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Global economic recovery may be shaped like the Nike ‘swoosh’
JANICE ROBERTS Editor, MoneyMarketing
“The shock that the world economy has just experienced has been devastating, and outside any sort of historical experience that we've ever known,” says Fitch Rating’s Chief Economist, Brian Coulton, in the agency’s latest Global Economic Outlook (GEO), presented at its Global Sovereign Conference 2020 - Middle East & Africa, held online last month.
Official data now shows the extent of the economic dislocation in 2Q20, with world GDP falling by 8.9% yearon-year. Describing this as outside the range of anythingseen in modern peacetime, Coulton points out that there has been a large variation across countries. “This variation is quite closely correlated with the stringency and the length of lockdowns that were imposed to cope with the COVID-19 pandemic in the second quarter. The biggest falls that we saw were in India, Spain, the UK and France, all countries where there had been very tight lockdown policies in place that lasted for a long time.”
The recovery in economic activity following the coronavirus-related recession in March and April has, however, been faster than anticipated.
“The shocks have been short by the standards of historic recession episodes. We find ourselves looking at economic activity and economic data at a much higher frequency than we normally find necessary – over the last few months, we've been looking at monthly, weekly, even daily indicators of economic output. What's clearly coming through is that this was really all about April and March. Essentially, it was a two-month recession in most of the advanced countries.”
He explains that some countries, including the UK and Canada, have official measures of monthly GDP – and there are third-party estimates for the US as well, with the data illustrating that GDP had declined precipitously in March and April, but had then recovered quite sharply in May and June. Many indicators across the GEO economies point to a faster sequential increase in GDP in 3Q20 to date than previously anticipated. “We have almost across the board been revising up our growth forecasts for sequential growth between 3Q and 2Q, and that's been quite important for where we've ended up on our annual GDP forecast.”
Fitch now expects global GDP to fall by 4.4% in 2020, a modest upward revision from the 4.6% decline expected in the June GEO. “It’s not a big revision, but the direction is important because this is the first time that we're slightly less pessimistic about the world economy this year.” In terms of the major economies, the US economy is seen as contracting by 4.6% this year, compared to a fall of 5.6% in the June GEO. Fitch Rating’s2020 China growth forecast is +2.7% (this was revised in late July at the time of the agency’s most recent China sovereign rating review) compared to +1.2% in the June GEO.
These revisions have been partly offset by cuts to the 2020 GDP forecasts for the eurozone to -9.0% (-8.0%), the UK to -11.5% (-9.0%) and for emerging markets (EM) excluding China to -5.7% (-4.7%). The latter mainly reflects a big change in Fitch Rating’s India forecast for the fiscal year ending March 2021 (FY21) to -10.5% from -5.0%.
The pace of the global expansion is not, however, expected to continue. This is as the boost from the reopening of economies fades, and as labour market dislocations constrain consumer spending and companies retrench. “We still see the recovery path being decidedly ‘swoosh' shaped, like the Nike logo,” Coulton adds.
He sees GDP recovering to its pre-virus level in the US only at the end of 2021, and in the Eurozone not until the end of 2022. What drives his view that the recovery will slow from now on is the expected headwinds in private sector domestic demand.
“We think that on the capex side, business investment will slow very sharply. Companies are going to be responding to this huge revenue shock that they've seen by slashing capex. And more importantly, from a GDP perspective, is the labour market shock that we've already seen in North America. We’re going to be seeing this in Europe in the next three or four months and this will keep consumers cautious. We expect unemployment in the UK, Italy, Spain and France to rise quite significantly in the second half of this year.”
Ongoing social distancing during the next 12 to 18 months will also continue to have a large direct impact on the macro economy. A significant offset from policy easing is expected. “By June, macro policy easing announcements were already on an unprecedented level, but since then there have been further significant stimulus measures,” he says. “While the massive central bank response in the first half of the year is now easing, this is only because central banks see the financial stability risks having moderated quite significantly
– and while these banks are feeling a bit more comfortable, we think they remain fully prepared to take further action.”
Examining risks to the forecast, Coulton says that while economies have been opened, the virus has clearly not been contained and is an ongoing concern. “I think the good news from recent developments is that the surge in virus cases in the US in late June and in Europe from late July have not yet been associated with a sharp downturn in mobility in terms of measurements of footfall in retail. This is perhaps because the response to the virus of late has been slightly different, in a sense. It has been much more targeted, and much more focused on specific geographies and specific types of activity, so that it hasn’t led to the downward adjustment in activity across the board that we saw before.” However, a reversion to full lockdown approaches cannot be ruled out. “If that happened, we could see renewed declines in GDP, although probably not as severe as we saw back in the second quarter.”
Brian Coulton, Chief Economist, Fitch Ratings
Image credit: imwaltersy / Shutterstock.com
