• Financial firms will face weak demand for their services, ultra-low interest rates and mounting defaults by businesses and households in 2021. 

• Robust levels of reserves, base capital and liquidity should allow most firms to survive.

• The UK and Hong Kong will begin to chart new courses as financial centres.

• The National Security Law will make Hong Kong a less appealing location for some global financial firms, but Chinese firms will continue to operate there.

Our new report “Industries in 2021” foresees a difficult year for financial services firms in 2021 as they grapple with weak demand in feeble economies, “lower for longer” in interest rates in most currencies, and a rise in defaults among beleaguered companies and households. We anticipate a return to modest growth in most economies in the new year, but foresee customers’ difficulties leading to mounting levels of bad debts. With public debt mounting, governments will curb spending even while monetary policy is likely to stay highly accommodative for many years.

“The financial industry fared surprisingly well at the beginning of the Covid-19 crisis as rapid policy responses avoided a freeze-up in markets and firms’ financial buffers proved much more robust than in the past. The sector will begin to recover in 2021, at a pace largely dictated by the rollout of effective vaccines, but we will also see more borrowers—many now protected by forbearance and state assistance—succumb to heavy debt burdens.”

STEVEN LESLIE, PRINCIPAL ANALYST FOR FINANCIAL SERVICES AT THE ECONOMIST INTELLIGENCE UNIT

Some parts of the industry have benefited from the Covid-19 crisis and we expect them to continue to enjoy tailwinds in 2021. These beneficiaries include digital payment companies as well as capital markets, which have enjoyed increased demand for bonds as firms bolstered their cash positions. Banks have drawn in volumes of cheap deposits as households increased their savings amid economic uncertainties.

London and Hong Kong, two of the world’s principal financial hubs, will begin to shift their orientation in 2021. The UK will sever its economy from the EU single market in the new year, which will make it less enticing as a centre for European finance. Likewise in Hong Kong, the imposition of the new National Security Law, will make the city a less appealing location for many global firms and their staff. Counterbalancing this trend will be its rising role in providing finance for mainland firms, including those listed overseas and seeking a secondary listing at home.

Download the full report “Industries in 2021“