Back on track for growth

Will the global economy quickly bounce back from the coronavirus slump? Or will the economic consequences be with us for some years to come? It is likely that further recovery will vary significantly from region to region and sector to sector – depending on how the coronavirus pandemic is handled.

The pandemic will continue to dominate the outlook for economic growth. While prospects are being dampened by government-imposed lockdowns on the one hand, multi-billion relief packages are providing additional impetus on the other. The greatest risk to the positive economic picture is how the pandemic plays out from here. New variants of the virus are one major uncertainty factor, and the speed of the vaccination rollout programmes is another. Provided that the pandemic continues to gradually ease, there is likely to be a noticeable upturn in the economy from spring 2021 – albeit with substantial variation between different regions and sectors.

Different rates of recovery across Europe

In Europe in particular, where the pandemic hit some countries much harder than others, recovery is patchy. In Germany, for example, the containment measures are likely to last into the second quarter but then the vaccine should be available in sufficient quantities to immunise broad sections of the population. And when that happens, service providers who are currently only able to offer their services to a very limited extent will be able to resume their activity. This applies for example to large-scale events, trade fairs and leisure activities. Following the 5.3 per cent fall in economic output in Germany in 2020, the economists at Union Investment expect growth of 4.0 per cent this year followed by 4.9 per cent in 2022.

Rocketing growth from the second quarter of 2021

Predicted year-on-year change in real GDP

Rocketing growth from the second quarter of 2021
Source: Union Investment, as at 18 March 2021.

Meanwhile, the United Kingdom has made much faster and more visible progress in delivering the vaccine. By mid-March, 36 per cent of all adults in the UK had received at least one dose. This puts the UK second only to Israel in a global comparison of vaccination success. It is currently still under a strict lockdown which – as in Germany – is set to be gradually lifted from the beginning of March. However, based on the success of the vaccination rollout, we can expect a significant economic rebound from the second quarter of this year, with economic output expected to grow by 5.0 per cent in 2021 and by 6.0 percent in 2022, following a fall of 9.9 per cent last year.

USA to reach pre-crisis level sooner, China is recovering the fastest

The US economy has also lost momentum. However, the fiscal packages passed by the US Congress at the end of 2020 and beginning of March 2021 have greatly reduced the risk of recession. The support for consumer spending provided in the form of stimulus cheques and the extension of, and increase in, unemployment benefit are particularly important in this regard. It is also likely that negotiations on the next federal budget in autumn will be used to push through plans for additional infrastructure investment. The US economy is therefore forecast to grow by 5.5 per cent in 2021, following a 3.5 per cent contraction last year. The economists at Union Investment predict an increase in economic output of 3.6 per cent in 2022.

The Chinese economy is in a far healthier position. It recovered quickly from the slump in the first quarter of 2020 and economic activity had already returned to pre-crisis levels by the middle of 2020. The increase for 2020 as a whole was 2.3 per cent, making China the only major economy to have grown last year. Even if the virus flares up again in certain regions there, the impact is likely to be limited due to the strict countermeasures. The disruptions to production caused by the New Year holidays were also far lower than usual. Economic output in China as a whole is forecast to grow by a substantial 8.5 per cent this year and by 5.2 per cent in 2022.

The changing face of business

While the global economy is back on track for growth in 2021, the face of business is set to change noticeably in the coming years. Firstly, mergers and acquisitions are likely to lead to a significant increase in market consolidation in some sectors. A recent example involves Deutsche Lufthansa, which has regained its monopoly position over many domestic flight routes in Germany following the insolvency of Air Berlin.

This phenomenon is even more marked in the US, where there are four dominant airlines and three dominant telecoms providers. Secondly, the possibility of insolvencies at individual company level cannot be ruled out. This is most likely to affect companies that had already been struggling to remain profitable before the crisis and managed to survive purely thanks to favourable financing conditions in recent years. Retail, energy, transport and tourism are the sectors most likely to be affected.

Coronavirus crisis exacerbates structural trends

But where there are losers, there are of course also winners. Coronavirus is also acting as a catalyst for digitalisation. Individual companies that dominated the market before the crisis are benefiting from the pandemic – such as major online retailers, for example. But this is essentially true for all companies that had already shifted their focus before the crisis to providing and using web-based platforms for commercial purposes. To some extent, market share is just being redistributed – from analogue to digital. But ultimately, innovation will also generate some genuine growth. Other companies in the digital or IT sector, such as leading electronics manufacturers, will not benefit directly. They may even be adversely impacted by the pandemic – whether in terms of production or sales. However, these problems are not life-threatening. This is partly because strong growth in recent years has allowed many tech companies to build up large liquidity reserves, enabling them to survive the lockdown phase and then continue expanding their market position.

Sectors that are already attracting attention for their innovative advances during the crisis are also likely to benefit. These include the pharma, biotech and medical technology industries. Not only are these companies stepping up their development activities to ensure that COVID-19 diagnostic tests are made available in ever greater numbers and at ever increasing speed, but research into treatments and vaccines is also being greatly accelerated. Possible examples include the two German biotech companies CureVac and BioNTech, and the US company Moderna. All three have been carrying out research into the new mRNA types of vaccine for a number of years, taking a fundamentally different approach to the major pharmaceutical companies. The coronavirus pandemic has drawn increased attention to the biotech companies and will potentially also attract more funding into their businesses.

The vaccine represents a turning point in the equity markets

Commodity stocks and banks made the biggest gains

The vaccine represents a turning point in the equity markets
Sources: Bloomberg, Union Investment; as at 12 March 2021. All MSCI indices stated in US dollars based on net returns.

Vaccine represents a turning point in the equity markets

These developments are already being reflected in substantial share price movements in the capital markets. Since the news broke that the BioNTech/Pfizer vaccine was ready to go to market, stocks in the travel sector, for example, have risen significantly. Energy stocks, which are hoping for accelerated growth this year, also benefited. The rosy economic picture is likely to significantly boost corporate profits in 2021 – and that will unlock further upside potential for share prices.

As equities are a forward-looking asset class, where anticipated future developments are often already priced in, the majority of the gains are likely to happen in the first half of 2021. For investors with an appetite for risk, it is therefore important to take an early position and select stocks carefully.


As at 18 March 2021