HSBC: Vaccine hopes drive Q1 economic recovery

In its economic update for the first quarter of 2021 HSBC provided a global growth forecast and predicted a revival for the UK economy in the summer, rather than spring. It also expected negative interest rates will be off the table, at least for now.

HSBC noted that the race to vaccinate the world’s vulnerable populations against Covid-19 is now off and running. The speed with which vaccines can be rolled out, and whether new variants of the disease circumvent them, will be the key determinants of the timing and strength of economic recoveries. HSBC said that at present, the political imperative in advanced economies is to immunise as many people as quickly as possible, which means that a concerted effort to provide vaccines to poorer countries won’t get underway until later this year.

The global economic revival is just about intact, believes HSBC, although the second wave of the pandemic means that many economies, notably in Europe, are again in lockdown. But the restrictions are not as severe as those that were imposed last spring, while many businesses have adapted their offerings to the new environment. The surge in demand for manufactured goods, which helped to fuel strong growth in China in the autumn, is now waning as western consumers contemplate the re-opening of close-contact services in the spring.

The economic update noted that financial markets continue to rally in anticipation of a vaccine-fuelled recovery. Commodity prices are now above where they were when the pandemic struck, and bond yields have edged up as investors anticipate higher inflation rates in the near term. Yet the roll-out of vaccines may not be as straightforward or as quick as markets expect, which could set the stage for further bouts of volatility.

“The UK has made a good start in rolling out vaccinations, and it is likely that some restrictions will be eased in March,” said Mark Berrisford-Smith, head of economics, commercial banking, HSBC UK. “With GDP expected to expand by around 4.5% both this year and next, the economy is projected to regain its pre-covid level of output at the end of next year. A key driver of the recovery will be the £140 billion or so of additional bank deposits that have been built up by households during the pandemic.”

But before the revival gets underway, GDP is set to contract by nearly 3% in the first quarter, with matters made worse by the disruption encountered by businesses as they adjust to the new trading relationship with the EU, and with the operation of the Northern Ireland protocol.

Chancellor Rishi Sunak is due to present his second budget on March 3. He will be keen to signal how and when covid support measures will be wound down, and how money might be raised to help pay for them. Nonetheless, HSBC thought the budget deficit is still likely to top £200b in the 2021/22 fiscal year.

HSBC believes negative interest rates in the UK are off the table for now, although a final dose of quantitative easing is expected, probably in May. Sterling has enjoyed a modest rally in recent weeks, most likely in response to the UK’s relatively fast vaccine roll-out. But in the medium term, it will continue to be pressured by the abundance of quantitative easing, compared to other major economies, and by the UK’s weak fiscal position.

Read the full economic commentary here: Economic update 2021 Q1