• Klaus Meitinger

Economic boom in 2021?

iStock 1265159212 03022021Dear Readers,

Over the past month, we have virtually visited a dozen annual outlooks from banks and asset managers. The quintessence is clear: In the coming year, the forecasters expect a massive economic recovery.

What is remarkable is how unanimous the experts are. Rarely have we seen such a clear consensus at the beginning of the year. The reasoning is simple. Either we get the virus under control - then the economic path is clearly programmed. Or we don't get the virus under control - in which case a forecast would not even be possible at this point. That's why the professionals always send a caveat in advance: the prerequisite is that the vaccination strategy works to some extent, that the vaccines actually work and that this is not impaired by mutations.

In this case, three very positive factors come together from the second quarter onwards:

First, the effects of pent-up purchasing power. In many countries, governments have replaced a lot of the lost income. But because of the lockdowns, the money could not be spent at all and was saved. "That's an important lesson," Jim Cielinski, Janus Henderson, made clear: "When policy makes up for lost income, that's the key to future growth." If the Corona situation eases, expect a boom in consumer spending. César Perez Ruiz, CIO Pictet, illustrated this by quoting Visa chief Alfred Kelly: "People who pay with their cards today don't want a discount - they want points for future travel. People want their lives back."

Stefan Riße, Acatis, did the math on the sums involved. From March to November 2020, wages in the US have indeed fallen by 43 billion. But disposable income has risen by 1.03 trillion dollars - mainly due to government support measures. And with total personal spending down by $535 billion, more than $1.5 trillion extra went into savings accounts during that period alone. That's equivalent to nearly 10 percent of 2019 household consumption.

Berenberg chief economist Holger Schmieding also calculated this effect for the three major economies in Europe. According to this, there is a surplus saving of 290 billion euros there for the first three quarters of 2020 - or 6.2 percent of 2019 consumer spending.

By the end of January 2021, these sums are likely to have increased significantly further. If even a portion of this is spent briskly, the term "consumption boom" may be an understatement for developments from summer 2021 onwards.

Secondly, there will be further massive support from government spending, generously financed by the central banks.

In the US, Terence Riley of F&V Capital Management is already talking about a Biden boom. And even if some of the new president's $1.9 trillion package is cut in Congress, there will still be a massive stimulus. In Europe, the 750 -billion-euro reconstruction fund will have its effect this year.

Experts are also optimistic about China. On average, real growth of nine percent is expected for the Middle Kingdom in 2021.

The important question now is: Can it really be that the consensus forecast will come true? In the past, when everyone agreed, things usually turned out differently.

We see two issues:

First, it is possible that the expectations for calendar year 2021 are too optimistic. If, due to the vaccination delays, the recovery does not start until the summer, the mortgage of four or five weak months would be too large to actually achieve the targeted high growth rates in 2021. But that would probably only be a small delay, not a change in the overall picture. In that case, the boom will not start until the second half of 2021.

The second aspect is more important. The upswing could be stronger overall and last longer than the consensus still expects today. For, as Carsten Klude, chief economist at M.M.Warburg & Co, notes, this is the first time in a long time that we have seen a globally synchronized upswing with self-reinforcing effects. It is quite possible that the consensus is too cautious in the longer term.

In this context, we like best the headline that Berenberg's Holger Schmieding has chosen for his outlook:

"Strong rebound 2021 - into the golden twenties."

Because this, of course, must not disregard the caveat made at the outset, we advise keeping a close eye on developments in Israel. Should the vaccines not show the hoped-for effectiveness, we should see it there first.

Tomorrow, you'll read the pros' answers to the question in this space:

Is inflation coming back now?

And at the end of the week we will publish the conclusions for the equity markets.

Yours sincerely,

Klaus Meitinger

Note: Despite careful selection of sources, no liability can be accepted for the accuracy of the content. The information provided in private wealth is for information purposes only and does not constitute an invitation to buy or sell securities.

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