Expectations for a sharp GDP rebound later in 2021 remain, albeit with increasing concerns for the path of the pandemic and the timing of the economic recovery
Global equities took a breather in the past week, as the speed of vaccine rollouts remains disconcerting and valuations are elevated by historical standards. Recall that the 12-month forward P/E ratio stood at 20.3x for the MSCI ACWI at the start of the past week (19.5x as of January 31st) vs a 15-year average of 14.2x. All told, the MSCI ACWI was down by 3.6% wow (-0.5% YtD). The S&P500 fell by 3.3% wow (-1.1% YtD), with increased volatility as the Cboe Volatility Index – “VIX” – reached 37% mid-week vs 22% on average in the previous week.
Pockets of “short squeeze” exacerbated both the decline and the volatility. In the event, a large number of retail investors coordinated into supporting some stocks for which large short positions had been built by hedge funds. As a result (and with the aim of “damage control”), some of these hedge funds embarked on a significant liquidation of other positions to close the aforementioned short ones (see graph page 3).
According to the latest estimates (World Economic Outlook, January update) from the International Monetary Fund (IMF), global GDP will increase by 5.5% in 2021 and by 4.2% in 2022, following a contraction by 3.5% in 2020 due to the pandemic. The estimate for 2021, reflects an upward revision by 0.3 pps compared with the previous forecasts (in October), in view of the commencement of the rollout of vaccines against Covid-19 and additional fiscal policy support in some large economies, mainly during December in the US ($900 bn or 4.2% of 2019 GDP) and Japan (new stimulus estimated at ¥30.6 tn or c. 6% of GDP).
The path of the recovery varies across regions (see graph), depending , inter alia, on the severity of the health crisis, the selected stringency of the social distancing measures to stem the spread of Covid-19, economic structures (mainly the exposure to contact-intensive sectors such as food services, leisure & hospitality) and, importantly, the extent of policy responses.
Regarding the insofar fiscal measures to stem the economic consequences from the pandemic, the IMF estimates that they amount to $14 tn globally (16% of World GDP), consisting of $7.8 tn in additional spending or forgone revenue and $6 tn in equity injections, loans, and state guarantees (excluding the “Next Generation EU” recovery fund). The aforementioned headline amount is heavily concentrated in advanced economies, with an estimated total count of $11.8 tn (22.8% of GDP | see graph). On the flipside, the ratio of public debt to GDP in advanced economies, is projected by the IMF to rise by c. 20 pps (versus 2019) to 124.9% by the end of 2021.
Economic activity in China has already been restored at pre-pandemic (end-2019) levels, being the only major economy that avoided a contraction of GDP overall in 2020 (+2.3% yoy), on the back of highly effective measures to contain Covid-19 alongside policy support (mainly via public investment and liquidity measures).
In the US and Japan, GDP is projected by the IMF to return to end-2019 levels in H2:2021, while in the euro area and the United Kingdom, such a development is expected into 2022. Note that the aforementioned forecasts do not incorporate the fiscal stimulus package currently under political consideration in the US, a development that represents a meaningful upside risk. According to preliminary estimates from the IMF, the package proposed by the US Administration (total size of $1.9 tn or c. 9% of GDP) could provide a boost of 5% to GDP over a period of three years.
Having said that, the IMF highlighted that economic projections continue to be surrounded by exceptional uncertainty, as global economic activity remains highly dependent on factors which are inherently imponderable, namely the path of the pandemic alongside the respective medical developments (rollout of vaccinations, treatments).