Euler Hermes: Seven key obstacles to an economic recovery after the Covid-19 crisis

  • Global GDP growth of 5.1% is expected for 2021
  • Excess savings from households boost consumer spending by + 1.5% of GDP in Europe and more than + 3% in the U.S.
  • Approximately 163 billion euros could be relocated to private consumption in the euro area
  • Global trade will grow by 7.9% in 2021 in terms of volume


The global recovery is on the right track albeit conditional on key differentiating elements across countries. Global GDP is expected to rebound by +5.1% in 2021, with one fourth of the recovery being driven by the US, while China should con-tribute less to growth by progressively adopting a less accommodative economic policy. In 2022, world GDP growth should reach +4.0%. Europe should recover its Covid-19 losses only at this horizon against H2 2021 for the US. The race to recovery will hinge on seven key obstacles.

A first obstacle is the race for vaccination. Execution risks will remain a key differentiator between countries, with the pace of vaccination campaigns driving a multi-speed recovery and keeping divergence at high levels. At the current pace of vaccination, the US and the UK will reach herd immunity in May. While Europe should be able to vaccinate its vulnerable population by the summer, herd immunity is not likely to be reached before the fall at the current pace. On the other hand, most governments are speeding up the vaccination pace to reach herd immunity during the summer.

Excess savings will still hover around 40% above pre-crisis levels at end-2021. In a relatively optimistic scenario, excess savings from households should provide a tailwind to consumer spending to the tune of +1.5% of GDP in Europe and more than +3% in the US in 2021. Close to the same amount could be added on top for investment or consumption abroad purposes should confidence effects play a positive role. We calculate that around EUR163bn could be transformed into private consumption in the Eurozone, equivalent to 30% of the Covid-19 excess savings. However, in the US, we expect 50% of the current excess savings to be spent in 2021 as an earlier loosening of restrictions and more powerful fiscal impulses should boost the confidence effect. The US household savings rate should be back to a normal level at close to 7% of gross disposable in-come at end-2021.

Even in these conditions, the phasing out of assistance mechanisms is not a zero-sum game, and the risk of political mistakes still remains high. In China, the path towards a policy normalization has already started, with official targets implying a clear withdrawal of policy support in 2021, even if some flexibility will be kept to manage credit risk if need-ed. The global demand torch will pass to the US, with its gigantic USD1.9trn fiscal stimulus (9% of GDP) and a new gigantic infrastructure plan to come. Europe’s fiscal response pales in comparison: the Next Generation (NGEU) fund will only extend a helping hand from H2 2021 onwards and the growth impact (a cumulative +1.5pp until 2025) should prove moderate and delayed, given its focus on the supply side – 2/3 of the EUR313bn grants are likely to be used for investment – and drawn-out payments. It will be difficult to operate a smooth phasing out of job retention schemes, transfers to the most impacted sectors and public credit guarantees, without adding to difficulties of non-financial companies. Corporate bond redemptions will increase by more than 70% in 2022 and double in the US.

US President Joe Biden’s “Build Back Better” plan (with a potential of $ 2.3 billion), the Next Generation fund of 725 billion euros and China’s infrastructure plan worth more than $ 1.5 billion will contribute to 2025 to support the demand and growth potential of the global economy in the medium term. However, the effects of investments compared to the effects of foreclosure on investments are not yet resolved. Success depends on the ability of governments to stimulate the private sector and direct excess savings to productive projects. In the USA, Germany, France and the United Kingdom, a positive impact of excess savings on investment can be observed. In the future, however, much of it will depend on fiscal policies and funding conditions.

Global supply chain bottlenecks are expected to push global trade into recession in the second quarter of this year. It will increase by 7.9% in 2021 in terms of volume, but excluding the positive effects of carry-over from 2020 to + 5.4%. Moreover, a temporary slowdown is expected in the second quarter of 2021 due to the predominant supply chain disruption. During 2021, the impact of supply chain disruptions will make its mark on the growth of global trade by a decrease of -1.7pp. In addition, trade in services will remain affected by the delayed reopening of sectors affected by Covid-19 restrictions and ongoing barriers to cross-border travel.

A temporary overshoot of inflation may be due to the temporary base effects. Due to the reduced dynamics of demand: excess savings from households and non-financial companies acting as a barrier to money; Persistent production gaps due to lower capacity utilization and rising unemployment rates, the power to set companies’ prices will likely remain limited. Central banks will not organize a policy change in response to the temporary overcoming of inflation in the U.S. (3.5%) by mid – 2021.

Risky assets are operating under the assumption that what is good for them – unconventional monetary policy and fiscal profligacy – is necessarily good for the real economy, which will ultimately validate their optimism. For the time being, however, what we see is a widening divergence between asset prices and their underlying value. Amplified by various investment management techniques (ETFs, risk-parity) that put asset allocation on automatic pilot, this divergence is a vulnerability. An inadvertent escalation in geopolitical tensions between the US and China, surging inflation that wrong-foots the subdued inflation expectations held by central banks or nationalistic impulses prevailing over the common good in Europe are all exogenous triggers that could put its widening in reverse. But exogenous sources of risk are always easier to identify than endogenous ones: the danger is more likely to come from within capital markets. As shown by the rise of options trading and margin debt, leveraged investing is pervasive, and so is the confusion about liquidity: especially in capital markets, the velocity of money (the flow of liquidity) is far more volatile than its quantity (the stock of liquidity). In the presence of leverage and overtrading, risk-taking is prone to running amok and even a minor shock to confidence can lead to a sudden drying up of liquidity, forced liquidations and/or default.


The situation in Central and Eastern Europe


In the Emerging Europe region as a whole, annual real GDP growth is fore-cast to recover to +3.7% in 2021 (from -2.7% in 2020), followed by +3.4% in 2022. Third waves of Covid-19 infections are underway, especially in Central Europe, and lockdown measures have been raised to relatively stringent levels in the major economies towards the end of Q1 2021, except for Russia. Since the progress on vaccination is slow, we expect the lockdown measures to be relaxed only gradually in the course of Q2, pushing the recovery of Covid-19-sensitive services sectors to H2 2021. Accordingly, consumer sentiment has remained subdued.

“GDP growth of 3.8% estimated by the European Commission for Romania in 2021 is also related to inflation of 2.6%, with a smoother evolution in 2022 to 2.4%. As usual, the Government’s growth forecast is higher (+ 4.3%), but this time, even the IMF seems much more optimistic, recently advancing a + 6% forecast with increased inflation at 2.8%. Achieving these growth goals of course depends on the efficiency and speed of the vaccination campaign, which seems to have slowed down from the start. The NBR’s Consumer Price Index projections are also around the 3% level with a significant margin of error. A slight rise in inflation – now supported by rising fuel, electricity and gas prices – would not necessarily be a bad thing for the economy if it does not deviate significantly over the long-term target of 2.5% over the long term. Less favorable is the return of the current account deficit to pre-pandemic levels in the face of a budget deficit already at a very high level of almost 10% of GDP in 2020. Even in the conditions of adjusting this deficit to the proposed 7-7.5% target by the end of this year, invoking inflation as a motive for financing rising debt is not a sustainable goal. Romania cannot afford for a long time a budget deficit over 3-4%, inflation in excess of the European average and a currency in continuous depreciation in the perspective of joining the Economic and Monetary Union, ” said Mihai Chipirliu, CFA – Risk Director Euler Hermes Romania.

However, the outlook for the industrial sector is fairly positive as reflected in solid growth rates and manufacturing PMIs. Occasional supply-chain disruptions will make the recovery bumpy but not affect the full-year performance. Meanwhile, accommodative monetary and fiscal policy will continue to support most economies over the next two years or so. Ukraine and Russia, however, have already began a monetary tightening cycle as inflation exceeded central bank targets but we expect policies to remain credible. The same cannot be said for Turkey, which fired its central bank governor in March after six months of appropriate interest rate hikes that had calmed financial markets. Turkey will most likely revert to its known unorthodox monetary policy style, which could maneuver the economy once again close to the next currency crisis.

We also identify Hungary, Romania, and to a lesser extent Poland and Czechia, as facing increased inflationary pressures in the next two years, though rising unemployment should moderate wage growth and mitigate these pressures in 2021 at least. Fiscal policy leeway is diverse amid rising public debt levels. Czechia and Poland are stimulating their economies the most, while elevated public debt in Croatia, Hungary, Romania and Ukraine require close monitoring.



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