2021.01.04

What 2021 will bring to Baltic business community?

2020 was extreme not only for the global health care – but also for the business community, including companies in the Baltic region. Rapid spread of Covid-19 was followed by a series of lockdowns, collapse in foreign and domestic demand, high uncertainty about economic recovery and creation of effective Covid-19 vaccine. And this was only part of the issues that Baltic businesses experienced: 2020 was also the year of U.S. presidential elections, which resulted in a very close race between the two (very different) presidential candidates. Lastly, there was also a high level of uncertainty regarding the future EU-UK economic relations, as rounds of trade deal negotiations time after time ended without a deal and without a major breakthrough. To sum up, uncertainty and risk-wise, 2020 was a year to forget for the business community – not only in the Baltic region, but perhaps also globally.

However, 2020 came to an end – and now is a good time not to reflect on all things that happened in 2020, but to look forward and anticipate changes that 2021 will bring to business community.

What should businesses in the Baltic region expect from 2021? Here are the main aspects that you should consider.

1. Do not look at 2021 as one time period – there will be 2 different economic cycles

This is probably the main message that I would like to communicate for the Baltic business community. 2021 will also be a rather strange year for the Baltic companies – because we will see not one, but 2 different economic cycles. Yes, all of the major global economic institutions in the Baltic region communicate and expect economic recovery in the region in 2021 – but 2021 will not be without its challenges.

It does not take a genius to forecast that economic recovery in the Baltic region will depend on 2 critical aspects: (1) the start of mass vaccination; and (2) the speed of mass vaccination. This is why we will see 2 economic cycles in 2021.

All in all, of course the economic situation in 2021 will be better than in 2020. But do not expect economic recovery to pick up from the beginning of 2021. I suspect that the real economic recovery will not begin until late spring or even early summer – which is when mass vaccination will probably begin. Therefore, in the fist half of 2021 expect similar economic environment to economic environment of autumn 2020 – with a chance of mild lockdown measures in the first quarter of 2021. 

On the other hand, the start of mass vaccination will mark and end to business misery and a beginning of major economic recovery, which will be primarily driven by increasing willingness of consumers to spend and decreasing consumer willingness to save. Things will pick up very fast. The start of mass vaccination will mark an end to uncertainty for consumers – in turn, lower level of uncertainty and more predictable economic future will encourage people to spend – and spend big. Therefore, the second half of 2021 will see a major economic recovery on all fronts – summer, autumn and winter of 2021 will be the period of economic euphoria.

2. Prepare for 2021 H2 in 2021 H1

Despite that fact that the first half of 2021 will be rather dull sales and profits-wise, businesses must use this period to prepare for major economic recovery in the second half of 2021. Those who will fail to prepare will fail to capitalize on a major boost in foreign and domestic demand in 2021 H2. To sum up, businesses should look at the first half of 2021 as a period of preparation for economic recovery in 2021 H2.

3. Things will be more expensive in 2021 H2

Economic recovery in the second half of 2021 will go hand in hand with an increase in prices. For the Baltic business community this means an increase in commodity prices. Therefore, businesses that are operating in manufacturing sector, should expect prices of inputs to increase in 2021. Mass vaccination on a global scale will push prices of oil, metals, etc. upwards. Perhaps the first half of 2021 is a good period to buy additional amount of inputs, as prices of commodities will go up in 2021 H2.

Increasing global energy and commodity prices, together with increasing consumer willingness to spend will also result in a much higher inflation. In fact, in 2021 H2 we will probably experience economic event called “inflationary spiral”. Economic recovery, decreasing uncertainty, better labor market perspectives will encourage consumers to spend money on goods “today” rather than “tomorrow”, as “tomorrow” prices of goods and services should be higher. To put it simply, together will economic recovery, businesses should expect higher prices in 2021 H2.

4. Consumers have a lot of money to spend. The question is how to attract those consumers

Economic stimulus, together with lockdown measures in the euro area resulted in a fact, that, generally speaking, the financial well-being of consumers has actually improved – despite a major decline in economic activity. Data compiled by the European Central bank (ECB) shows that in October 2020 the accumulated amount of deposits that euro area consumers hold in commercial banks stood at 8.2 trln. EUR – a historical record. This basically means that currently, euro zone consumers are sitting on a record pile of cash. What is more, since the beginning of Covid-19 epidemic in EU, household deposits in the euro area increased by 401 bln. EUR. In comparison – data compiled by Eurostat shows than in 2019, the GDP of Austria stood at 397 bln. EUR. This means that cash pile that euro area consumers accumulated since the beginning of epidemic on Europe, is equal to GDP of Austria. Similar rules also apply to the Baltic region: data compiled by Bank of Lithuania shows that in October 2020, accumulated deposits of Lithuanian households stood at 17 bln. EUR, which is also a historical record.

These numbers show that once lockdown measures will be eased and once mass vaccination will begin, EU consumers will be ready to spend money. The question is – hot to make consumers spend money on your product or service. Therefore, in order to “catch” the consumer, businesses should spend on marketing and communication to create an adequate identity of your company, brand, your product or your service. Ideally, your company should spend around 10% of total expenditures on marketing and communication. If your company spends less, I would suggest to seriously reconsider this – small marketing budget will result in smaller sales as consumers will engage with companies with better brand identity.

5. Covid-19 changed the way we do business and work – some of those changes will remain

Covid-19 has changed the way we do business and the way we work. It is quite clear that some of those changes will remain even after the pandemic ends. To put it simply, business environment will never come back to “normal”. For example, you should expect that some of your workers will continue to work from home at least partly. Therefore, businesses will have to adapt and accept changes in the working environment. Companies which will not adapt will find it more and more difficult to manage teams and do business.

To sum up, 2021 will be an interesting year for the Baltic business community. Things will gradually improve, but economic recovery will take time – expect sluggish economic cycle in 2021 H1 and major economic recovery in 2021 H2.