Cyclical outlook: new opp's & old risks of the grand reopening; Whose to win from a G7 corporate tax deal; ‘Tomorrow’, a podcast by Allianz Research

Life is often like a game of tennis: the player who serves well seldom loses. A kick-serve this week with our cyclical outlook: Not the 10 commandments but the 10 messages we’d like to convey related to the grand reopening after the long periods of lockdown; Match point with fresh insights on whose to benefit from the G7’s landmark agreement to target a 15% global minimum corporate tax rate for large Multinationals. And our attempt at a ‘double bagel’ with the launch of our new macro podcast series ‘Tomorrow’ with Ludovic Subran & other economists from Allianz Research.

Grand Reopening: new opportunities, old risks (cyclical outlook)

Ten key messages to bear in mind:

1. Vaccine security will shape the grand reopening. While advanced economies delivered on immunization campaigns, vaccine hesitancy and second-generation vaccines are first-order priorities. In the meantime, under-vaccination in Asia and in Emerging Markets may cause desynchronized growth paths.
2. A multifaceted recovery: high-pressure economics in the US, low-pressure economics in Europe. We expect global GDP to grow by +5.5% in 2021, with the US being a clear outperformer. In Europe, the return to pre-crisis levels will take one year more compared to the US (Q1 2022) and the return to the pre-Covid-19 growth path an extra four years – if it happens at all.
3. Revenge spending is happening but residual savings to amount to EUR500bn in Europe, and USD1trn in the US. Consumption will lead the recovery as we expect pent-up demand to reach 3% of GDP in the US and the UK, and around 1.5% of GDP in Europe. However, hoarding behaviors remain for precautionary reasons, complicating policy choices down the road.
4. Inflation, what inflation? Bottlenecks in terms of supply (raw materials, transportation capacity, workers) will likely keep cost inflation at a five-year high until the end of 2021. Companies’ pricing power remains limited, notably in Europe. Households’ purchasing power will be under pressure as the employment gap (4 million jobs in the Eurozone and more than 7 million in the US) will keep wage inflation in check. But no monetary inflation is likely as the velocity of money is at a record low.
5. The Faustian pact between expansionary fiscal and monetary policies is here to stay. We expect central banks to be patient before hiking rates in 2023 (some exceptions: Norway, New Zealand, the UK by September 2022). Total global debt increased by more than USD24trn in 2020, including USD12trn of public debt and USD12trn of private debt. Emerging Markets are more exposed to a sudden shift in market sentiment, which would impose a disorderly adjustment of currencies and debt. 
6. Political crossroads ahead for Europe but no repeat of the 2012 crisis in 2022. In the Eurozone the Next Generation EU fund and the ECB will support the recovery and keep financial stress at bay while German-French elections may create policy surprises. Yet, watch out for heterogeneity and the Italian situation.
7. Credit risk under control. The insolvency puzzle continues as corporate debt increased to new highs but cash on the balance sheet did, too, and liquidity support to firms will continue into 2022. European non-financial companies will have to increase their margins by 1.5pp on average in order to make their debt sustainable.
8. Green is the new black of industrial policy. The transition towards a cleaner model of growth will require the definition of a real new industrial policy, consisting of generating new fiscal resources, subsidizing the transition, protecting domestic producers and investing in infrastructure. Over the 2021-50 period, annual energy sector investment has to increase by around 1% of global GDP compared to today's levels to enable a net-zero energy transition. With USD1.3trn, investment in renewable electricity will need to surpass the highest level ever spent on fossil fuel supply (USD1.2trn in 2014).
9. Political risk remains amid a new US paternalism and tactical multilateralism. The US has launched a new wave of global and multilateral initiatives for climate change and tax policies. But this type a revival in international engagement does not necessarily mean unselective multilateralism: so far in 2021, the US has been the most active with trade protectionist measures and China and Germany the most targeted (in net terms). While the Asia-Pacific region could see some acceleration in the expansion and implementation of free trade agreements (e.g. RCEP, CPTPP etc.), it is not immune to pre-existing geopolitical tensions that have worsened with the Covid-19 crisis (e.g. China and the “Quad”).
10. Markets’ risk-on music keeps on playing but mind endogenous financial instabilities. Most asset classes are front-running the grand reopening and strong policy support far better than expected. But the upside is limited now while growing imbalances increase risks to the downside.

Please find our full report and a short slide deck here.

G7 corporate tax deal: Who is winning, who is losing?

Ahead of the G7 summit this weekend, we looked into who will win and who will lose from the recently proposed global minimum tax rate of at least 15% for companies. Among large Base Erosion and Profit Shifting (BEPS) countries for which data was available, we find that Poland, Spain, China, the Netherlands are clear winners; the US, the UK, Russia and Italy are relative winners; France, Japan, and Canada are neither winning nor losing and that Ireland, Brazil and Hungary are clear losers from the deal. The G7’s decision has initiated a crucial negotiation process, which will include a virtual meeting of more than 130 nations on 30 June to agree on changes proposed by the OECD in relation to global taxation under the umbrella of the BEPS initiative. Next, a G20 summit will be held in Venice on 09 July for the endorsement of these agreements and then a possible sign-off is expected in October 2021 during another G20 meeting. In the meantime, and given the US’s endorsement of the OECD’s proposals, tense debates and negotiations emerged in countries such as Mexico (necessity to reduce tax loopholes), Ireland (necessity to increase the 12.5% corporate tax rate), Hungary and the UK (proposal of excluding financial activities from the agreement).

Though the eventual implementation of this agreement will take a long time because of ratification issues, the initiative represents a unique moment of global fiscal convergence. In the long run, the global minimum tax rate for MNEs could impact economies’ potential growth via different channels:

• The capital repatriation or productivity growth channel
• The terms of trade channel
• The public debt channel
• The public investment channel or crowding-in/crowding-out effect
• The corporate tax revenues channel or redistribution channel

More on the channels and the long-term impact and our full report here.

’Tomorrow’, a podcast by Allianz Research

Listen up! There’s a new way to get the latest analysis from the experts at Allianz Research. Tune in to Tomorrow, a podcast where we’ll be talking about our latest analyses of economic and capital market developments, as well as our views on trends affecting risk management.

In each episode, economists from Allianz Research, including Chief Economist Ludovic Subran, will dive into the details of one of our recent reports, explaining what the findings mean for the global economy, companies, markets and more. Five episodes are already available, more will be added twice a month.

You can listen to the episodes on Apple Music, Spotify, Deezer, Google Podcasts and Amazon Music.