The year ahead – a global economic outlook for treasurers
What are the key drivers behind the global economic outlook for 2021?
When you think about what drove the global economy in 2020, the top factors would have to be coronavirus, central bank policy action, and US politics, with the new administration coming in. In some ways, what affects the economy in the coming year will be fairly similar, but with different outcomes.
There's an expectation for a restoration phase during which the pace of recovery will slow from what we've seen in 2020 - we will see a continuation of this recovery, based on certain assumptions, such as a vaccine becoming widely available. We'll still see localized Covid outbreaks, but they will become less frequent. In terms of monetary policy, our view is consistent with the wider market in that we do expect a continuation of current policy across the globe, with maybe the exception of China. This will drive what we call the restoration economy.
Clearly the risks with that, both for the upside and the downside, are heavily skewed towards the availability and success of vaccination campaigns. If you look at where the vaccine is already being made available, it's in developed markets which are buying it up, and as such there will be significant gaps in coverage. Meanwhile, central bank balance sheets have seen significant expansions in 2020, and they are expected to continue to expand to support quantitative easing in 2021.
Specifically in Asia, we will see monetary and fiscal policy support that was put in play in 2020 to continue into the coming year, with the possible exception of China, depending on the outcome of Covid.
What macroeconomic factors do corporate treasurers need to consider going into the new year?
A key macro factor is going to be what happens to US fiscal policy in the new administration – we expect there to be further fiscal support for the US economy, targeted in areas where the new administration is keen to support, but the key question is what is that going to be?
There's clearly some uncertainty there – it's difficult to tell how that will play out, but our base case is further support. A very large stimulus package is probably off the table – it's more likely to be around the trillion-dollar mark, because of the challenges of getting it through the house and the senate; there's going to have to be compromise to get it through. If we take that high-level view, what that means for treasurers, cash management and the global economy in general is that lower for longer is the base case.
A more interesting question, for the US and the UK, and maybe for Australia, is what is the risk of negative interest rates? At the moment, central banks are reluctant to move into negative territory; however, it doesn't take much for official rates to remain in positive territory, while market rates go into negative territory, based on fairly benign comments by central banks. In the UK, we've seen public comments on contingency planning from the Bank of England, and that that type of statement really changed expectations of investors – this type of thing is definitely a risk in certain economies for 2021.
What other key developments in the market should treasurers be keeping an eye on in 2021?
The potential of regulatory change for money market funds, particularly in the US is one – we do expect to see something in Q1/Q2 of this year.
Regulators are looking at all aspects of the impacts on markets, in terms of what can be learned from the Covid-19 crisis, including looking at prime money market funds in Europe and the need for regulatory change, as a point of comparison.
The best treasurers in Asia are using regulated funds in the EU, so it is worth keeping an eye on what is going on there. Another thing to consider is the growing focus on ESG considerations, and how treasurers should be engaging. It's something that is very individual company specific, as to whether it is on their radar – for many it clearly is, and they are fully engaged. Treasurers are now looking at how they borrow or invest in the market with a focus on green investment solutions. ESG money markets, for example, are investing cash in a way that depends on the strategy; not just taking a one-size-fits-all approach.
Ultimately, if we continue to see growth in interest in these solutions, then over time, that could impact the cost of funding in the market. It's an issue that should be on every treasurers' radar, and our expectation is that it will continue to grow in importance.
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