Top Industry Trends and Outlooks for 2021

Credit

As we approach the end of this extraordinarily and uniquely difficult year and look ahead, the question foremost in our minds is: Will 2021 be the year we bring the pandemic under control so that the world can get back on track?

The COVID-19 pandemic will continue to dominate the credit story in 2021 but promising news on several vaccines has brought hope that an end is in sight. Yet obstacles to production, distribution, and acceptance mean that the end-date for the pandemic remains uncertain. Even if a vaccine is widely available by mid-year, which is assumed in S&P Global Ratings’ baseline, the containment of the pandemic is likely to be very uneven worldwide. Until then, the main risk for the first half of 2021 is that further waves of COVID-19, requiring renewed containment measures, may harm a fragile economic recovery and lead to further credit deterioration, particularly in sectors most exposed to social distancing and travel restrictions.

Once the pandemic is largely contained, the focus will likely turn to the gradual phasing out of extraordinary stimulus measures—and the social, economic, and credit implications of doing so.

Economic Recovery

Recovery prospects look brighter for 2021, but the sequence of the recovery matters. The recent endorsement of the COVID-19 vaccine in the U.S. and other countries supports a potentially faster economic recovery in 2021.

However, the vaccine still needs to be effectively distributed and immunization needs to take place before the pandemic fades. Consequently, the short-term outlook still looks challenging, especially for those EM economies where cases are surging again.

The recent slowdown in economic activity will probably extend into the first quarter of 2021. This sequence is especially stressful for those governments facing the rising debt and fiscal pressures and for corporations with depressed revenues and limited room to further cut expenses.

U.S.

As the pandemic has continued to spread this year, public finance issuers across the U.S. have had to navigate the social, financial, and economic effects of the disease. The pandemic and its aftermath will continue to dominate credit conditions in 2021.

Despite a vaccine in sight, the virus curve is spiking and there is likely to be additional economic damage ahead in the U.S. S&P Global Ratings expects the aftershocks from 2020 will be reverberate for many years in U.S. public finance and will continue to be felt unevenly by sector and state.

S&P Global Economics expects real GDP to contract 3.9% this year and not get back to precrisis levels until the third quarter of 2021 The U.S. unemployment rate won't reach its precrisis low until after 2023.

Market Volatility

A rise in the price of copper is likely to continue in 2021 on low inventories and a bullish demand narrative, though at a slower pace, industry analysts said.

The red metal has found support on the back of upcoming elections and labor negotiations in Chile and Peru, an anticipated rebound of the global economy, sustained growth of industrial activity as well as robust metal demand by China, global COVID-19 vaccination rollout, and a weaker dollar.

"This provides a lot of confidence," said ABN AMRO Group senior economist Industrial Metals Markets Casper Burgering.

"As a result, total long positions are high, but this also brings a downside price risk because it increases the likelihood of profit-taking by speculators. In 2020, the market has taken a substantial advance on the good news of 2021. The copper price will rise further in 2021, but in a lower gear."

Banking

Bank earnings will improve on lower credit loss provisions, although pandemic-related asset quality challenges and decades-low net interest margins will keep profitability ratios below 2019 levels. The recently passed $900 billion stimulus bill, continued economic growth, and vaccine distribution will keep credit losses from rising as high as S&P Global Ratings had anticipated earlier in the pandemic.

Loan charge-offs triggered by the pandemic will move toward S&P Global Ratings' updated estimate for the U.S. banking system of 2.2% rather than S&P Global Ratings' prior 3% estimate. With provisions, which equated to about 1.2% of loans in the first three quarters of 2020, falling to 1% or less of loans in 2021, allowances for credit losses will shrink.

The Biden Administration and a Democrat-controlled Congress could push for more stimulus--which may benefit the economy and bank asset quality--but also higher corporate taxes and tougher regulatory and legal enforcement, which could pose risks for banks. Capital and liquidity will remain in good shape. However, regulatory capital ratios, which rose in 2020 in part due to restrictions on shareholder payouts, will likely decline with the easing of those restrictions.

ESG

After a tumultuous 2020 for the global recycled plastics markets that saw production margins pressured and bearish virgin prices causing buyers to shun recycled plastics, the first half of 2021 may see a step change, at least in Europe and the US, in reaction to newly signed legislation that may provide an impetus to increased demand.

In the Asian markets, a combination of uneconomic export opportunities and expected low virgin prices well into H1 2021 will likely mean recycled plastics markets will continue to struggle, though upcoming high-specification recycling plants, delayed from 2020, may provide a lifeline and a new impetus to high-specification recycled plastics in the region.

Commodities

Global gas demand is expected to increase by 2.8% -- or around 110 Bcm -- this year, just above the extent of the decline witnessed last year and signaling a return to 2019 consumption levels, the International Energy Agency said Jan. 26.

In its first ever quarterly gas report, the IEA warned, however, that the rate of demand growth remained uncertain due to ongoing concerns over the coronavirus pandemic.

According to the IEA, gas demand in 2020 fell by 2.5%, or by an estimated 100 Bcm -- the largest ever recorded drop in gas consumption. Demand this year is seen at 4.021 Tcm, up from 3.91 Tcm in 2020. "Global gas demand is expected to recover in 2021 from an unprecedented drop in 2020," the IEA said. "Yet the prospect of a prolonged economic impact related to the COVID-19 pandemic heightens uncertainty about the pace and trajectory of growth," it said.

Further Reading