In the first quarter, the global economy continued to recover from the steep losses of a year ago, but at a weaker pace as a result of still high COVID-19 cases and slow starts to vaccinations in many countries. The shape of the outlook for the global economy will be heavily affected by further developments in the COVID-19 pandemic and government responses, including restrictions on economic activity, the pace and breadth of vaccine rollouts, and monetary and fiscal policies.
While these factors differ among regions and countries, the broad outlook for the global economy beyond the very near term is for a marked acceleration in economic growth as restrictions begin to ease, vaccinations become more available, and strong fiscal stimulus and continued monetary ease fuel increased economic activity.
The US and Chinese economies will be the locomotives for this recovery, with China having already reached its pre-COVID-19 level of GDP and the US expected to do the same by the third quarter of this year, helped by its rapid vaccine rollout and massive fiscal stimulus. Other Asian economies that been relatively successful in dealing with the pandemic (Taiwan and South Korea), along with India, are also expected to fare very well.
Despite strong advances in the manufacturing sector in the first quarter, Europe is projected to have a slower recovery: Slow vaccination progress is delaying the easing of restrictions, and Europe’s fiscal stimulus is less front-loaded than that of the US. The services sector, which bears the brunt of the economic costs from the pandemic, accounts for some 77% of the Eurozone’s GDP. Eurozone GDP may not return to a pre-COVID level until next year. The United Kingdom suffered a severe recession in 2020 as it experienced Brexit uncertainty along with high levels of COVID-19 cases. This year, a successful vaccination rollout together with timely fiscal stimulus is leading to an earlier recovery than is expected on the continent.
Japan has been relatively successful in dealing with the pandemic. However, its vaccination progress has been very slow so far. While private sector business activity in Japan remained subdued in the first quarter, an anticipated acceleration in vaccinations and the lifting of COVID restrictions, along with supportive government policies, are expected to stimulate domestic demand and return the Japanese economy to a steady growth path of a little less than a 3% annual rate.
International equity markets will be affected by the above developments and outlooks. Recovering well from the steep market declines early last year, advanced-market stocks outside of the United States ended 2020 with a gain of 8.3%, as measured by the MSCI EAFA Index. Within that gain, national market performance varied widely, from the MSCI UK Index ending down by 10.4%, to the MSCI Germany Index gaining 12.3%, the MSCI Japan Index gaining 14.9%, and the MSCI Sweden Index gaining 24.4%.
The MSCI Emerging Market Index outperformed EAFE, ending 2020 up 18.7%. The gains were mainly in Asia, with the MSCI South Korea Index up 45.2%, MSCI Taiwan up 42.0%, and MSCI China gaining 29.7%. Latin America, on the other hand, has suffered badly from the pandemic, which is still raging there. Latin American stocks were still down at year end. The MSCI Brazil Index was down 18.9% for the year, and even MSCI Mexico ended down, at a minus 1.6%, despite benefiting from Mexico’s close ties to the US economy.
With the first quarter almost complete, the year-to-date March 22 international equity market returns show further modest gains in most markets, with the MSCI EFA Index up 4.3% and the MSCI Emerging Market Index up 3.8%. Among the advanced economies, Sweden is still outperforming, with the MSCI Sweden Index gaining a further 12.0%. The UK is gaining from a more positive outlook made possible by its vaccine rollout success, some well-designed support policies, and the end of the Brexit uncertainty. The MSCI UK Index has gained 6.6%, better than the 4.2% gain in the MSCI Germany Index, which reflects the surge in infections and slow vaccine rollout in that country. Among the emerging markets the high-flying South Korean and Chinese markets have experienced unsurprising adjustments, with the MSCI South Korea Index at 2.5% and the MSCI China Index at 3.6%. In contrast, the MSCI Taiwan Index has registered a further +9.3%, in part due to Taiwan’s predominant position in semiconductor production at a time when there is a global shortage. The MSCI Brazil Index has lost another 9.2%.
Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio
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Sources: Oxford Economics, Barclays Economic Research, Action Economics, Financial Times, Goldman Sachs Economic Research, etf.com, novelinvestor.com
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