As the first half of 2021 comes to an end, the global economy is recovering strongly from its sharp decline last year caused by the COVID-19 pandemic. While the disease continues to surge in some countries, particularly those with a slow pace of vaccination, and the Delta variant of COVID proves to be a dangerous threat, global case numbers have declined. Overall global economic growth appears likely to average over 6% this year and to maintain a still-strong advance of almost 5% in 2022, significantly above long-run trend rates of growth.
International equity markets followed the US market in continuing the recovery that began last year, with the MSCI All Country ex US Index, ACWI ex USA, registering a total return 6.38% gain in the three months through June 28th and a 10.0% gain year-to-date. While concerns about a re-emergence of inflation and the likely timing of moves to less accommodative economic policies have caused some modest corrections, the strength of the economic recovery, healthy growth in profits, and the continuation of very low interest rates and fiscal stimulus have sustained the boom in equity markets.
Regional economic growth differences during the first half reflect differences in the spread of the pandemic and policy responses to it. China and its East Asian neighbors were the first to be hit by COVID, and their governments and citizens responded rapidly and effectively to take corrective measures. Shutdowns and restrictions caused a steep drop in economic activity last year, followed by a rapid recovery when these measures were relaxed. The Chinese economy’s early return to vigorous expansion boosted other economies in the region, including those of Taiwan and South Korea. Even with the moderation evident in recent economic indicators, the Chinese economy looks likely to advance by close to 9% this year. The economies of Taiwan and South Korea are also looking robust, propelled by the continued global boom in technology. Both countries have been relatively successful in checking second waves of COVID cases. India’s prospects had also looked bright, but the country’s ongoing second wave of COVID, with most new cases being of the Delta variant, and the slow pace of vaccination threaten future economic performance. Indonesia has also had to impose new restrictions as COVID cases rise.
Some Asian equity markets have been able to continue their strong performance of last year. Taiwan stocks continue to rise with the boom in technology, with the Taiwan stock index up 20.5% year-to-date as of June 30. Similarly, South Korea’s KOSPI Index gained 14.7% over this period. In contrast, China equities underperformed, with the Shanghai Index gaining just 3.4% over this period. Factors that contributed to that underperformance included some modest slowing in the still very strong growth in the Chinese economy, along with some stocks appearing to be heavily overbought, but government regulatory moves against the largest tech firms were a more important headwind. India’s equity market was little affected in the first half by the devastating resurgence of COVID in the country, with India’s Nifty Fifty Index gaining 12.2%.
European economies lagged Asia and North America in recovering from the economic impact of the pandemic and in implementing their vaccination programs but caught up substantially in the second quarter. As the first half ends, the latest economic indicators point to very strong growth momentum in Europe, despite some concerning new outbreaks of COVID. Manufacturing is leading the surge in economic activity, while the service sector is now recovering and catching up. Central banks are expected to continue very accommodative monetary policies for a long time. Trade relations with the US appear to be improving. The Eurozone economy is likely to grow at an above-trend rate of 4.3% this year and 4.6% in 2022. The United Kingdom, despite the negative effects on trade from Brexit, is like to register an 8% advance this year from last year’s steep decline, followed by a further 6% growth in 2022.
European equity markets are reflecting the very strong surge in economic activity and elevated investor optimism. The broad STOXX Europe 600 Index is up 13.5% year-to-date June 30. Outperforming markets in the region were Stockholm’s OMX 30 Index, 20.7%, France’s CAC Index, 17.2%, and Amsterdam’s AEX Index, 16.8%. Germany’s DAX Index gained 13.2%, while London’s FTSE Index rose a more modest 8.9%.
The performance of other advanced economy markets varied, again reflecting differences in the impact of the pandemic. Canadian stocks were helped by the economic recovery in the US and by strong energy and commodity markets, with the TSX COMP Index gaining 15.7 %. In contrast, Japan’s extended state of emergency and its slow vaccine rollout, which lagged far behind those of its advanced economy peers, are having an impact on the needed, consumption-based recovery of the economy. The Nikkei Index declined 1.3% over the three-month period ending June 30 and is up only 4.9% year-to-date. Australia’s economy and its equity markets had been doing well for much of the first half with the country’s relatively good record of limiting COVID. This has now changed with disturbing outbreaks of the Delta variant of COVID spreading in a country where only about 14% of the population has been vaccinated. As this commentary is written, half of the population in now under lockdown. Australia’s 11.0% equity market gain in the first half of 2021, as measured by the S&P ASX 200 Index, may be difficult to maintain despite an expected rebound in business investment.
Bill Witherell
Chief Global Economist
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Sources: Oxford Economics, Financial Times, Action Economics, cnbc.com, etf.com
