Global economic quarterly: the recovery outlook & economic forecasts

15 July 2020

Michelle GirardUS Chief Economist

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Ross WalkerChief UK Economist

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5 minute read

Lockdowns may be easing, but risks of longer-term economic scarring remain. Global Co-Heads of Economists Michelle Girard and Ross Walker forecast what’s on the horizon for the global economy.  

It’s several months since the coronavirus lockdowns took hold around the world, and with more Q2 data now in hand we can crystalize what it all means for the global economy in both the short and long term. While it looks like there’s going to be a sharp rebound in activity in Q3, we’re expecting longer-term “ scarring” to the global economy.

Let’s take a look at why and how these economic trends vary by region. For a two minute snapshot of this article’s insights watch this video.

Global Growth Forecasts: April 1st forecast vs. current forecast

While the Q2 contraction in gross domestic product (GDP) levels will be somewhat deeper than expected, as you can see above we’re now forecasting a stronger rebound in Q3 as lockdown measures ease.  This chart may appear to project a V-shaped recovery but we don’t expect a return to pre-virus activity levels before the middle of 2021. That’s because the scars to the economy caused by business insolvencies and elevated unemployment will be longer-lasting.

No two recessions are identical. One distinguishing feature of this one is that it’s been caused by an external shock hitting consumer demand rather than capital expenditure. We see this reflected in consumer confidence surveys lagging behind their business counterparts. This isn’t to suggest that external demand will escape unscathed: global trade is set for its weakest year since World War II.

Let’s now consider three economic drivers that we’ll be closely monitoring over the coming months and years: policy, unemployment and inflation.

Policy responses: sustained stimulus on the horizon

Over the past four months we’ve seen unprecedented macroeconomic policy stimulus to prop up demand and boost the flow of credit to the real economy. In fact, we estimate that stimulus across the world’s major economies amounts to 10% of global GDP – a truly remarkable degree of policy activism. This stimulus has almost certainly averted an economic catastrophe in terms of business bankruptcies and soaring unemployment.

Will this pattern continue though? Fiscal stimulus is likely to be sustained in order to support the global economic rebound. The short-term concern is that much of the stimulus is temporary and front-loaded – especially the support for the labour market we’ve seen in the form of welfare transfers in the US and furlough schemes in Europe. That means that further policy action is likely, with greater emphasis on measures to support a sustainable recovery.

Unemployment: a long-term problem

The labour market is a hugely important measure to follow because in our view it can provide a more accurate guide to the state of the global economy than just GDP figures.

Different regions have different starting points and labour market structures, which makes it difficult to make comparisons. However, unemployment has generally risen significantly as a result of coronavirus and as you can see in the below, we’re expecting that to continue well above pre-crisis levels at least into 2022 – even in Japan, the location least affected by coronavirus. 

That’s because we believe that the lockdown will lead to a restructuring of economies in a way never seen before in modern times.

Unemployment rate comparisons

Inflation: muted in the short term, but a potential risk in the longer-term

The coronavirus-induced drag on consumer inflation from lower energy prices looks to have run its course, but core inflation seems likely to remain muted, and we do not expect any major spikes in inflation next year. In fact, subdued demand looks likely to be the most important driver of prices for the next two or three years, putting a cap on inflation.

The longer-term outlook for prices is much more uncertain. The current policy stimulus – much greater fiscal activism combined with extensive quantitative easing (QE) – should be inflationary in theory, but much depends on central banks’ actions, and these could differ by region.

The US

  • Growth: we believe that the US economy contracted by a remarkable 11.2% between its peak in February this year and its low point in April. In Q3 we’re predicting a rebound in GDP of 6.5% but congruent with the global trend on a year-on-year basis we’re looking at a contraction of 4.8% for all 2020.
  • Inflation: the coronavirus lockdowns are strongly deflationary in the near term. Core Personal Consumption Expenditures (PCE) inflation fell to a ten-year low of 1.0% in April and it could drop to 0.8% by the end of the year before approaching the Fed’s 2% target in 2021.
  • Policy: the Fed has cut rates to zero, reintroduced QE and announced a host of measures to support households, businesses and financial markets. We expect rates to remain around zero until at least 2022.

Euro area

  • Growth: we’re still expecting the euro area economy to shrink by 8.2% in 2020, with a 6.7% rebound next year.
  • Inflation: inflation is likely to fall below zero this year due to a VAT cut in Germany, but we expect it to bounce back to around 1% by the end of 2021.
  • Policy: the first phase of policy has been bold, and fiscal plans are now focusing on the recovery phase, including at the federal EU level. This could be strongly beneficial for both the regional economy and the European Union itself.

UK

  • Growth: we expect the UK economy to contract by 21.3% in the second quarter and by 9.3% in 2020 overall. It’s unlikely to return to pre-crisis levels before 2023 as the end of the furlough scheme is likely to see a second wave of job losses later this year.
  • Inflation: CPI looks set to dip – temporarily – into negative territory this year as the VAT cut combines with weak underlying demand.
  • Policy: the fiscal policy response so far has amounted to over 9% of 2020 GDP, and we expect further easing to be announced in the autumn Budget.
  • Brexit: the risks of no deal, or a very limited free trade agreement, with the EU look to be rising.

China

  • Growth: China has already entered the recovery phase, with industrial production leading the way. Domestic demand has lagged due to weak consumer sentiment.
  • Policy: after initially making job security the top priority, policymakers now seem likely to adopt stronger fiscal easing to stabilise growth, although we expect the central bank to remain prudent.

Japan

  • Growth: we expect the recovery to moderate in Q3 as Japanese people voluntarily social distance.
  • Inflation: deflationary pressures should be more limited than elsewhere due to structural price rigidity.
  • Policy: the Bank of Japan should continue with its current monetary policy measures, but could increase the supply of funding to companies if necessary. The government has already announced stimulus packages equivalent to 40% of GDP.


Watch this video for a commentary of the above insights

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