Early signs of a difficult start to 2021 - Capital Economics
Global Economics

Early signs of a difficult start to 2021

Global Economics Chart Book
Written by Global Economics Team

Global growth slowed throughout the fourth quarter and most economies entered the new year on a weak footing. We have limited hard data for 2021 so far, but timely surveys and our high-frequency Mobility Trackers are generally consistent with a further loss of momentum in January. Infection numbers are now moving in the right direction, but this has prompted restrictions to be relaxed in only a handful of cases. COVID-19 deaths are still high and health systems remain under pressure, so the bulk of containment measures are likely to remain in place throughout Q1. Fortunately, given that most business services seem to have adapted to life under virus restrictions, the economic fallout should continue to be small compared to the falls in output seen in the first half of 2020. Indeed, the resilience of much of the services sector – especially in Europe – explains why Q4 GDP wasn’t quite as bleak as forecasters expected.

  • Global growth slowed throughout the fourth quarter and most economies entered the new year on a weak footing. We have limited hard data for 2021 so far, but timely surveys and our high-frequency Mobility Trackers are generally consistent with a further loss of momentum in January. Infection numbers are now moving in the right direction, but this has prompted restrictions to be relaxed in only a handful of cases. COVID-19 deaths are still high and health systems remain under pressure, so the bulk of containment measures are likely to remain in place throughout Q1. Fortunately, given that most business services seem to have adapted to life under virus restrictions, the economic fallout should continue to be small compared to the falls in output seen in the first half of 2020. Indeed, the resilience of much of the services sector – especially in Europe – explains why Q4 GDP wasn’t quite as bleak as forecasters expected. (See Chart 1.)
  • Coronavirus cases are falling in most parts of the world, but restrictions will remain strict in most cases.
  • Output & activity seems to have stayed subdued at the start of 2021 in most economies outside east Asia.
  • Business surveys are consistent with a continued outperformance of industry, but also of the US economy.
  • Consumer spending slowed throughout Q4 and retail sales fell sharply in December in medium-sized DMs.
  • External trade surpassed its pre-virus level in November, but shipping problems present a near-term risk.
  • Labour markets have coped well with the latest round of restrictions due to continued government support.
  • Inflation has jumped in a few places and will rise further as oil price base effects drive up headline rates.
  • Monetary data show that business lending almost ground to a halt around the turn of the year.
  • Commodity prices have generally rallied so far this year, with oil benefitting from OPEC+ supply restraint.
  • Financial markets have seen risky assets rally again after a pause for breath in January.

Chart 1: GDP Growth Outturns Vs. Consensus Expectation (%-pts, Q4 unless otherwise stated)

Sources: Refinitiv, Capital Economics


  • After peaking at roughly 740,000 daily new cases in mid-January, new infections globally have fallen sharply since to around 430,000 as of 9th February (2). The largest fall in cases was in advanced economies, with smaller declines in new infections occurring in emerging Europe and Latin America (3).
  • Countries in Europe – the hotspot of the latest surge in cases – have seen case numbers trend down sharply due to tight restrictions in January (4). These have included national lockdowns in Germany and the UK, while most Italian regions have moved up a band in its tiered system. However, laxer restrictions in France in the form of just an evening curfew have resulted in case numbers hovering stubbornly around the 20,000 mark. New deaths have also increased in France, in contrast to elsewhere (5).
  • Two more vaccines, manufactured by Janssen and Novavax, have reported encouraging stage 3 trial results in the past month, with efficacies of 66% and 89% respectively. Canada, the UK, and the US have pre-orders of both these vaccines, while the EU, COVAX, and the African Union have pre-orders for the Janssen vaccine. While vaccine rollouts continue to progress at speed in the UK and US, they have not got out of first gear in the euro-zone (6). At the regional level, vaccine rollouts in advanced economies are outpacing those in the emerging world, particularly outside emerging Europe (7).

Chart 2: Global Daily New Infections (7d MA)

Chart 3: Daily New COVID-19 Infections (7d MA)

Chart 4: Daily New COVID-19 Infections (7d MA)

Chart 5: Daily New COVID-19 Deaths (7d MA)

Chart 6: Total Coronavirus Vaccine Doses Administered Per Hundred People

Chart 7: Total Coronavirus Vaccine Doses Administered* Per Hundred People

Sources: CEIC, John Hopkins, Natl. Health Ministries, OurWorldInData

Output and Activity

  • Even though COVID-related restrictions tightened in most DMs over Q4, GDP outturns generally surprised to the upside. Germany and Spain managed to avoid outright falls in output, while France and Italy experienced far smaller contractions than in Q2 (8). Meanwhile, China’s recovery continued to steam ahead – a further strong increase in GDP pushed output well above its pre-virus path (9).
  • The relative resilience of DM GDP appears to reflect two main factors. First, restrictions were more targeted than in Q2 and activity in sectors including construction and manufacturing was typically allowed to continue. The industrial recovery gathered pace in November and early GDP breakdowns suggest that industry and construction contributed positively to GDP growth in Q4 as a whole (10). Second, there is evidence that falls in the services sector were smaller than in Q2 as some businesses managed to adapt to the restrictions. Indeed, monthly GDP breakdowns from the UK showed that while food and accommodation services were hit very hard again, falls in the business services sector were far more limited (11).
  • Nonetheless, we still expect GDP to contract in most major DMs in Q1. After all, having held steady for the majority if Q4, our Mobility Trackers for DMs fell sharply around the turn of the year, pointing to a decline in broader economic activity (12). Further ahead, though, successful vaccine rollouts should inject a new lease of life into the global recovery in the second half of 2021 (13).

Chart 8: Real GDP (% q/q)

Chart 9: China GDP (Q4 2019 = 100, SA)

Chart 10: Contributions to q/q GDP Growth (ppts)

Chart 11: UK Monthly GDP (% m/m)

Chart 12: CE COVID Mobility Trackers*

Chart 13: World GDP (Int’l $tn, 2019 prices & PPP)

*% difference from Jan-6th Feb median level

Sources: Refinitiv, CPB, CEIC, Moovit, Capital Economics

Business surveys

  • The global composite PMI fell again last month, from 52.7 in December to 52.3 in January, with falls in both the manufacturing and services PMIs. There was a particularly sharp fall in the manufacturing output index, from 54.9 to 54.0 (14). On the face of it, the index still appears consistent with 4% annual growth in industrial production, but it has overstated the pace of the recovery so far (15).
  • The reported slowdown in manufacturing activity was not common to all economies, with the US, India and Russia seeing small rises (16). But the survey revealed a sharp increase in global supplier delivery times (17). Though this is usually a sign of excess demand, it instead currently reflects supply-chain disruption, in part due to shipping shortages and port congestion caused by the pandemic.
  • Indeed, surging freight rates appear to have begun to weigh on new export orders (18). But since orders remain above pre-virus levels, this is not a major cause for concern just yet. Other forward-looking indices such as future output and new orders added to signs that the industrial recovery is slowing, both falling for the second consecutive month in January (19).

Chart 14: Global Manufacturing & Services PMIs

Chart 15: Global Manufacturing Output Index & IP

Chart 16: Manufacturing PMIs by Country

Chart 17: Global Mfg. PMI: Suppliers’ Delivery Times

Chart 18: Global Mfg. PMI Export Orders & Real Exports

Chart 19: Global Mfg. New Orders & Future Output

Sources: IHS Markit, Refinitiv, Capital Economics

Consumer Spending

  • Available GDP breakdowns for Q4 display contrasting fortunes for consumer spending. While consumption contracted in France, where non-essential retail shut in Q4, it grew in Spain where shops stayed open (20). Consumer spending growth was muted in the US due to the resurgence in coronavirus cases, leaving it just over 2.5% below its pre-virus level (21). We estimate that consumption in Q4 was below pre-virus levels by a similar amount in Japan, but much further below in the euro-zone and the UK (22).
  • Monthly data show that consumer spending finished 2020 on a weak note. The UK and the euro-zone saw sales slump in November and then recover only a little lost ground in December as non-essential stores remained closed in parts of both economies (22). Broad-based weakness across categories caused modest falls in sales in the US. And larger-than-usual Black Friday discounts brought forward Christmas shopping windows in Canada and Australia. But while real retail sales ended the year on a weak note, spending on goods has typically fared better than that on services and sales remain above pre-virus levels (23).
  • Forward-looking indicators suggest that there is probably some more short-term pain in store. Consumer confidence fell in January in the UK, Japan and the euro-zone as restrictions generally tightened across all three economies (24). Visits to retail sites fell significantly in all three economies, albeit from a relatively high level in Japan (25). There has also been a fall in the US, but to a much smaller extent than elsewhere.

Chart 20: Real Consumer Spending (% q/q)

Chart 21: Real Consumer Spending (Q4 19 = 100)

Chart 22: Real Retail Sales (% m/m)

Chart 23: Real Retail Sales (Dec. 19 = 100)

Chart 24: DM Consumer Confidence Indices

Chart 25: Visits to Retail & Recreation Sites*

*% difference from Jan-6th Feb level.

Sources: Refinitiv, Google, Capital Economics

External Trade

  • World goods trade continued to recover in November, but early evidence suggests that recent supply-chain disruptions have begun to weigh on export demand. Real world trade rose by 2.1% m/m in November, pushing annual growth back into positive territory (26). This leaves trade volumes about 1% higher than in December 2019. The regional breakdown revealed that exports from Asia continued to steam ahead as global demand for consumer goods – much of which are produced in Asia – remained strong (27).
  • The global manufacturing PMI’s new export orders sub-index points to further increases in world trade in December and January (28). But the sharp drop in the supplier delivery times sub-index implies that goods are now taking longer to be delivered, as supply struggles to keep up with rising demand (29). This has coincided with a jump in shipping costs, particularly for routes originating in China and East Asia (30).
  • There are some initial signs that the sharp rise in freight rates has started to weigh on demand for exports. Given that the increase in shipping costs has been largest for routes from Asia, we would expect external demand to fall in Asian economies first. New export orders have edged down in South Korea and Taiwan, but not by enough to suggest that shipping has become a major problem for exporters. But in China, the new export orders index fell below the 50.0 no-change mark for the first time in six months (31).

Chart 26: Global Real Goods Trade

Chart 27: Real Exports by Region

Chart 28: Global Mfg PMI: Export Orders & Real Exports

Chart 29: Global Mfg. PMI: Supplier Delivery Times

Chart 30: Freightos Baltic Container Freight Rate Indices
(1st Jan 2020 = 100)

Chart 31: Mfg. PMIs: New Export Orders

Sources: Refinitiv, IHS Markit, CPB, Capital Economics

Labour Markets

  • Government support has limited the fallout from the latest round of lockdown restrictions, but unemployment rates in Europe will still rise this year. The UK unemployment rate edged up from 4.9% in October to 5.0% in November (32). Meanwhile, the euro-zone jobless rate remained unchanged at 8.3% in December. And in the US, the unemployment rate started to fall again in January, from 6.7% to 6.3%.
  • With job retention schemes due to be withdrawn in the next few months, we expect unemployment rates to rise further. Surveys of firms’ hiring intentions remain consistent with a further drop in employment in the euro-zone (33). And in the UK, we expect employment to fall back in line with GDP, turning the 1.7% fall in employment so far into a 3% fall by July (34). But our forecasts for unemployment rates to peak at around 9% in the euro-zone and 6.5% in the UK, will still be a better result than in previous recessions.
  • In the US, non-farm payrolls rose by just 49,000 in January as restrictions weighed on jobs growth. As well as job losses in leisure & hospitality, there was also a fall in manufacturing, retail, transport, and health care (36). But the stronger outlook for the economy means we expect the unemployment rate to drop to 4.5% by the end of 2021. As for earnings, following a rise of almost 5% in 2020, we anticipate a further strong rise in the US this year (37). Pay growth should jump in the UK, but largely due to the idiosyncrasies of its furlough scheme rather than fundamentally stronger pay pressures than, say, in the euro-zone.

Chart 32: Unemployment Rates (%)

Chart 33: EZ Firms’ Hiring Intentions & Employment

Chart 34: UK Employment and GDP

Chart 35: Unemployment Rate Forecasts (%)

Chart 36: US Change in Non-Farm Payrolls (000s, Month)

Chart 37: Regular Earnings (% y/y)

Sources: Refinitiv, CEIC, Capital Economics


  • Mixed outturns in January should give way to rising inflation globally as energy effects take hold in the coming months. In December, OECD headline inflation rose only slightly to 0.8% whilst core inflation was 1.1% for the third consecutive month (38). When the oil price fall early last year drops out of the year-on-year comparison in March, we expect the headline OECD rate to be boosted by over 1.5%-pt (39).
  • Most advanced economies saw modest rises in inflation in December, but data for January paint a mixed picture. While the US saw its core rate slip back from 1.6% to 1.4%, there was a huge 1.2%-pt jump in both headline and core HICP inflation in the euro-zone (40). This was partly the result of delayed winter sales but was also due to factors affecting the German HICP. These include the introduction of carbon pricing, the reversal of a VAT cut, as well as an increase in the weights of high-inflation goods in the German HICP basket (41). These German effects should prop up euro-zone inflation until early next year.
  • Aggregate EM headline inflation stayed at a record low of 2.9% in December, while the core rate fell to 2.7% (42). There have been concerns that the recent rise in global agricultural prices could cause a surge in food inflation in EMs. In fact, the relationship between global food prices and food CPI inflation is not strong (43). But there are other inflation risks, such as steep increases in the cost of container shipping.

Chart 38: OECD Inflation (Excluding Turkey, %)

Chart 39: Brent Oil Price & Energy Prices Contribution to CPI Inflation in OECD Economies

Chart 40: Euro-zone Inflation (%)

Chart 41: Change in German HICP Category
Weights vs. Inflation Rate in 2020

Chart 42: Aggregate EM Inflation* (%)

Chart 43: S&P GSCI Agricultural Index & EM Food Prices

Sources: Refinitiv, CEIC, Destatis, Capital Economics


  • The latest credit data suggest that firms did not pile on debt around the turn of the year, even as restrictions started to bite. In December, the stock of bank loans to firms remained steady in the euro-zone and Japan and fell to below its pre-virus level in the US (44). In the US, weak lending may have been related to stricter lending criteria. But it is likely that firms were also paying down debt and some official scheme loans were forgiven. Either way, US banks expect to stop tightening standards in Q1 (45).
  • While DM net corporate bond issuance rose again in December, it seemed to grind to a halt in January (46). This was despite market conditions becoming even more favourable, with credit spreads in almost all sectors lower than they were at the start of 2020. So, whether it’s bank loans or bonds, business lending has been muted compared to the first wave of restrictions. Indicators of credit stress have also been contained – the “fallen angel” share of the corporate bond market has fallen in the past few months (47).
  • With economies yet to throw off the shackles of virus containment measures, and lots of uncertainty over the path of recoveries, we suspect that major central banks will not rush into tapering their asset purchases, contrary to some recent speculation (48). In contrast, we expect the PBOC to press ahead with monetary tightening this year, meaning that January’s fall in Chinese credit growth is a sign of things to come (49).

Chart 44: Outstanding Bank Loans to Businesses*
(Jan-20 = 100)

Chart 45: Credit Standards on Bank Loans to Businesses
(Net % of banks tightening standards)

Chart 46: Face Value of DM Corporate Bonds ($tn)

Chart 47: “Fallen Angel” Share of Corp. Bond Market (%)

Chart 48: G4 Central Bank Net Asset Purchases ($bn)

Chart 49: China Aggregate Financing (Outstanding, % y/y)

Sources: Refinitiv, CEIC, Capital Economics

Commodity Prices

  • The prices of most commodities have generally increased since the beginning of the year (50). The price of Brent Crude has increased by over 15% in 2021 so far. The discount on the 12-month compared to 1-month Brent price has grown since December (51). This reflects a perceived lack of near-term oil supply, given Saudi-led output restraint among OPEC producers.
  • While the recent rally in oil prices may have got a bit ahead of itself, we think that there could be more upward pressure on prices later in the year. On the demand side, we think that pent-up oil demand will be released once lockdown measures are lifted, provided that vaccine rollouts are successful. Meanwhile, supply should remain constrained, particularly among OPEC+ producers. While OPEC+ compliance with quotas will probably slip later this year (52), the oil market should remain in deficit throughout 2021 (53).
  • As for other commodities, the silver price reached an eight-year high in early February, rising by nearly 10% from the beginning of the year led by a surge in demand by retail investors. But it has since fallen, erasing most of its gains. Meanwhile, gold prices have generally fallen over the past month due to a slightly stronger US dollar (54). Industrial metals prices have been relatively unchanged despite weak China manufacturing PMI readings for January (55). This is probably because China’s economy is still growing above trend and that manufacturing PMI readings for the rest of Asia rose to their highest level since 2011.

Chart 50: S&P GSCI (1st January 2021 = 100)

Chart 51: 12-Month and 1-Month Price Spread
(Brent, US$ per Barrel)

Chart 52: OPEC Production & Quotas (Mn. BpD)

Chart 53: Oil Market Fundamentals (Mn. BpD)

Chart 54: Gold Price & US Dollar Index

Chart 55: China Mfg. PMIs & Industrial Metals Prices

Sources: Refinitiv, IEA, OPEC, IHS Markit, CE

Financial Markets

  • In the past month, a lot of focus has been on extreme movements in the prices of a few securities, typically of heavily shorted equities in the US. But these big moves have not been reflected in the performance of risky assets more generally, which have made much more moderate gains, after a brief pause for breath in January. Concerns about new variants of the coronavirus seemed to be largely responsible for holding back global equities, though DM equity prices have now clawed back lost ground (56).
  • Credit markets have not rallied much either. Corporate credit spreads fell by just a couple of basis points, albeit to lower levels than they were a year ago in most sectors (57). And leveraged loan prices merely continued to edge back towards par (58). This disconnect between excessive swings in a few securities and the overall market picture reassures us that we are not in the midst of a bubble in risky assets generally.
  • In government bond markets, 10-year yields have risen by up to 20bp across DMs since late January (59), as inflation compensation has risen (60). If a Fed staff model is anything to go by, the rise in inflation compensation, at least throughout January in the US, had little to do with investors’ actual expectations for higher inflation, and instead reflected other demand and supply factors. Either way, the rise in yields outside the US looks to have taken the steam out of January’s rally in the US dollar (61). If US yields once again rise further than those in Europe and Japan, as they did in January – perhaps due to Congress passing Biden’s $1.9tn fiscal package – that would challenge our forecast for the dollar to weaken further this year.

Chart 56: MSCI Equity Price Indices (1st Jan. 2020 = 100)

Chart 57: Investment-Grade Corporate Credit Spreads (bp)

Chart 58: S&P/LSTA Leveraged Loan Indices (Par = 100)

Chart 59: 10-Year Government Bond Yields (%)

Chart 60: Change in 10Y Gov’t Yields since 27th Jan. (bp)

Chart 61: US Dollar Exchange Rates

Sources: Refinitiv, Capital Economics

Simon MacAdam, Senior Global Economist, simon.macadam@capitaleconomics.com
Gabriella Dickens, Global Economist, gabriella.dickens@capitaleconomics.com
Kieran Tompkins, Assistant Economist, kieran.tompkins@capitaleconomics.com
Bradley Saunders, Research Assistant, bradley.saunders@capitaleconomics.com