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The road to Covid-19 recovery is a hurdle race: How will Finnish businesses cope?

May 2021

If all goes well, the Olympics will be held this summer in Tokyo, Japan. One of the more spectacular sporting events during the games is the 400-metre hurdle race. And much like the athletic exercise, the road to economic recovery after Covid-19 will be a hurdle race.

Let’s start with the good news. The global recovery is on the right track. As a global insurance credit insurance company, we expect the global GDP to rebound by 5.1% in 2021 with one fourth of the recovery being driven by the US, while China should contribute less to growth by progressively adopting a less accommodative economic policy. In 2022, world GDP growth should reach +4.0%. Europe should recover its Covid-19 losses during 2022 while the US should achieve this in the second half of 2021. These are some of the findings in the most recent macroeconomic analysis from Euler Hermes Economic Research.

Vaccination campaigns are picking up steam at different pace

The global roll out of vaccinations is under way. However, the pace of the vaccination campaigns differ from country to country. At the current pace of vaccination, the US and UK will reach herd immunity in May. Europe will be able to vaccinate its vulnerable population by summer, but herd immunity is likely first to be achieved in the fall of 2021.

»In Finland 38.3% of inhabitants have received at least the first dose of vaccination (19.05.2021). With the current pace, it is estimated that 70% coverage will be reached by 30 July 2021. As the vaccination pace has been slower than expected in the beginning of the year, there are still many uncertainties, especially for summer event organizers and the tourism and hospitality sector. We might see an increased amount of insolvencies in the service sector«, says Tiina Björkqvist.

Excess savings will still hover above the pre-crisis level

Excess savings will still be around 40% above the pre-crisis level at the end of 2021. In a relatively optimistic scenario, excess savings from households should provide a tailwind to consumer spending to the tune of EUR180bn or +1.5% of GDP in Europe and more than +3% in the US in 2021. According to Euler Hermes this will mean that around EUR163bn could be transformed into private consumption in the Eurozone.

In the Nordic countries, excess savings are expected to be unleashed in this way (in 2021 percentage of GDP) according to the macroeconomic analysis from Euler Hermes:

Pyyhkäise nähdäksesi lisää

  Household excess savings likely
to flow into consumption (minimum % of GDP)
Remaining household excess savings
potentially unleashed for investment or
consumption purposes (% of GDP)
1.04% 1.2%
Sweden 0.7% 0.8%
Finland 0.5% 0.5%
Denmark 0.3% 0.3%

“Cumulated savings have been boosting online shopping, the sale of construction materials, household items and electronic equipment”, says Tiina Björkqvist and continues: »The consumer confidence is still relatively strong and it is estimated that the GDP growth during 2021 will be based on private consumption, especially during the second half of the year. Car sales have already recovered to the pre-crisis level«.

Assistance mechanisms are phasing out

The “whatever it takes” consensus and approach to fiscal policy in 2020 will be giving way to more diversified policy prospects.

If we stick with the Olympic lingo, the global demand torch will pass to the US, with its gigantic USD1.9trn fiscal stimulus (9% of GDP). Euler Hermes expects most EU flagship fiscal policies to be phased out no sooner than fall 2021, which is bound to trigger a rise in unemployment and insolvencies.

Most countries will continue to inject liquidity and support companies and jobs to avoid the sanitary and economic crisis morphing into a financial and social crisis. However, 2022 will bring an economic reality check for companies.

The amount of filed bankruptcies in Finland has declined 17% during 2020 and 28% in the beginning of 2021, according to Tiina Björkqvist.

»It might be that some “zombie” companies have been kept alive with government subsidies and that the amount of bankruptcies is cumulating during the second half of the year. We still expect to see an increase in bankruptcies by approximately 25% during the second half of 2021 compared to 2020«, says Tiina Björkqvist.

Effects on investment are not yet resolved

The huge investment packages in the pipeline in the US, the EU and in China will all contribute to support demand and the global economy’s growth potential over the medium term. However, their success depends on whether governments can channel excess savings to productive projects and boost the private sector.

Tiina Björkqvist explains that huge investment plans are impacting Finnish economy positively as the economic structure in Finland is mostly built around producing machines and investment commodities.

»Finland is known globally for its high tech solutions. It is a huge opportunity for Finland as a relatively small but smart high tech economy«, says Tiina Björkqvist.

Bottlenecks in the global supply chain

Global trade growth will rebound to 7.9% in 2021 in volume terms, but excluding the positive base effects from 2020 growth, will stand at 5.4%. More importantly, Euler Hermes expects a temporary slowdown in Q2 2021 due to prevailing supply-chain disruption. In addition, trade in services will remain impaired by the delayed reopening of sectors most impacted by Covid-19.

Even though disruptions in production in the short term might cause harm for some companies in the Finnish industry and wood sectors, these uncertainties might be a positive thing in the longer term, argues Tiina Björkqvist.

»Overall the uncertainties in the supply chain could impact the European and Finnish economy positively in the long term as production will move back from Asia to Europe or closer countries, which could provide a cheaper workforce and more reliable business conditions«, says Tiina Björkqvist.

Temporary overshoot of inflation

Inflationary pressures will continue to increase notably in 2021, thanks to the recent input cost bonanza, we have recently experienced, driven above all by strained supply chains and the oil price recovery, higher inflation in service sectors along with the economic reopening in the second half of 2021 and strong pandemic-related roller coaster base effects.

However, Euler Hermes don’t expect central banks to stage a policy U-turn as a reaction to inflation temporarily overshooting in the US at 3.5% by mid-2021 and hitting the 2% target for a few months in the Eurozone.

During 2020 the inflation was only 0.4%, especially due to the reduction in energy prices and there was only a moderate increase in service prices, says Tiina Björkqvist.

»There is expectations that inflation will reach 1.3% in 2021, impacted by an increase in oil prices. Additionally, the Finnish government has decided to increase the tax on alcohol, tobacco and fuel products during 2021. The increase in fuel prices will somewhat impact the overall price level«, says Tiina Björkqvist.