Download Scope Ratings’ June 2021 interim global outlook.
The legacy of this Covid-19 crisis includes much higher government debt and structurally wider budget deficits, reflecting the shift in fiscal orthodoxy as governments have turned their backs on austerity, which was the default policy paradigm to differing degrees after the Global Financial Crisis.
Structurally weakened government balance sheets are credit negative, but still highly accommodative monetary policy – particularly from the Federal Reserve, ECB, Bank of England and Bank of Japan – has been compensating by ensuring continued low rates. The G4 central banks have enhanced roles as lenders of last resort.
In Europe, important institutional reforms with the agreement on the EU Recovery Fund and joint EU debt issuance is another credit positive development brought about in response to the pandemic.
More sovereign issuers on Negative Outlook than Positive; greater crisis effect on emerging countries
Since the Covid-19 crisis started, Scope has downgraded two sovereign issuers of the 36 credits it evaluates (Turkey, Belgium), while upgrading two (Lithuania, Ireland). Eight countries globally are presently evaluated by our agency on Negative credit Outlook (three EU member states, five non-EU) with one on Positive Outlook (Greece).
In emerging economies, the crisis has held greater net negative consequences for sovereign credit risk as governments’ balance sheets have weakened without domestic central banks being able to provide commensurate monetary support.
The global economy has fresh momentum, but recovery is likely to stay uneven and subject to setbacks
The good news is that the global economy has renewed momentum, supported by vaccination programmes, which have accelerated across many countries. However, vaccines are not equally available everywhere, so the economic recovery does not look as sustainable in emerging economies as it may in advanced ones.
However, full economic normalization remains vulnerable even in advanced economies to setbacks as segments of populations are yet to be vaccinated, virus variants present latent health-care risks and the withdrawal of extraordinary economic stimulus potentially lays bare higher unemployment and corporate insolvencies.
Governments may have to re-introduce some restrictions to deal with possible future increases in coronavirus cases, though we do not expect a repeat of the economic disruption of 2020 as vaccinations continue and countries adapt to new ways of doing business.
Upside revision of 2021 global growth driven by stronger US growth; monetary policy to remain accommodative over immediate future
The slight upward revision to our 2021 global GDP forecast stems mostly from a revised outlook for the US (+2.2pps to 6.2%) compared with six months ago. In contrast, we have revised down our forecast for euro area growth by 0.9pps to 4.7% and revised down China’s by 0.6pps to 9.3%, with forecasts for the UK and Japan unchanged from December projections at 6.6% and 3.0%. The impact of the pandemic on labour markets remains comparatively benign due to government interventions, with unemployment rates averaging 8.3% in the euro area this year, 5.7% in the US and 4.6% in the UK.