08 December 2020
GDP takes a hit
2020 is drawing to a close, and with a host of vaccine developments in recent weeks, investors are beginning to look toward the shape of economic recovery that’s expected in 2021.
The OECD published its biannual economic outlook on countries around the world last week, which predicted that the UK will suffer more economic damage from COVID-19 than any other developed country. It predicts that GPD will be 6.4% lower at the end of 2021 than it was at the end of last year. In contrast, the OECD thinks that China will be 9.7% larger, while the US will have lost only 0.1%. It’s a sombre outlook, but UK stocks still hit their highest levels since March last week.
The fortunes of various retailers, meanwhile, revealed the effects of the pandemic on the economy. An earnings boost caused by being one of the few places allowed to stay open during lockdowns allowed some of the biggest supermarkets to pay back the huge sums of business rates relief given by the government this year. ‘Non-essential’ shops however have suffered after being forced to shut – last week, 242-year-old retailer Debenhams has said it will close soon, and Topshop owner Arcadia has also gone into administration. A ray of hope for Debenhams emerged over the weekend when it came to light that Frasers Group tycoon Mike Ashley was in talks with them about a potential rescue deal.
Oil prices soar
After oil-producing countries agreed to boost supply from January next year, oil prices hit their highest level since March – something that can be interpreted as a sign of confidence in a world economic rebound in 2021. The production boost is less than previously agreed however, making this optimistic outlook one of caution too amid oil producers.
Brexit negotiations enter their final stages
At the time of writing on Monday morning, Brexit negotiations were in their final stage. With very little time to find a compromise before the UK’s transition period ends, and no agreement reached over the weekend, an announcement is likely to be made this week. If talks fall apart, the pound could drop given that markets appear to be expecting a deal. As Capital Economics notes, however, the differences between Brexit deal and no deal aren’t as big as they were given the UK’s pursuit of a fairly ‘hard’ Brexit already.
What will 2021 hold?
Forecasters are now trying to sketch the path to recovery in 2021 – no mean feat given the tumultuous year we’ve all had. Will we see a repeat of 2008’s sluggish return to normality? Or will we see quick bounce-backs for the world’s economies once the virus has been brought under control?
“This is not 2008 – it couldn’t be more different,” said Jeffrey Cleveland, Chief Economist at Payden & Rygel, Co-manager of the St. James’s Place Diversified Bond fund.
Economic recovery in 2021 may be livelier than the one that followed the 2008 financial crisis for a few reasons, according to Cleveland. Firstly, this recession has been led by the services sector, which is poised to make a comeback in 2021. There has also been far more fiscal stimulus from governments this time around, and recent data shows that consumers are spending more freely than they did after 2008, and, due to lockdowns, are also sitting on savings that they are ready to spend once they can.
US stocks reaching fresh highs last week indicate optimism among investors, but it is important to be reminded not to be swept up in it. As there’s already been a remarkable rally this year, the reality of distributing and administering vaccines may cause a market slowdown in 2021, according to Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.
This may in turn lower investment returns, he added:
“Looking at how far markets have travelled this year, it feels like investors have been eating a ‘substantial meal’ in 2020…maybe 2021 will resemble more of a ‘Scotch egg’.”
Just as 2020 was a lesson in the importance of investors not reacting to short term volatility, so they should also be wary of the potential for a more positive outlook. As the saying goes, markets are always climbing a wall of worry.