Global Economic Outlook 2021: Global Growth Recovers amid High Debt; Changing Fiscal, Monetary Frameworks

Download Scope Ratings’ 2021 Sovereign Outlook.

 

Explainer video: Scope Ratings presents its 2021 Global Outlook

The pace of 2021’s recovery will be asymmetric across countries. China, where coronavirus first struck last December, will lead the global recovery with strong 9.9% growth next year – accounting for more than a third of global growth – with other leading global economies recording turnarounds: 4% in the US, 5.6% in the euro area, 3% in Japan and 6.6% in the UK.

We continue to expect recovery to gain a firmer foothold by the early spring of 2021 as vaccines are made available to at-risk segments of the population, better weather slows virus transmission and governments ease social and economic restrictions.

Full economic normalisation in 2021 and beyond will remain vulnerable to setbacks, however – partly from the risk of another wave of infection in countries that ease restrictions too speedily – such as in advance of the coming holidays.

There are both upside and downside risks to the 2021 global outlook, compared with our assessment of a downside skew to risk in entering 2020.

Debt is high and rising, although central banks mitigate immediate liquidity risks

Global government debt is close to a record 100% of GDP, while public debt trajectories are unlikely to reverse significantly post-crisis in the cases of some government borrowers. This represents a constraint for sovereign rating outlooks for countries such as France and Spain.

Rising household and corporate debt levels, in addition, hold implications for financial stability. Non-performing loans and defaults could rise as extraordinary support provided to protect households, jobs and business tapers as the crisis moderates next year.

Central banks have mitigated immediate sovereign liquidity risks in advanced economies. Due to central bank action, financing rates for governments in advanced economies have fallen compared with pre-crisis levels despite much higher debt. However, any normalisation steps of central bank policies could lead to a repricing of risk. In emerging economies, financing constraints are more significant as increased debt has escalated currency and debt crises.

Budget strategies transitioning to pro-growth orientation rather than austerity

The budgetary strategies of governments post-crisis will concentrate on maintaining pro-growth policies to achieve fiscal consolidation rather than relying on austerity as they did after the global financial crisis.

However, this carries its own long-term risks. If sustainably higher growth does not materialise after investment spending over the coming years, large deficits could translate to unsustainable debt dynamics, forcing more permanent central bank interventions.

Accommodative monetary policy and rising euro to support euro area borrowers?

Monetary policy will remain highly accommodative. Revisions to central banks’ policies in the context of asset purchases and ambitions to support green transitions could transform global central banking in the years ahead.

Meanwhile, the dollar remains the dominant global currency, with the euro still far behind entering 2021. Still, recent developments – notably the enlarged pool of euro area safe assets as the European Union issues debt to finance recovery – could enhance the euro’s global reserve currency role to challenge the dollar’s dominance longer term, with positive rating implications for euro area sovereign issuers over time.

EU issuance to finance the Recovery Fund as well as ECB asset purchases mark a fundamental transition in EU fiscal and monetary frameworks towards closer implicit fiscal and monetary union. This is positive for EU borrowers even though the landing zone for an EU architecture post-crisis remains unclear.

Environmental risks as a growingly significant thematic

We also expect governments, regulators and investors to pay increasing attention to environmental, social and governance risks, partly from the disruption caused by Covid-19.

Scope’s sovereign rating methodology now explicitly accounts for environmental credit risks via three factors: i) the transition risks to lower-carbon economies, ii) natural disaster risk and iii) ecological wealth.

2021 rating actions to hinge upon impact of crisis, policy response and credit profile

Scope currently rates 10 sovereign governments of a portfolio of 36 rated countries with a Negative Outlook, including the UK and Japan, while Ireland, Greece and Lithuania hold Positive Outlooks. Rating actions in 2021 will depend on the impact of the crisis and expected speed of recovery; the efficacy of monetary and fiscal policy responses; as well as the sovereign’s credit profile at a given rating level.

For a look at all of today’s economic events, check out our economic calendar.

Giacomo Barisone is Managing Director of Sovereign and Public Sector ratings at Scope Ratings GmbH.

Global Economic Outlook: Gradual, Uneven Recovery Runs into Virus-Containment Challenge in Q4

Scope Ratings presents its updated economic forecasts

 

Download Scope Ratings’ Q4 macroeconomic update.

Scope Ratings’ baseline forecast is for a contraction in the global economy of around 4% in 2020, compared with its July forecast of a 4.5% slump, with growth rebounding by 6% in 2021, compared with a previous forecast of 5.8%. The 2020 forecast represents the sharpest global contraction of the post-war era.

However, under a stressed scenario, Scope expects a deeper global contraction of 6.5% this year and only 4.8% growth in 2021 assuming that, in the months ahead, governments reimpose lockdowns on a similar scale to those in early 2020 under this alternative scenario.

We have expected that the economic recovery would become more uneven and subject to interruption by this stage in 2020 after the sharp recoveries mid-year when governments ended lockdowns in Europe and North America. The re-imposition of restrictions to contain the resurgence in Covid-19 will inevitably have an impact in curtailing economic activity.

While the trajectory of Covid-19 remains uncertain, our baseline scenario remains for a severe contraction in output in 2020 even though, as governments and public health sectors are better prepared than in March and April, we don’t generally expect a return in the coming months to the same scale of drastic restrictions of earlier this year.

However, under any scenario, the return to more normal levels of economic activity will take time and there will be setbacks as we are now experiencing.

Second coronavirus wave has slowed or even temporarily reversed national recoveries

Second waves of Covid-19 have slowed or even temporarily reversed national economic recoveries. The latest measures to contain the pandemic will slow down the recovery particularly in more hard-hit countries such as the US, the UK, Spain and France. After moderate interruptions to economic recoveries in Q4, including outright contractions in Q4 GDP expected in multiple cases, recovery should regain momentum by the spring of 2021.

An important possible exception to significant renewed economic restrictions in Q4 is China, with a sustained recovery since the first quarter as authorities have mostly contained the transmission of Covid-19 over recent months. We forecast growth in China of 1.3% this year – the weakest since 1976 – accelerating to 9% in 2021 (revised upward 2.6pps from July forecasts). The revision to 2021 China growth expectations drives a higher 2021 baseline global growth forecast.

Emergency financial measures to protect households, workers, and businesses – including around EUR 700bn in fiscal stimulus in the euro area – amid the lockdowns and other healthcare-related restrictions have led to rapidly rising government borrowing. Higher debt ratios weaken general government balance sheets. In addition, putting fiscal consolidation on hold as central banks ensure easy financing conditions creates moral hazard. These are credit concerns – though ratings implications will vary country by country.

Forceful policy responses have placed a floor beneath economies, protected jobs market

At the same time, the forceful monetary and fiscal policy responses to this crisis have moderated the degree of deterioration in sovereign creditworthiness near term. Countermeasures have put a floor beneath the economy, maintained low interest rates for many public sector borrowers and transferred significant sovereign debt from private sector balance sheets to central banks, in addition to forestalling sovereign liquidity crises. This explains the only modest downward rating actions we have taken so far in this crisis.

In the euro area, we have revised the Outlook on ratings for Italy (BBB+), Slovakia (A+) and Spain (A-) to Negative. Turkey lost its BB- ratings in July, when it was downgraded to B+.

The modest upward revision to Scope’s 2020 global baseline forecast to -4% mostly reflects somewhat more optimistic assessments of activity in the US (+1.5pps to -6%) and the euro area (+0.6pps to -8.5). Spain (-12%), France (-10.1%) and Italy (-9%) will nonetheless experience deep recessions this year, compared with a less drastic slump in Germany (-5.6%). Euro area unemployment has, however, not increased in line with the depth of output losses due to the exceptional policy action undertaken.

Outside the EU, the UK faces among the world’s deepest recessions with a contraction of 10.8% in 2020, including continued anticipation of a quarter-on-quarter contraction in Q4, though the UK could also see one of the sharpest recoveries next year, with growth of 8%. Scope expects milder recessions in Turkey (-1.4%) and Russia (-5.5%) this year than previously forecast.

For a look at all of today’s economic events, check out our economic calendar.

Giacomo Barisone is Managing Director of Sovereign and Public Sector ratings at Scope Ratings GmbH.

Global Economic Outlook 2020 Update: Gradual and Uneven Global Recovery; Significant Risks Still on Horizon

Download Scope’s Q3 2020 Sovereign Update (report)

Scope Ratings’ latest baseline scenario embeds a renewed increase in Covid-19 infections in the second half of 2020 in advanced economies, but one that is “manageable” in most such nations. Renewed virus transmission does not halt economic recovery but forces it onto a more gradual and uneven trajectory.

Only a selective second round of economic restrictions is imposed; more intensive in countries such as the United States or the United Kingdom. This scenario is similar to a check mark- or wing-shaped global recovery with a decelerating recovery slope after the speedy pick-up in activity of recent months.

“The implications of this crisis more broadly for the creditworthiness of sovereign states link significantly to the activation of monetary and fiscal policy responses,” said Dr Giacomo Barisone, head of sovereign ratings at Scope Ratings. “These raise debt ratios longer term, could increase moral hazard and weaken government balance sheets. Higher unemployment, non-performing loan ratios and private sector default instances weaken private and banking sector resiliencies – especially under our stressed scenario.”

“However, central bank actions continue to transfer a significant share of new public debt to monetary authorities – momentarily at least easing the scale of sovereign liquidity or solvency risk from the standpoint of private sector creditors,” Barisone says. “Weakened reserve coverage ratios and FX instability are additional risks to emerging market issuers.”

Sharp 2020 contractions globally; 2021 recovery speeds vary

Under the rating agency’s baseline economic scenario, the euro area (EA) economy contracts sharply – by 9.1% in 2020, led by deep recessions in Spain (-12.5%), France (-11.0%) and Italy (-10.0%), with a more moderate growth decline in Germany (-5.5%). Of the four largest euro area member economies, expected 2021 recoveries range from 3.2% in Germany to 7.5% with Italy.

The UK, the US and Japan also see significant contractions in activity in 2020 (-10.4%, -7.5% and -6.0%, respectively), with recoveries of 8.8%, 6.0% and 3.0% in 2021. China sees its weakest economic growth since 1976 of 1.3% in 2020, while Russia’s and Turkey’s economies contract by 6.8% and 4.2% respectively.

A stressed scenario assumes fresh lockdown in H2 2020

In a stressed scenario, there is a second round of coronavirus cases and non-essential economic activity in Europe and the US by Q3 or Q4 2020, forcing countries to reimpose highly disruptive full or partial lockdowns – leading to a double-dip economic contraction extending into prolonged economic weaknesses in 2021.

This stressed case is akin to a W-shaped recovery with, on top, severely weakened economic conditions in 2021. The stressed scenario sees global growth contract by 7.3%, with the EA seeing growth decline by 12.7% and the US by 12%. China experiences near zero growth. Under the stressed scenario, 2021 economic recoveries are more moderate.

“There is both upside and downside risk to Scope’s economic baseline, however,” said Barisone. “A more robust-than-anticipated release of pent-up demand supported by extraordinary fiscal and monetary stimulus and/or better than anticipated Q2 2020 GDP could present upside growth potential. Conversely, downside growth risks include those under the stressed case or any reversal in inflated global asset markets, crystallisation of corporate debt risks or intensification of global trade tensions.”

For a look at all of today’s economic events, check out our economic calendar.

Giacomo Barisone is Managing Director in Public Finance at Scope Ratings GmbH.

Central and Eastern Europe: Covid-19 Shock Triggers Deep Recession

Scope Ratings says that, with the euro area economy set to contract by about -6.5% in 2020 under a baseline scenario (and -11.5% in a severe scenario), EU-member CEE countries will also slide into deep recession this year. In the rest of the emerging Europe region, Russia faces the additional impact from lower-for-longer oil prices.

Turkey is vulnerable to the present global financial market turmoil. This relates to high volatility in FX and bond markets, which is likely to remain so over the duration of Covid-19 lockdowns, reflecting crisis impacts on global risk aversion. CDS and bond yield spreads in CEE widened markedly in mid-March before narrowing again in some cases more recently.

Varying magnitudes of economic contraction and sovereign ratings implications

The magnitude of this year’s contraction will vary from country to country, but the economic impact of the pandemic alongside higher spending needs will sharply widen budget deficits and push levels of public debt back towards 2014 levels for most CEE governments.

How severe the impact turns out to depend on how quickly and durably lockdowns in CEE economies as well as in western Europe can be relaxed, how effective the monetary and fiscal response to the crisis proves, and how fast an economic recovery takes hold later on in Q2 and through the second half of the year.

“The current situation is exceptional for CEE countries on four fronts,” says Giacomo Barisone, head of sovereign ratings at Scope. “The countries face: i) an unprecedented supply and demand shock to services sectors; ii) the adverse impact of global supply-chain disruptions and temporary suspensions of critical regional car industries; iii) renewed volatility in capital and currency markets; and iv) a collapse in oil prices, meaningful especially for Russia,” Barisone says.

Cyclical implications of the crisis relate to risks linked to rising unemployment, corporate defaults, borrowing rates, and FX and banking sector risks. Structural implications correspond to monetary and fiscal policy responses being deployed – which raise debt ratios longer-term and weaken the private sector and government balance sheets.

Sharp economic contractions in EU member states of CEE

In Scope’s baseline scenario, output in Poland and Hungary will contract by around 4% in 2020. In Poland, an important factor is the high share of temporary employment and self-employed, each around 17% of total employment, with these agents usually having limited cash buffers and are thus more exposed in times of economic distress. In contrast, Hungary has one of the highest exposures to global value chains among CEE countries, which constitutes a key risk in times of global economic turmoil.

Under the baseline scenario, Scope forecasts that output will contract by around 5.5% in the Czech Republic and Slovakia, given reliance on car industries, which account for 10% and 13% of their GDP, respectively, and by almost 7% in Slovenia, which has high goods trade with a severely weakened Italian economy. Romania’s economy will contract by around 4.3%, with limited room for fiscal stimulus, given the country’s already elevated budget deficits.

Bulgaria’s output will shrink by 4.6% this year. Croatia’s economy will be heavily hit – with a projected contraction of almost 7.5% in 2020 – given its dependence on travel and tourism, which contribute around a quarter of GDP (indirect activities linked to the sectors included). The small, open economies of the Baltic states will shrink by over 6% each.

Deep contractions in the rest of emerging Europe

For Russia, Scope has revised a baseline growth projection to around -5% in 2020, accounting for the recent oil price collapse, with Brent crude oil prices now trading around USD 20 a barrel at time of writing even after OPEC+’s 10m barrels a day output cut decision.

Scope anticipates a GDP contraction of 5% in 2020 in Turkey, revised down from an earlier estimate of about -1% in 2020. Turkey’s external sector weakness, including significant FX debt exposure and high external debt outstanding, increases its sensitivity to any extended period of global economic weakness and/or “risk-off” market conditions. Lastly, Georgia’s externally-exposed economy may contract over 3% in 2020.

Risks to baseline assumptions remain skewed to the downside as growth in CEE could be weaker if the economic shock from the Covid-19 crisis endures longer.

Read more in the rating agency’s Q2 2020 CEE Sovereign Update.

Giacomo Barisone is Managing Director in Public Finance at Scope Ratings GmbH.

Covid-19 Pandemic Creates High Risks, Triggers Deep Global Recession

2020’s global recession will be deeper than even that seen in the global financial crisis trough of 2009 when world output contracted by 0.1%, says Scope Ratings. For more detail, see Scope’s Q2 2020 Sovereign Update: Covid-19 pandemic’s economic impact: significant risk as the world economy falls into recession.

None of the world’s largest economies will escape the pandemic’s macro-economic and financial-sector impact. We forecast an economic contraction of around 6.5% for the euro area in 2020, with the steepest declines in Spain (around 8%) and Italy (around 7.5%) with Germany’s economy shrinking 5.2% and France’s by 6.3%. China grows only 4%, while the United States contracts around 3.5% and Japan’s GDP recedes 4%.

Double impact on sovereign ratings

“The pandemic-linked recession will have a double impact on sovereign credit ratings,” says Giacomo Barisone, head of public finance at Scope.

“The cyclical implications of this crisis relate to the severity and duration of the downturn in the near-term with risks linked to rising non-performing loans, unemployment and corporate defaults,” Barisone says.

“Structural implications correspond to the extraordinary mobilisation of monetary and fiscal policies to respond to the economic impact of the health crisis, which will raise debt ratios longer-term and structurally weaken private sector as well as government balance sheets,” he says.

Higher borrowing rates and currency depreciation are further rating-relevant risks.

Countries most exposed include: China (rated A+/Negative), Japan (A+/Stable), Italy (BBB+/Stable), Spain (A-/Stable), and Turkey (BB-/Negative).

Assumptions in baseline forecasts

“We have made several assumptions, including the prospect that, in China, the outbreak stays fairly contained after end-March, while in Europe and the US, there is momentary but marked slowing of infections by end-Q2,” Barisone says. Scope assumes an associated gradual lifting of containment measures during Q2 and entering Q3.

“Our baseline forecasts reflect, moreover, the assumption that economic output among most developed economies declines sharply over Q1 and Q2 and gradually recovers starting in Q3, with the strength and durability of this recovery subject to risk in the second half of the year and depending on the country,” Barisone says.

Thirdly, the recovery in China, where the coronavirus outbreak started, and the country that plays such a crucial role in global supply chains, will precede those in the US and Europe, with the latter economies beginning to recover after a delay.

“The recovery, when it does take place, will reflect the pandemic’s longer-lasting impact on supply chains and sentiment and the impact of potential further waves of coronavirus infection, which is why we see neither a dramatic V-shaped turnaround nor a prolonged L-shaped slump,” says Barisone.

Risks to baseline outlook

“That said, we cannot ignore downside risks to our economic baseline,” Barisone says.

In one stress case scenario, assuming lockdowns and quarantine policies are extended significantly in western economies to the end of Q3 2020, global growth would contract an unprecedented 3.5%, with a 11.5% decline in the euro area and 8.0% drop in the US economy. China would experience its slowest growth since 1976 of about 2%.

Giacomo Barisone is Managing Director in Public Finance at Scope Ratings GmbH.

Exceptional Circumstances Demand Exceptional Action: Scope on Europe’s Covid-19 Crisis Response

Below is an interview with Giacomo Barisone, managing director in sovereign ratings at Scope Ratings.

Are European governments’ responses to the coronavirus crisis the right ones?

Governments in Europe have realised the gravity of the circumstances and are enacting two types of policies: i) containment measures to respond to and mitigate the public health crisis and ii) policies to reduce the economic impact of the crisis.

Tough containment measures are negative for near-term growth, but assuming that they achieve desired ends of slowing transmission – as they have in parts of the world like China and Taiwan – they support prospects of gradually “flattening the curve” of infection rates: that is, ensuring a slower rate of transmission and thus, lowering the strain on hospital capacity and fatalities.

Assuming the containment measures slow the coronavirus’ transmission in the coming months in the northern hemisphere, a focus by governments on alleviating the impact of the crisis on businesses and households is key.

In this context, action by national governments and the European Commission, including liquidity guarantees and targeted support to groups most likely to suffer from the effects of the pandemic – such as the self-employed and small businesses – are what is needed at this stage.

Banks are unlikely to extend loans to businesses that have now become riskier owing to limited cash flows. Tough containment and economic- and liquidity-support measures could abet a very gradual recovery, hopefully starting in H2 2020. However, risks of continued transmission of the virus and/or a new wave in the fall or winter could still have an impact in H2 2020.

What do you think of the ECB’s announcements so far including the ECB’s new emergency package?

The ECB delivered last week a well-designed package of emergency measures to counter the shock, including attractively priced liquidity to the banking system and additional asset purchases to ease significant market anxiety.

The new Pandemic Emergency Purchase Programme (PEPP) of EUR 750bn of new purchases of public- and private-sector securities extending to at least the end of 2020 implies cumulative new asset purchases of almost EUR 1trn when combined with the package announced earlier in March.

Importantly, the ECB is giving itself more room for manoeuvre by conducting securities purchases under this programme with greater flexibility with regards to time and across asset classes and jurisdictions, including a waiver that allows for the purchase of Greek securities.

In addition, the ECB Banking Supervision agreed to temporary capital and operational relief for euro area banks, which should mitigate pro-cyclical, unintended consequences.

This ECB decision also allows for consideration of public-sector issuer limit changes and de facto activation of Outright Monetary Transactions without conditionality via facilitation of the front-loading of purchases for certain countries. The action also underscores authorities’ commitments to avoid the Covid-19 economic shock deepening the existing financial crisis, which could, if left unchecked, exacerbate the overall economic dislocation caused by the pandemic.

What is the impact on Europe’s economic outlook?

We expect a strong downward revision to growth in H1 2020.

Prior to the outbreak of the COVID-19 crisis, we expected moderate euro area growth of just above 1% for 2020. Now, depending on the duration of the lockdowns, the economic impact will be severe. On average, in line with a recent ECB update, we assume for now a 1.5 to 2.0pp decline in growth for each month a country is in lockdown, which for the euro area implies deeply negative growth for 2020.

Will the containment, fiscal and monetary policy response be enough?

This is too soon to tell.

The key for overcoming this crisis is to slow the transmission of the virus until ultimately immunisation treatment is available for public use (hopefully by 2021). The earlier containment measures work, the sooner they can be relaxed in gradual phases, bringing businesses and households back towards normality. In this context, the national and European policy responses are now accelerating and in the right direction.

Will countries breach the European fiscal rules?

No. The Stability and Growth Pact allows for deviations from the 3% fiscal deficit rule under exceptional circumstances and the European Commission has indicated leniency in this regard at least for the year 2020.

Therefore, even if countries’ 2020 deficit figures break beyond 3%, which may be the case for Italy (BBB+/Stable), France (AA/Stable) and Spain (A-/Stable) among others, member states would still be compliant with budget rules as these have been suspended under a “general escape clause” for 2020.

Does this crisis put sovereign ratings for countries at risk?

Our focus in the current environment will be on assessing whether temporary and urgent fiscal measures enacted by governments to counter the public health emergency will have implications that persist over the medium-run as well.

At this stage, the prospect of one-off 2020 fiscal deficits closer to or above 3% of GDP in 2020 is not in and of itself a reason to downgrade a sovereign’s credit ratings. The size and potential longevity of the current simultaneous demand and supply shock induced by the crisis warrant a significant fiscal effort to mitigate the economic impact.

The pandemic is an external shock that will ultimately hit most countries of the world, albeit to varying degrees depending on the effectiveness of containment actions, hospital capacity, policy responses as well as economic structures and fiscal resilience.

COVID-19 is exacerbating risks especially for countries already experiencing low growth and/or those with elevated debt ratios, external vulnerabilities and/or financial system fragilities. Countries whose sovereign ratings might be more likely to be affected include China (A+/Negative), Japan (A+/Stable), Italy (BBB+/Stable) and Turkey (BB-/Negative).

Giacomo Barisone is Managing Director in Public Finance at Scope Ratings GmbH.