2021: NO CLEAR PATH OUT OF THE ABYSS
As 2020 starts drawing to a close, it is constructive to look towards the year ahead. Given how miserable and uncertain 2020 has been, it is only natural that many of us will be looking forward to a brighter New Year.
From a global economic and investment perspective, we believe the fourth quarter of this year will be a lacklustre one to say the least. This is due to four factors:
The fading effect of the pent-up demand that led to the sharp rebound in the third quarter. This is evident in numerous indicators such as purchasing managers’ indices, labour market indicators in the US and retail sales in major economies. The tapering of global stimulus, especially in the United States. Liquidity gauges, such as the Federal Reserve balance sheet, Treasury yields, the value of the dollar and money supply growth in major economies, have decreased slightly from the second quarter, when the Fed sent strong signals about supporting the economy. This is understandable, as the global economy needs less stimulus than it did a few months ago, but reduced liquidity will inevitably affect the performance of risk assets.
Weakening activity due to renewed lockdowns caused by the second Covid-19 wave. Coronavirus cases now exceed 41 million, with new daily infections setting records in some countries. Millions of Europeans face tighter restrictions on movement, with London, Paris and Vienna among the cities enforcing stricter curbs and Ireland enacting a national lockdown. The situation will worsen as the northern hemisphere winter approaches.
The rise in unpredictable and risky events, especially the US election, Brexit talks and coronavirus vaccine approval. The chance of a contested result and a count that could drag on for days or weeks is growing as the race tightens. RealClear Politics’ average of opinion polls shows a marked narrowing of Joe Biden’s lead over Donald Trump. The possibility of an orderly Brexit by year-end, and the chance of swift vaccine approvals, has been reduced as well.
VACCINE WATCH
In 2021, the economic recovery will depend largely on the approval of effective vaccines, which in the most optimistic scenario is not expected until the end of the first quarter, with widespread distribution by the third quarter. Nevertheless, we believe public confidence won’t come back right after the approval, hence the global service sector will remain depressed, leading to slower growth than previously thought.
This corresponds with the view of the International Monetary Fund, which has reduced its forecast for global growth in 2021 to 5.2% (from a low base in 2020) from 5.4% previously. Overall, it sees global output by the end of 2021 being just 0.6% higher than at the end of 2019, before the pandemic, but that is driven almost entirely by China.
Most other nations, including the US, will need to wait until at least 2022 to see a full recovery to pre-virus levels. Hence, the economy in 2021 will be constrained by three factors:
Uneven growth: The shape of the growth curve will resemble a Nike swoosh, but will be soft, craggy and bumpy. Stimulus tightening: Fiscal stimulus will be capped by the fear of rising public debt, and monetary stimulus by fear of a financial bubble and moral hazard. Rising political and geopolitical risk in all major parts of the world including the US, Europe and China (especially where Taiwan is concerned) and in Thailand.
‘BLACK HOLE’RISK
In Thailand, economic indicators in the third quarter — private investment, exports and farm income — showed signs of reviving after the great contraction in the second quarter. Nevertheless, in the fourth quarter we still believe the economy is risky and could fall into a “black hole” due to three factors:
The continued closing of the tourism sector, the arrival of a few dozen wealthy long-stay travellers notwithstanding. We believe that, in the best-case scenario, inbound tourists will be allowed to enter Thailand in the second half of 2021, resulting in approximately 10 million tourists for the whole year — one-quarter of the total we saw in 2019.
The “partial” ending of debt moratoriums. Although the Bank of Thailand has approved relief measures that will apply on a case-by-case basis until June next year, we believe that about 10% of those receiving assistance will still have problems repaying loans. This will lead to increasing NPLs and business closures, notably in services such as travel and tourism, causing higher unemployment. Political uncertainty: Protests could lead to a plunge in consumer confidence, resulting in reduced consumption, investment and overall economic activity, depending on the duration of events such as those we have seen this month.
The government and the central bank have been trying to help through partial extension of debt moratoriums and measures to stimulate consumption (shopping tax rebates, a co-payment scheme and additional living allowance for state welfare cardholders). However, negative underlying macro factors will make these measures far less effective than they could have been.
Hence, in 2021, the Thai economy will feature three themes: domestic headwinds related to politics and international ones from the extended Covid effect; a service sector constrained by rick-averse consumer behaviour (though agriculture will rebound due to La Nina effect; and relaxed fiscal policy alongside tightening monetary policy.
Given these factors, we envision a 4-3-2-1 scenario next year: 4% growth in consumption (especially non-durable goods), 3% GDP growth, 2% growth in private investment and real exports of goods and services, and 1% headline inflation.
In short, 2021 growth will be soft, craggy and bumpy and depending largely on government stimulus, with headwinds from both international and domestic factors.
As the global and Thai economic landscape in the near future is not very conducive to investment, investors should continue to be extremely cautious.
In 2021, light at the end of the tunnel remains elusive. Investors, prepare for a rough ride.
We believe that, in the best-case scenario, inbound tourists will be allowed to enter Thailand in the second half of 2021, resulting in approximately 10 million tourists for the whole year — one-quarter of the total we saw in 2019.