Headwinds impact vaccine optimism
“Vaccination roll-outs will not be rapid in all advanced economies, qualifying prospects for a rapid OECD recovery. Restraints on inflation apply, but even a small rise in long-term bond yields complicates the emerging market outlook. Several large emerging markets without rapid inoculation prospects may see private consumption stall in 2021. Supply chain imbalances have moved beyond container shortages to reflect the deficits in port capacity and are large enough to add tangibly to transit costs. The vulnerability of just-in-time supply chains was twice exposed in just a few weeks by the grounding of a single ship in the Suez Canal, and a plant fire at a major chip supplier in Japan” said Dr Arun Singh, Global Chief Economist, Dun & Bradstreet.
Our forecast is now for global economic activity to surpass its 2019 level in 2021, on the back of improving performance in China, the US and India. However, while early optimism about the global recovery being supported by Covid-19 vaccines is already priced into financial markets, it could yet dissipate, as it is quite apparent the roll-out will not be rapid even in the most advanced countries. This is resulting in a third wave in Europe, as new cases are rising in India, where it had been hoped that herd immunity had been achieved naturally.
The vaccine supply chain is both delicate and subject to existing and potential export controls, and India and Europe are critical suppliers. Delays to a successful global vaccination programme raise the spectre of new variants and fresh lockdowns beyond Europe, and may well confound the recovery in oil prices further above USD60/barrel.
The US Federal Reserve and Treasury are not expecting a powerful contribution to headline inflation from the former’s 2020 employment-prioritising monetary policy stance. The y/y declines in producer prices in Europe into at least January, and the lack of wage-price spirals during the pandemic crisis, do restrain inflation. However, if US Treasury yields rise further, thanks to anticipations of post-pandemic recovery and large fiscal stimulus effects, the potential exists for a ripple effect to hit emerging market bonds and both private and public debt-servicing costs, when they are already set to face the challenges of a stronger dollar. Yields reflect not just growth but also inflation expectations, and supply chain bottlenecks may yet prolong well into Q3-Q4 and have a minor but noticeable inflationary impact in OECD countries.
Large emerging markets will struggle to achieve significant inoculation rates in 2021, and their labour force participation rates are already depressed by the pandemic. In Q4 2020, they fell by 5.1 percentage points (pp) y/y in Brazil, by 3.6pp in Turkey, by 3.2pp in South Africa, by 2.9pp in Mexico and 2.7pp in the Philippines. For Brazil, Mexico and the Philippines, their labour force participation rates in Q3-Q4 fell to their lowest level since at least 2000. It is unclear how rapidly consumption can revive in such economies. The situation in the OECD is masked by government schemes. In the UK the furloughed and unemployed workforce at 23.1% of the total in January was well above the post-financial crisis, with the 2011 peak unemployment rate of 8.9%.
- China: Economic prospects look strong amid effective Covid-19 control measures.
- Myanmar: The political environment is deteriorating rapidly as the military coup continues.
Monthly changes in country risk ratings and outlook trends
|Dun & Bradstreet Country Risk Analysis|
|Country||March 2021||April 2021||Change|
|Country Risk Rating Upgrades (risk level has improved)|
|Country Risk Rating Downgrades (risk level has deteriorated)|
|Outlook Trend Upgrades (from/to)|
|Outlook Trend Downgrades (from/to)|
The market outlook for Q3-Q4 has improved with the enactment of the USD1.9trn American Rescue Plan and the acceleration of the US Covid-19 vaccination programme. A forthcoming two-part USD3trn physical and social infrastructure plan could ultimately be a fillip for medium- to long-term productivity and growth.
Western and Central Europe
Countries like France, Germany, Finland and Belgium are either extending or reintroducing lockdowns as the region is hit by another wave of infections. Positively, the supply-chain effects of such public health measures are smaller than those seen in 2020. Worryingly, our data shows a rise in the average B2B payment delay in the region.
With China likely to post double-digit y/y growth in Q1 and taking a larger share of world trade as the pandemic evolves, we upgraded its risk indicator two quartiles to DB4a in March. However, global shortages of semiconductors beyond the automotive sector challenge the narrative of an uncomplicated boom in technology for the home and remote working.
Latin America & Caribbean
Brazil is the pandemic’s current epicentre with a collapsing health system struggling with rising infection rates. Its politicised and patchwork state-level approach to containment and tightened border restrictions increase Brazil’s supply chain and business continuity risks. The region is heavily impacted and without an obvious recovery path.
Eastern Europe & Central Asia
With a third wave of the Covid-19 pandemic now sweeping through many countries in the region, the downside risks to our 3.5% regional growth projection for this year are mounting. Indeed, the rising prospect of governments being forced to reimpose harsher lockdown measures threatens to derail the nascent recovery.
Middle East & North Africa
Regional business activity will show considerable variations which will be dictated by the success or failure to roll out a vaccine programme. Israel, the UAE and Bahrain are among the leading countries globally, while Sudan, Egypt and Iran are among the laggards. Positively, stronger oil prices will support regional business activity.
Limited access to vaccines will undermine business activity across the region well into 2022 as containment measures remain in place. Growth will also be held back by economic and political constraints in the two largest economies, South Africa and Nigeria, by debt distress risks, lack of tourism flows and continuing logistics disruption.
Dun & Bradstreet Risk Indicator
Dun & Bradstreet’s Country Risk Indicator provides a comparative, cross-border assessment of the risk of doing business in a country. The risk indicator is divided into seven bands, ranging from DB1 to DB7 – DB1 is lowest risk, DB7 is highest risk. Each band is subdivided into quartiles (a-d), with ‘a’ representing slightly less risk than ‘b’ (and so on). Only the DB7 indicator is not divided into quartiles.
The individual DB risk indicators denote the following degrees of risk:
|DB1||Lowest Risk||Lowest degree of uncertainty associated with expected returns, such as export payments and foreign debt and equity servicing.|
|DB2||Low Risk||Low degree of uncertainty associated with expected returns. However, country-wide factors may result in higher volatility of returns at a future date.|
|DB3||Slight Risk||Enough uncertainty over expected returns to warrant close monitoring of country risk. Customers should actively manage their risk exposures.|
|DB4||Moderate Risk||Significant uncertainty over expected returns. Risk-averse customers are advised to protect against potential losses.|
|DB5||High Risk||Considerable uncertainty associated with expected returns. Businesses are advised to limit their exposure and/or select high-return transactions only.|
|DB6||Very High Risk||Expected returns are subject to large degree of volatility. A very high expected return is required to compensate for the additional risk or the cost of hedging such a risk.|
|DB7||Highest Risk||Returns are almost impossible to predict with any accuracy. Business infrastructure has, in effect broken down.|
Ratings and Outlook Changes:
Ratings changes: Changes in rating are made when we judge that there has been a significant alteration in a country’s overall circumstances – this could stem from a one-off event (e.g. a major natural disaster) or from a change in something structural/cyclical (e.g. an important shift in growth prospects). An upgrade indicates a significant change for the better, a downgrade a significant change for the worse. The number of quartiles of change indicates the extent of the improvement/deterioration in circumstances.
Outlook changes: The outlook trend indicates whether we think a country’s next rating change is likely to be a downgrade (‘Deteriorating’ trend) or an upgrade (‘Improving’ trend). A ‘Stable’ outlook trend indicates that we do not currently anticipate a rating change in the near future.
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