Raiffeisen RESEARCH: Annual Outlook 2021
Eurozone and CEE economies more dynamic over the course of the year than previously expected * Austria: GDP-growth should reach 3.5% after minus 7.2% (2020) * Fiscal and monetary policy provide strong support for GDP and financial markets
The economy in Europe is still in a difficult phase at the beginning of 2021. The renewed government-imposed closures due to COVID-19 infection rates represent a huge setback for the service sector in particular. However, in contrast to the spring of 2020, industry and international trade are less affected this time, so the production slumps are more moderate. With hopes of widespread vaccination, the overall mood among companies has improved significantly. "We expect a significant pickup in economic activity during the first half of 2021, which should continue into 2022. Thus, in 2021, the GDP growth rate could reach 4 per cent in the euro area and 3.5 per cent in Austria," said Gunter Deuber, Head of the Economics and Financial Analysis division at Raiffeisen Bank International (RBI) since the beginning of January. In Central and Eastern Europe (CEE), countries are affected differently by the pandemic. Accordingly, Raiffeisen Research analysts also expect the catch-up process in the region to vary. With real GDP growth of 3 to 5 per cent (exceptions: Czech Republic and Russia with 1 and 2.3 per cent, respectively), especially countries with strong private consumption should be able to catch up with the pre-pandemic period. Risk factors here are longer delays in reducing the number of infections, a pronounced wave of insolvencies, no significant growth in employment and a persistently high savings rate.
Strong support for GDP and financial markets
Economic activity is receiving strong support from monetary and fiscal policy. Budget deficits in 2021 will remain at high single-digit levels in the euro area and Austria. Added to this are the funds from the EU's reconstruction fund in the second half of 2020, which should benefit Croatia, Bulgaria, Romania, Slovakia, Poland and Hungary in particular. Additional stimulus will come from the new EU budget 2021-2027, whose main beneficiaries will be Bulgaria, Hungary and Poland. "The culmination of European monetary policy is likely to be the redefinition of the ECB's strategy from mid-2021. In any case, no interest rate changes are expected for the foreseeable future. The same applies to the U.S.," said Raiffeisen Research chief analyst Peter Brezinschek. "The focus of monetary policy, and increasingly also in CEE, continues to be bond purchase programs. The risk factors in this regard are delays in both the allocation of funding from the NextGeneration program and in submissions of EU funding in CEE countries, and major discrepancies in the redefinition of the ECB strategy.“
Little fluctuation in bond yields, all the more so in equity markets
This means that yields on the bond markets remain well below the natural level of risk to reward. In the euro area, both German and Austrian ten-year bond yields remain negative, while they are at 1 per cent in the USA. As inflation is expected to trend upward, real yields will fall even deeper into negative territory in 2021. Most CEE countries are benefiting from the negative interest rates in the euro area and therefore remain at low interest rate and yield levels. Risk factors for Deuber are stronger than expected price increases, higher budget deficits and unexpected currency turbulence for political reasons.
The stock markets performed strongly at the turn of the year. Overall, several prominent stock indices are at historic highs (S&P500, NASDAQ, DAX) or continued their upward trend (EuroStoxx50, ATX). "In addition to generous fiscal and monetary policies, significantly higher earnings estimates for 2021 and brightening economic prospects through 2022 are having a positive impact on stock market performance. On the other hand, valuations in many countries have reached extremely high levels and would not forgive any setbacks in pandemic response during the year," Brezinschek said. "Investment style preferences, and thus respective sector favorites, will also determine which stock indexes will outperform or underperform in 2021. “The political reorientation in the U.S. but possibly also in Europe (federal election in Germany) would also have to be counted among the risk factors.