisis.

Will the second wave and lockdown have more far-reaching effects than the first one?​

The economic impact of the second lockdown is less than the first one. For example, in April there was a 31% reduction in economic activity in France. In November, the damage is being estimated as ‘only’ 12%. The impact varies per country, but, all things considered, we can speak of a moderate decrease in economic growth in the last quarter of this year. We should, however, continue to be careful.​

​​What is even more noteworthy: the first lockdown hit the economy in a more general sense. In the second lockdown, we see, for example, that the services sector continues to be weighed down, but that industry is experiencing relatively little impact. 

In the meantime, the economy for the entire eurozone will be back at approximately 93% of its pre-coronavirus level for the entire eurozone. This will even be 97% in the U.S. where there was no second lockdow​n. Due to the positive vaccination news in the past few weeks, the economy will also continue to grow.​

The central banks and governments have implemented unprecedented measures. Could they have prevented an even worse situation?

At the start of the first quarter, the economy collapsed. This led to much pessimism, and rightly so. This was also immediately the reason for unprecedented support measures from governments and central banks such as both the European Central Bank (ECB) and the Federal Reserve (FED). China, in turn, supported its economy through massive loans. All these efforts have prevented the worst from happening.

What other issues can further explain the speedy recovery?

An important difference with the financial crisis is that the coronavirus crisis is an ‘event-driven’ crisis and not a structural crisis as in 2008. The blow in the spring of this year was sudden and very severe, and people all over the world were affected by the crisis in one way or another. This has a great impact on the willpower of the average citizen. The will to return to their old lives as soon as possible ensured that the recovery was much faster and more robust than expected. ​

To conclude, equity markets have been clearly benefiting from the positive vaccine news in the last few weeks.​

​“The coronavirus crisis is an ‘event-driven’ crisis: sudden and very severe. A big difference with the financial crisis of 2008.”

Has recovery been just as strong everywhere?

At the end of 2020, we can see that most asset classes are at their highest YTD levels or very close.

China has now more or less recovered. The economy is running there as never before with a palpable improvement in growth, both in exports and consumption. The low dollar is an incentive within this context for world trade and emerging markets.

The U.S. has also come back with a vengeance. In the first quarter, unemployment was very high, but the recovery is unprecedented thanks to exceptional welfare benefits that support household consumption. The S&P 500 (fuelled by tech shares) and the Dow Jones are now even higher than their pre-coronavirus levels.

Europe is trailing slightly behind, as is often the case. However, the catch-up manoeuvre has been strongly felt in the last few weeks. Not all European countries have been hit as hard by the crisis. Germany, for example, is the leader of the pack. This is in stark contrast to countries such as Spain where tourists staying away is greatly felt.

Are there any snags in relation to the strong recovery? 

Although volatility continues to drop, a disturbance is always possible as, for example, we saw when the second wave hit in Europe or in relation to the presidential elections in the U.S. We must, of course, stay alert to a new flare-up of the virus. The distribution of the vaccines are just around the corner and we must prevent a third infection wave in Europe no matter what this may cost.

If we look towards the future, what do you expect that 2021 will bring?

The square root” scenario is the most likely with, after the sharp drop and a levelling off this summer, a further recovery in 2021, but not as strongly as the recovery during the past months. We will see a reasonably weak first quarter for 2021, but still with growth when compared to the fourth quarter of 2020. Afterwards, we are expecting greater growth with low inflation figures. In the last few weeks, this scenario has been strengthening under the impulse of the very positive vaccine news.

​​“The positive vaccine news strengthens the square root scenario.”

Do you notice any regional differences?

In the eurozone, the European recovery plan is of the utmost importance, especially for the hardest hit countries such as Spain and Italy. This recovery plan is an important trump card when compared with the approach during the financial crisis. Now we can definitely see a ‘whatever it takes’ attitude to do better than after 2008.

In the U.S., the presidential election of Joe Biden has deferred the hoped-for extra support measures, but this will probably not be for long. With the prospect of a split Congress, the next package of measures will probably be more modest than if there was a very wide Democratic control. The U.S. economy, however, can handle this while the FED keeps an eye on things.

​In China, we are expecting a further strong increase in economic growth in 2021.

Boris Johnson and the choice between a hard Brexit or a free trade agreement with Europe continue to be uncertain factors for the British economy. Currently, Johnson is leaning towards a hard Brexit, but you never know with him and a last-minute deal cannot be excluded. This does not change the fact that Brexit will mainly continue to be an issue for the British domestic market.

In Belgium, we must not underestimate the effect of coronavirus on our SMEs. The impact on our turnover figures is greater than on the entire economy. Up to now, there have been few bankruptcies. This, however, is only a matter of time due to the delayed effect. With the second wave, very many Belgian companies risk a cashflow crisis next year if the long-term support by the government is not continued. Fortunately, we are not yet at this stage if we examine the unemployment figures that defy all negative predictions for the time being.

How would you describe the monetary policy for 2021?

The low interest rates will continue. The ECB and FED will not do too much in this area anytime soon. The low interest is being further stimulated by excessive saving behaviour, both by companies and private individuals. This will lead to a permanent downward pressure on interest rates.

Support measures by the central banks and governments will also be needed in 2021. The debt level will continue to be enormous and will sometimes rise above the problematic level of 100% in many Western countries due to the strongly increasing budgetary shortages of this year. Quantitative Easing (QE) – increasing the money supply – has absorbed a large part and will also continue to do this. However, to bring debt down, we normally count on nominal growth. But this is weak in Europe rather than strong, as is inflation. Therefore, without support by the central banks, for example, by purchasing bonds, debt will probably not drop drastically. 

What impact will this have on asset classes?

A strong increase in interest rates is very unlikely to happen immediately. It is more likely to be a light and gradual increase over the next ten years, but even then, rates will probably not be higher than 0% in the eurozone. 

On the bond market, we see that the spreads on corporate bonds have already dropped considerably. The risk premium is therefore limited, but it is still above its pre-crisis level here and there.

After the strong recovery and the excellent performance in November, equity markets may possibly take a breather. Much positive news is already included in the prices and is also showing up in company profit lines. If we base ourselves on what happened after previous recessions, a strong recovery of profits is expected for 2021. It also looks as if the profit recovery will happen more quickly in the U.S. than in Europe. This will, however, be coupled with a more expensive valuation of U.S. shares, where mainly growth shares will be priced at a new peak level. For Europe, with a lower structural growth, recovery is coming: worldwide growth and industrial activity are again picking up while the implementation of the European recovery plan is providing a positive impetus. On top of this, investors in European equities can count on a fairly comfortable dividend yield. 

Last year, there was talk of the economy cooling off. Has this risk given way due to the coronavirus crisis?

This event-driven crisis means that little or nothing has changed structurally. The speedy recovery shows that everyone wants to return to the 'old normal'. For 2021, we will therefore see a further recovery of the economy. The general context should also be positive for 2022. The election of Biden will remove some uncertainty worldwide. After a time, however, we risk again to come up against the structural issues from before the coronavirus crisis.

Such as?

In 2019, you could already notice a cooling of the world economy brought on by the trade war between the U.S. and China and structural issues such as the accelerated ageing population and lower productivity that put a drag on potential growth. We also see in the eurozone that both private individuals and companies are saving a lot and are investing too little in the economy.

The central banks and governments want to stretch every economic cycle as far as possible, but structural adjustments have not really been made. It is best to make them when things are good and therefore, in the short term, we should not expect them.

Then we therefore are again looking at supporting interventions by the central banks. The very low interest rates and QE may relieve the rising government debt and buy time, but do not enough in making growth increase. There is therefore a chance that we will again see a cooling of the economy within a few years. 

“The chance of a cooling of the economy within a few years exists. 
Structurally, nothing has changed up to now.”

What can we do to prevent this?

The European Green Deal is an opportunity for companies to position themselves and invest in a sustainable economy. I hope that this will be a catalyst for the European economy where Europe takes the lead on the world stage to become climate neutral by 2050 as the first continent. The Green Deal therefore has the potential of becoming a trump card in the long term

The European recovery plan should also play a very important role. It is absolutely essential that the plan does not constitute empty words and that the plan is also rolled out for the long term. It is an opportunity not to be missed to elaborate structural solutions in the long term and to invest in the future.

​To conclude: what is your vision of this long term? Will COVID-19 have a permanent impact?

​There will be elements in our way of living and working that will change. Working from home is here to stay, which will undoubtedly have an impact on many shopkeepers and catering establishments that are dependent on commuters in large cities. Their turnover figures may remain negatively affected for longer than the rest of the economy.

Tourism will again pick up. Business travel, on the other hand, will find it more difficult now that everybody has seen that you do not have to travel around the entire globe thanks to Zoom or Teams. The hotel sector will, of course, feel the pinch.

​Not all sectors will therefore recover and not everybody will be saved. But a great majority will. This is why governments and central banks are making such great efforts. I am only expecting a full recovery in 2022. Full recovery is therefore actually a matter of time.

"Full recovery after the coronavirus crisis is therefore actually a matter of time."​