Market outlook

Update: 11 May 2021

Risk statement 

As we are mainly active in banking, insurance and asset management, we are exposed to a number of typical risks for these financial sectors such as – but not limited to – credit default risk, counterparty credit risk, concentration risk, movements in interest rates, currency risk, market risk, liquidity and funding risk, insurance underwriting risk, changes in regulations, operational risk, customer litigation, competition from other and new players, as well as the economy in general. KBC closely monitors and manages each of these risks within a strict risk framework, but they may all have a negative impact on asset values or could generate additional charges beyond anticipated levels.

At present, a number of items are considered to constitute the main challenges for the financial sector. These stem primarily from the impact of the coronavirus crisis on the global economy and, in particular, the financial sector. These risks come on top of risks relating to macroeconomic and political developments, which affect global and European economies, including KBC’s home markets. Regulatory and compliance risks (including anti-money laundering regulations and GDPR) remain a dominant theme for the sector, as does enhanced consumer protection. Digitalisation (with technology as a catalyst) presents both opportunities and threats to the business model of traditional financial institutions, while climate-related risks are becoming increasingly prevalent. Finally, cyber risk has become one of the main threats during the past few years, not just for the financial sector, but for the economy as a whole.

Our view on economic growth 

The coronavirus pandemic remained the single most important driver of global economic dynamics in the first quarter of 2021. As was the case in the fourth quarter of 2020, quarter-on-quarter economic growth in the euro area as a whole was moderately negative in the first quarter of 2021. The quarter-on-quarter growth of the Belgian economy was moderately positive in the first quarter of 2021, whereas it was slightly negative in the Czech Republic. 

For the time being, the recent surges in the pandemic continue to hold most of continental Europe firmly in their grip. In particular, the circulation of more infectious and dangerous virus strains is putting pressure on health systems again, necessitating the extension or introduction of strict lockdown measures in many countries. Significant progress on the health front can only be expected as the ongoing vaccination campaigns pick up speed. The impact of the vaccination programmes on economic recovery will therefore probably become increasingly visible in the second half of 2021 as economies gradual start to re-open. Therefore, we expect European growth to accelerate in the second half of 2021 and the level of European economic activity to return to its pre-pandemic level in the course of 2022.

Our view on interest rates and foreign exchange rates 

Coordinated monetary and fiscal policy stimuli continue to support the US and euro area economies. We expect both the Federal Reserve and the ECB to keep their policy rates unchanged for an extended period of time. 

In the first quarter of 2021, 10-year government bond yields in the US soared, resulting in a significant steepening of the US yield curve. Due to the strong correlation along the global yield cycle, German yields rose too, but to a much lesser extent. The increase in US yields was mainly driven by a rise in inflation-adjusted (real) yields. Despite falling back at the beginning of the second quarter, US bond yields are expected to continue increasing modestly in the second quarter, in line with the recovery of the US economy. This will also lead to further moderate upward pressure on German yields, but again to a lesser extent in view of the ECB’s stated intention to maintain favourable financing conditions and to step up its PEPP bond purchases in the second quarter. As a result of the ECB’s policy stance, we also expect intra-EMU sovereign spreads broadly to remain at their current compressed levels.

As regards exchange rates, we expect the Hungarian forint to strengthen somewhat on its current levels against the euro in the remainder of the first half of 2021, in line with our expectation that the Hungarian central bank will not ease its policy stance in the course of 2021. The Czech koruna is also likely to appreciate moderately against the euro in the coming quarters. We expect the Czech National Bank to raise its policy rate by 25 basis points in the fourth quarter of 2021, mainly as a result of the inflation outlook. As far as the US dollar exchange rate against the euro is concerned, we expect some short-term support for the dollar, based on interest rate differentials. In the medium term, however, a modest depreciation of the US dollar against the euro is likely, driven by the improving outlook for global growth and inflation, increasing US budget and current account deficits and the projected higher inflation differential between the US and the euro area.

For more detailed analyses and data, please refer to KBC Economics.


Disclaimer: the expectations, forecasts and statements regarding future are based on assumptions and assessments made when drawing up this text. By their nature, forward-looking statements involve uncertainty. Various factors could cause actual results and developments to differ from the initial statements. Moreover, KBC does not undertake any obligation to update the text in line with new developments.




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