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Executive Summary
The story of the global economy in February 2021 was also driven by the spread of the Covid-19 pandemic and the response of the world through vaccinations and relief measures.
How is the response to Covid-19 going?
After a surge in infections near the end of 2020, cases and deaths as a result of Covid have fallen substantially to levels last seen in October. Global cases have now exceeded 112 Mn, while the death toll has almost reached 2.5 Mn.
Vaccinations are starting to show their impact: With many countries, primarily in the developed world, having their vaccination drives underway, at least some level of protection is starting to be seen, with Israel’s success the most promising. If cases and deaths do fall as a result of vaccination, more countries could start opening up their economies.
New variants might slow down global recovery: Multiple variations are still the number one risk factor in the global fight against Covid, and variations that have resistance against the current vaccines could delay the time needed to recover from Covid, since they will either require more people vaccinated or additional booster shots.
Equitable distribution still remains a challenge: Despite some early success in 2021, the outlook for vaccine distribution in the developing world still looks somewhat bleak. Although developing world countries have now been able to get many contracts for vaccines, the actual manufactured capacity is still “hoarded” away by the developed world, which could delay a comprehensive recovery by a year or more.
How has the economic outlook changed?
US fiscal stimulus is the major relief measure left: The US is still to finalize its latest fiscal stimulus bill, and around US$ 1.9 Tn is on the board right now. Although some of this is likely to be trimmed down due to procedural requirements, this is expected to pass and boost US consumption spending drastically.
Treasury yields in the US are rising: With an economic recovery on the horizon along with high levels of economic stimulus, expectations of rising inflation in the future are causing US treasury yields to rise. This could have the effect of driving funds out of emerging markets, as the opportunity cost of having dollar assets falls.
The world might be set for a K-shaped recovery: The story of the global recovery might be largely split, as developed economies recover more quickly due to greater stimulus and more vaccines being available to them. Analysts and international organizations such as the IMF are calling for greater cooperation in response.
How have commodities been performing?
Oil prices rose across the month:
Oil prices continued to see upward momentum throughout February, helped primarily by a continuation of OPEC+ supply cuts as well as rising optimism on global energy demand. A cold storm that rocked US energy supply also contributed to rising prices. Prices rose from lows of US$ 55.53 per barrel on the 28th of January to highs of US$ 66.42 per barrel on the 24th of February.
Gold prices continued to see weakness along with a global economic recovery:
Gold prices fell across most of February, as the expectation of the global economic recovery combined with rising US yields which made it more of a cost to hold non-yielding gold to lower the value of the safe haven asset. Gold prices fell from highs of US$ 1863.90 per ounce on the 1st of February to lows of US$ 1772.80 per ounce by the 17th of February.
Top 5
Debt-laden world, rising bond yields – a toxic taper tantrum combo
Worries over rising inflation and whether it would lead to central banks such as the Federal Reserve to “taper off” their monetary stimulus are raising concerns of another taper tantrum like in 2013. However, real interest rates are still very low, and the Fed might be a lot more cautious in signaling any reversal of policy this time around.
How much is too much: can US stimulus trigger inflation?
Inflation concerns in the developing world might have the unintended effect of slowing down the economic recovery from the Covid-19 pandemic induced recession, as governments and central banks might become more cautious over any further stimulus. Given the still-present need to add more support, this might end up drawing out a global recovery.
Asia-Pacific central banks face delicate balancing act as economies stabilize
QE and money printing programmes in emerging Asia might not be reduced for sometime according to some analysts, who believe that central banks took on currency risk to protect their economies, and wouldn’t want to see that effort wasted. A weaker dollar has prevented the worst of currency pressure, and this could help the environment for emerging policies to remain dovish for longer.
Global demand will be key to post-Covid recovery among emerging markets
Although emerging markets, especially those in Asia, are showing a quick return to normal, a full economic recovery might still be some distance away. A key reason will be the performance of consumer demand in the US and Europe, as exports and tourism earnings will remain depressed until such demand recovers, possibly forcing austerity measures instead.
The U.S. economy is showing some sparkle again, but the dark days are far from over
Retail sales and consumer performance in the US surged unexpectedly, perhaps signalling that this lagging performer in the US recovery could finally be catching up. However, the fact that 10 mn Americans are still unemployed, and that a US$ 1.9 tn stimulus package could raise inflation as well, might mean the road ahead is still bumpy.
Compiled by: Chayu Damsinghe
Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned herein may not be suitable to all investors.
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