MACRO AND MARKETS, DOSSIER COVID-19
2020: Riding a Covid-coaster year
17 December 2020
As an extraordinary year draws to a close, flow take a look at 2020’s economic ups, downs, reverses from and accelerations towards any form of “normality” with thanks to our colleagues in Deutsche Bank Research
Even before the pandemic took hold, analysts had expressed concerns about low developed market structural growth, negative yields and rates, and record levels of global debt – all of which look set to get worse once Covid-19 ends and the temporary fillip of economic bounce backs wears off. Deutsche Bank’s Head of Fundamental Strategy and Thematic Research Jim Reid prefaces his December 2020 Chartbook with a reminder that while we will worry about the global cost of the pandemic “one day”, 2021 will see “strong growth snap back and pent-up euphoria”.
He explains how the Covid economic shock grew to become a more global recessionary event than the Global Financial Crisis (GFC) with some 165 countries going into recession during 2020.
This article picks out some of the underlying themes of 2020 and provides suggestions of further reading in flow content published through the year.
Asset class trends
When looking right across asset classes for 2020, Reid notes, “equities have seen divergence but considering the shock have performed remarkably well… ‘safe havens’ such as gold and sovereign debt have also performed well in 2020…” (see Figure 1). Going into 2021, he and the team forecast a weakening dollar and tighter credit spreads as uncertainty declines. “There’s a good chance that the combination of improving fundamentals and unwavering stimulus will lead spreads to “overshoot” and push towards cyclical tights around midyear”. They add “We may see a small correction in H2 2021 as markets look towards the second year of recovery, when stimulus is likely to be pared back.”
Figure 1: Returns* per asset class YTD 2020
Note: (*) Total return accounts for both income (interest or dividends) and capital appreciation. (**) FX, Commodities are spot returns. Returns as of Nov 30, 2020.
Source: Bloomberg Finance LP, Deutsche Bank Research
The observation on the reliability of gold was echoed by Deutsche Bank Metals Analyst Nicholas Snowdon in his February 2020 Trade Finance TV appearance, A golden safe haven, just before most lock-downs had started. “Geopolitical events support safe haven buying and this creates a strong environment for gold investor demand,” he explained. And the extraordinary negative plunge of Brent Crude was something we examined more closely in April in our article Covid-19 and commodities, which highlighted how at one point on 20 April the May contract for West Texas Intermediate (WTI), the US oil benchmark, which had started the day at US$17.85/bbl, traded at –US$39.55/bbl and remained in negative territory for around six hours before recovering to US$1.43 the next morning.
As for 2021, “We see upside risks to our forecast (Brent USD 45/bbl in H1, USD 50/bbl in H2), with potentially little to stand in the way before Brent US$ 60/bbl in 2021,” the team notes.
Debt mountains and inflation
During the year, Reid and his colleagues tracked the cost of government bail-outs and fiscal stimuli, comparing this with the spike of debt that followed the Global Financial Crisis (GFC). “Debt has exploded everywhere in 2020 even if design and size of fiscal response to Covid-19 has been very different,” notes Reid (see Figure 2).
Figure 2: Fiscal measures announced in G20 countries up to September 2020…
Note: data as of Sep 11, 2020
Source: IMF, Deutsche Bank
In our flow article Covid-19 and Inflation, Reid observes, “Most bailouts before the GFC tended to be less than US$10bn in today’s inflation adjusted terms. The [1986-95] savings and loan (S&L) crisis (US$293bn in 2020 inflation-adjusted terms) and  Peso (US$93bn) crises saw higher numbers but still relatively small for more recent times. The GFC moved us from ten billion being a big number to a trillion being the new bail-out currency. This Covid-19 crisis has moved us towards ten trillion plus being the bailout currency globally.” By the end of 2020, he pronounces that global developed market government debt is likely to be the highest on record (see Figure 3).
Figure 3: Historical median Debt/GDP for a sample of advanced economies, along with the IMF's forecasts for the advanced economies
Note: US, Netherlands, France, Great Britain, Italy, Australia and Sweden included from 1865, Germany from 1869, Canada from 1870, Japan from 1875, Switzerland from 1880. Germany without data 1915-24 and 1939- 49, France from 1915-19, Netherlands from 1942-47
Source : GFD, IMF, Haver Analytics, Deutsche Bank
“Will a post-Covid world see inflation or will we revert to pre-Covid norms?” asks Reid; a question reprised by The Economist in its leader of 12 December where it makes the point, “Even a small probability of having to deal with a surge in inflation is worrying, because the stock of debt is so large and central-bank balance-sheets are swollen. Rather than ignore the risk, governments should take action now to insure themselves against it.”1 In their more in-depth article, “A surge in inflation looks unlikely”, the newspaper identifies the main factors at play on what will shape the outcome: “the after-effects of the stimulus measures taken by governments to cope with the pandemic; demographic shifts; and changes in policymakers’ attitudes towards the economy”.2
So the overall view of whether we are heading for inflation or deflation as discussed in the 20 May flow article is unchanged seven months on. “The new normal will be somewhere between the extremes of Zimbabwe (galloping inflation) or Japan (deflation). It just depends on which balm economies apply to the pandemic scar tissue as to where on the spectrum between the two extremes that might be.”
As outlined in our flow article, Changing course on Capitol Hill? (November)3, the formal vote of the US Electoral College for Joe Biden as President took place on 14 December. “There were no “faithless electors”, or those that ignore the popular vote of their state’s citizens. This codified Mr Biden as President-elect with a vote of 306 to 232,” reported Reid on 15 December in his Early Morning Reid bulletin. “Now the next step will be for Congress to tally the Electoral College votes in a joint session on January 6th with Vice President Mike Pence presiding. While some Republican House-members have indicated they will object to the count, enough Senate Republicans have recognised Joe Biden as the President-elect for it not to matter,” he added.
“Turnout was the highest in over a century, with estimates pointing to 66.9%. Biden’s 51.1% - 47.1% popular vote lead is likely to be larger than that seen in both 2016 and 2012 when certified, and is in fact the second largest of the 21st century, with only Obama’s 2008 victory seeing a more decisive margin,” reflects Reid. He reminds us that “Biden’s cabinet picks may come under scrutiny in the Senate, since all appointments are subject to a confirmation vote.” Treasury Secretary nominee is former Federal Reserve Chair Janet Yellen. “Confirmation by the Senate is unlikely to be an issue for Yellen, since she previously won Senate confirmation as Fed Chair in 2014, with 11 Republican senators voting in support,” indicates Reid.
"The vaccine news is incredibly positive"
The vaccine news is incredibly positive,” declares Reid with Pfizer/BioNTech, Moderna and AstraZeneca have all having shown much higher efficacy than the average flu vaccine and ranking alongside the best. However while developed markets have a diversified vaccine portfolio, emerging markets are relying on AstraZeneca/Oxford and China’s vaccines, he notes.
In the flow article, Climbing out of Covid: Nearly there? (19 November), he points out that return to any form of post-pandemic “normality” depends on how quickly society’s most vulnerable groups can be vaccinated. In terms of the G10 economies, they should clear the herd immunity threshold by the summer of 2021 “if all goes well”, he adds.
Figure 4: G10 economies should clear the herd immunity threshold by the summer of 2021
Deutsche Bank (Robin Winkler), Haver Analytics, World Bank, company sources
As for expected take-up, this is still patchy across age groups. “The older UK and German populations are more prepared to take a vaccine. More work is needed elsewhere…,” observes Reid. In the flow article, Race for a vaccine (September) he notes the issue of indemnity from future liability claims has been “a tricky point in supply negotiations with the European Commission’s Directorate-General for Health and Food Safety”, and might have something to do with any lingering reluctance of certain groups to take the vaccine.
In the monthly dbDIG Survey for December 2021 covering 984 market professionals across the world, nearly half of the respondents (48%) said they would readily volunteer for a jab within one month of an approved vaccine being made available to them. Reid calls this “a decent rate”.
When the same group was asked when they expect to be vaccinated, taking into account potential availability as well, only 11% expect to have done so by the end of Q1 2021, with just over half by the end of H1 and three-quarters by the end of Q3 next year. Just 4% of readers preferred not to get vaccinated “which is encouraging”, he concluded.
On a festive note, it was this group (so this is the demographic in question) that declared the worst possible Christmas present someone could get them was “a cheap bottle of alcohol followed by cheap confectionary. “Our readers have refined palates, only the best for them,” comments Reid.
Deutsche Bank Research reports referenced
Early Morning Reid: December 2020 Research results (14 December 2020)
Monthly Chartbook: 2021 Outlook – forget large longer term worries for now by Jim Reid (December 2020)
1 See https://econ.st/388hd3h at economist.com
2 See https://econ.st/3oWE8p1 at economist.com
3 See Changing course on Capitol Hill? at flow.db.com
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