In these unusual and uncertain times, Helaba's economic and capital market outlook explores the question of "who is going to lead us into the future?" With this in mind, Markets and Trends 2021 presents a selection of characters that could show us the way ahead. The main scenario is entitled "A helping hand from Nanny". But the "Poltergeist" (the negative alternative scenario) and the "Avatar" (the positive alternative scenario) may also prove to be influential personas as well.
In the wake of the Covid-19 crisis, countries the world over have attempted to use a variety of means to influence the behaviour of their people and their companies while at the same time supporting them. “This is what is commonly understood by education. In this way, governments will – like a nanny – continue to carry out their educational work in 2021, which is also intended to instil a sense of security”, explains Dr. Gertrud R. Traud, Helaba’s Chief Economist. She assigns a probability of 70 percent to this scenario.
Following the pandemic and the strict lockdowns that have been imposed, in 2020 the global economy has shrunk more than at any time since the end of World War II. Helaba’s economists look for a contraction of 5.4 percent in Germany, while the euro area economy is likely to shrink by almost 7 percent. Monetary and fiscal policy will help to mitigate the consequences of the shock, such as corporate bankruptcies and unemployment, with a global economic recovery taking hold before a “second wave” of the virus hit. However, the recovery is expected to be interrupted in the fourth quarter before growth takes off again in 2021. At 5 percent, Germany should record its highest rate of growth since the early 1990s. This is based, however, on an assumption by Helaba’s economists that there will be no repeat of the nationwide, week-long and complete lockdowns and that a vaccine will be approved in the months ahead.
“Central banks are extending the scope of their remit to include a growing list of policy areas, such as social or environmental policy. Their core task – namely to maintain price stability – is being relegated to the sidelines in the process”, explains Traud. 2021 will provide a good example of this phenomenon: despite a noticeable rise in inflation rates, central banks will not unwind their expansionary stance and, in some cases, will go even further. In addition, monetary policymakers seem to be handing governments a carte blanche to implement additional debt-financed measures with their zero or negative interest rate policy.
In the short term, it may be appropriate for the state to considerably expand its intervention in the economy. But it harbours medium to long-term risks, not only for the freedom of the individual but also for economic development. In view of changing demographics, it is essential for a country to have a large and modern capital stock as well as high labour productivity, not least in Germany. That is why voters should pay close attention to the positions each party adopts in the next German federal election campaign in 2021. Who is prepared to put the long-term wellbeing of the country and its people ahead of short-term political gain?
In 2021, equities will continue to be caught between high valuations and a lack of investment alternatives. Until effective vaccines become available, equities will remain dependent on support from monetary and fiscal policy. In view of an anticipated strong economic rebound, among the standard asset classes equities hold out the best prospects for 2021. Towards the end of the year, the DAX is likely to be trading at around 14,000 points.
Despite the economic recovery and higher inflation rates, interest rate rises will be limited on the bond market since central banks control yields by virtue of their asset purchase programmes. At -0.2 percent by the end of 2021, 10-year German government bonds will not emerge from negative yield territory next year.
Real estate will continue to benefit from extremely low interest rates. However, the recession will have a lagging effect on the market. In commercial segments, especially retail, rents and purchase prices will decline in 2021. In contrast, the German housing market will resume its upward trend, albeit at a slightly more moderate pace, thanks to ongoing robust demand and a continuing shortage of available properties.
Although the pandemic will subside, there will be no reversal in the fortunes of gold in 2021. With real negative yields and astronomical levels of government debt set to persist for the foreseeable future, this situation will support the precious metal. Helaba’s economists expect gold to be trading at 2,000 US dollar or 1,600 euro per troy ounce by the end of the year.
In terms of the US dollar, caution is warranted due to a high budget deficit combined with a chronic current account deficit. The euro-dollar exchange rate is forecast to be around 1.25 by the end of the year.
In Helaba's negative alternative scenario, uncertainty becomes even greater. In this scenario, the things that we fear most are precisely those that we cannot see – a phenomenon embodied by the poltergeist. Though amorphous, it torments houses and their inhabitants. In the same way, the world economy continues to be plagued by an almost invisible virus and plunges back into recession. The DAX falls into a range around the 10,000-point mark. The yield on 10-year German government bonds ends the year in deeply negative territory. As a safe haven currency, gold reaches new record highs. Once again, the US dollar benefits from a challenging environment and the euro-dollar exchange rate falls to parity.
In the positive alternative scenario, it turns out that not all change these days is bad. The digital revolution is unlocking new opportunities that still seem inconceivable to many people. The avatar symbolises successful structural change. In this scenario, the global economy recovers very quickly from the crisis; innovation gives a significant boost to progress and growth as well as equity markets. The DAX shoots past 16,000 points. The yield on 10-year German government bonds breaks out of negative territory due to a sharp rise in inflation expectations. Gold loses its aura as a safe haven currency and its price falls significantly. The thriving economy is supportive to the euro, especially since Europe also lays the structural groundwork for further growth. The euro-dollar rate rises to 1.35.
As well as the capital market forecasts, the annual outlook also contains 14 country analyses and summaries of the German federal states of Hesse, Thuringia, North Rhine-Westphalia and Brandenburg.