(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own)
By Mike Dolan
LONDON, Jan 15 (Reuters) – There aren’t many years you can effectively write off economic growth forecasts for a quarter and leave markets unperturbed – but welcome to 2021.
Investors are once again training their sights beyond second and third waves of the pandemic even as they busily mark down first-quarter growth and earnings assumptions and cross their collective fingers and toes that often extremely hesitant vaccine rollouts do eventually work by midyear.
“It’s darkest before dawn” is the mantra from many economists and politicians but there’s more than a few nerves about just how dark and whether the light will be quite as bright as first thought.
On Wednesday, the World Health Organization warned that a second year of the pandemic “could even be tougher given the transmission dynamics”.
And with many of Europe’s biggest economies locking down hard again amid new waves and new strains of the virus over the new year period, the slow trajectory of mass vaccination through mid-year and beyond make the new dawn seem ever more distant.
Italy’s state of emergency looks set to persist into April, Germany is debating whether to keep stiff restrictions in place through the first quarter too, and in echoes of last March Britain has effectively shut down its economy again until at least mid February.
The worldwide death toll from COVID-19 is fast approaching 2 million with more than 90 million recorded cases of infection. Then there’s the virus variants from Britain, South Africa and now Brazil, reported to be far more contagious and spreading fast.
Even China – first in and out of the pandemic last year – is seeing a rise in new infections and shutting down selected cities and regions yet again this month.
For investment firms, optimism surrounding vaccines, post-election U.S. fiscal spending after a Democrat sweep of Congress and the White House and persistent central bank support foster long-running recovery bets despite the still raging, shape-shifting virus. World stocks and bonds remain at record highs.
But forecast downgrades for the first three months of the year are also coming thick and fast – even as faith in the coming ‘boom’ persists.
KEEPING THE FAITH
JPMorgan slashed Italy’s first quarter gross domestic product growth forecast to zero this week. It expects euro zone GDP to contract at a 1% annualized rate over the same period, with a whopping 9.5% contraction in Britain.
Deutsche Bank economist Sanjay Raja also saw a double-dip UK recession in Q1 of some 1.4% year-on-year and said that despite “light at the end of the tunnel” from the vaccine rollout, the recovery would be bumpy and further hampered by the realities of Brexit on trade and migration from Europe.
But it could get worse, he said.
“Given the emerging scale of the third wave, our initial expectations may be too optimistic,” Raja told clients, adding there could be additional downside of up to 2 percentage points.
“Should restrictions extend beyond mid-February, there will be a more pronounced impact on the growth outlook.”
Consensus forecasts for European annual corporate profit growth north of 40% for the first quarter look optimistic to say the least – even if that bounce is just shuffled to subsequent quarters.
New year gloom is partly offset by the fact that 2020’s global GDP outcome was not as bad as many initially feared and economists assume companies and consumers are coping better with restrictions this time around. Citi’s economic surprise index for the G10 major economies has been consistently positive since June and for emerging economies since August.
Germany’s economy managed to avoid shrinking in the fourth quarter despite new lockdowns, for example. And even though Commerzbank expects a Q1 contraction there, it’s sticking with full-year forecasts of about 4.5% growth.
Despite its dire Q1 predictions, JPMorgan only trimmed its full year forecasts for the euro zone to 5.5% from 5.8%.
The United States, distracted by politics for a couple of months, appears to have mainly avoided new lockdowns – even if mobility indicators dropped again in December, according to Barclays.
Faith in the coming boom seems almost unshakeable.
Goldman Sachs and Morgan Stanley stuck by their forecasts for a 6.4% rebound in world growth this year – more than compensating for the 3.7% slump in 2020 and both above the 5.3% median call by private forecasters.
“We expect the global economy to enter the next phase of its V-shaped recovery by reaching its pre-Covid-19 GDP path by 2Q21,” said Morgan Stanley’s Chetan Ahya, adding he expects the sharp rebound from March/April onwards.
HSBC too reckons: “The tunnel may be deeper and darker, but there is light at the end of it.”
And yet the longer it all drags on, the more uneasy investors get about so-called economic “scarring” – long-term unemployment, corporate balance sheet problems and pent-up debt defaults in certain sectors, economic policy fatigue, job insecurity and more persistent pre-cautionary cash holdings among household and companies.
Policy activism will keep markets afloat but as Carmignac managing director Didier Saint George said this week: “the return to normal somehow keeps receding from view.”
(by Mike Dolan, Twitter: @reutersMikeD. Charts by Morgan Stanley, Thyagu Adinarayan and Ritvik Carvalho; Editing by Kirsten Donovan)
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