Focus
October 30, 2020 | 13:16
Global Economy at the Crossroads: Which Way Now?
Global Economy at the Crossroads: Which Way Now? |
“Given the continued uncertainty about the evolution of the pandemic, the projection is highly conditional on the following assumptions: Extensive lockdown measures, such as the widespread closures imposed early in the pandemic, will not be reintroduced, although more localized and moderate containment measures will ebb and flow.” Bank of Canada, October Monetary Policy Report |
The sustained rise in COVID cases in many major economies is unsettling the economic outlook, with the mega wildcard of the U.S. election also looming (Charts 1 and 2). What does this imply for the economic outlook, now that we have more clarity on the starting point as the Q3 GDP results roll in from many countries? To illustrate the degree to which the forecast remains in flux, note that the above comment by the Bank of Canada was made on the very day that France announced sweeping new restrictions, including the closure of non-essential stores, putting a big dent into the Euro Area’s near-term outlook. Yet, we agree with the Bank that these tough measures in France are still likely to be the exception and not the rule among major economies. Thus, on balance, we are near-term cautious, but medium-term bullish on the outlook. The solid Q3 GDP results so far show that underlying economies were not fundamentally damaged by the lockdowns—those that managed to contain the virus have bounced back; and, those sectors that were able to reopen bounced back—largely thanks to the massive degree of government income support (Chart 3). So, yes, a short-term storm is possible, but look beyond the pouring rain on the windshield to the road ahead. And while the run-up in virus cases casts a cloud, note that the two largest economies in the world are unlikely to roll back openings—China doesn’t need to, and the U.S. doesn’t want to. Digging into what each region faces: USA: Heading into the November 3rd vote, the U.S. economy is dealing both with that uncertainty and an upswing in virus cases of its own. However, the U.S. experience in the summer, where cases surged early in Q3 and yet the recovery continued to grind ahead (including the record 33.1% sprint in GDP), suggests that this more recent wave won’t swamp the economy. The reality is that U.S. growth has held up much better than the consensus expected through the spring and summer, despite a tougher experience with the virus. For example, we now expect GDP to contract 3.6% this year, compared with the consensus call of a 6% drop at the depths in the spring (Chart 4). On the election, there are too many realistic possibilities and too much history with polls to make definitive assessments at this point. But, clearly, the absence of a stimulus deal heading into the vote ramps up the ante even further; a contested vote would be the worst scenario for additional support, while a sweep by the Democrats would likely usher in the largest spending package… eventually. The issue with that scenario is that we could easily be looking at a three-month delay before the next stimulus package is in place. Ultimately, we are big believers that politics play a distant secondary role in the economic outlook, and the election will only shift the needle on growth by a few ticks—provided we have a clear, or at least semi-clear, result by November 4. For now, we are looking at a 4% rebound in the U.S. economy in 2021, even with a lull around the turn of the year, with some upside risk on the possibility of a big stimulus package offset by the resurgence of the virus. Canada: While Canada’s experience with the virus continues to be less negative than in the U.S. or Europe, it has seen significant new restrictions in its largest provinces and many voices are calling for tighter measures. We believe that this will dent and delay, not derail or destroy the recovery. After a respectable September, when StatsCan believes the economy advanced by 0.7%, a small pullback in the next two months is possible with the rollbacks. However, consumers and businesses have learned to operate (as best as they can) with distancing measures in place, and fiscal policy remains highly supportive and without the uncertainty seen stateside. Combined with a raging housing market and surprisingly resilient consumer spending, we look for the economy to eke out modest growth in Q4 overall, albeit a shadow of the expected 47% bounce in Q3 and keeping the setback for all of 2020 at a massive -5.6% (Chart 4). Looking into next year, the U.S. election holds many important implications for Canada, from trade, to stimulus spending, to energy, to pipelines; but, again, as long as it’s a clear result, the election is of tertiary importance to the broad macroeconomic outlook. We have trimmed our above-consensus call for Canadian GDP growth next year, but remain higher than most at 5.5% (the BoC, for one, is at 4.2%), on the view that activity will rebound forcefully again as restrictions are lifted—as was so clearly shown during this summer. |
China: China’s economy has clearly suffered much less damage than the rest of the world, essentially carving out a V-shaped recovery (Chart 5). Hit by the virus first, its economy contracted sharply in Q1. But the recovery also started earlier as factories reopened, and the recent pickup in imports, as well as retail sales and passenger car sales, suggests that domestic demand is gathering some momentum and will help China grow 2% this year. Under normal circumstances, the slowest increase in 44 years would be an extreme disappointment. However, these are far from normal times and China will be one of the few major economies worldwide to post any growth this year. Simply, China benefited from a relatively mild experience with the virus and from its status as the world’s biggest exporter of goods (and low dependence on services)—a favourable mix in a world that is spending on goods not services in 2020. Next year will bring back an old battle: U.S. trade frictions. The faces, familiar or not, will not change the fact that it will be a rocky road to Phase 2 in the U.S. trade talks, or potentially an entirely different set of pressures. Even so, we look for the economy to rebound 8% next year, yielding average growth of 5% over the 2020/21 period, about one percentage point below the pre-pandemic trend. |
Euro Area: The Euro Area’s economic recovery from the shutdowns was far faster and stronger than many imagined, helped in part by the ECB’s massive €1.35 trln Pandemic Emergency Purchase Programme. The creation of the €750 bln EU Recovery Fund will be very beneficial, but the details still need to be hammered out. Time is of the essence, given the second wave of the coronavirus sweeping across Europe, and the renewed shutdowns (of varying degrees) announced in recent days. Though anything close to the historic collapse seen in Q2 GDP (-39.5% annualized) is highly unlikely, this second wave is coming at a time when the service sector and its workers are already vulnerable and could threaten at least a mild second dip. Economies facing the toughest restrictions (e.g., France and Ireland), are likely to post outright declines in Q4, but we expect an offset by modest gains elsewhere. At this point, we expect the record rebound in Q3 GDP (+61.1% a.r.) to be followed by almost no growth in Q4. This is based on the slowdown in the October services PMIs, and the new restrictions that have been reinstated, such as France and Germany's month-long nationwide lockdowns (Chart 6). |
Britain: The U.K. is in a unique position, as it fights two major battles... the pandemic, and Brexit. On top of the BoE’s QE program and record-low Bank Rate, there is now pressure to deploy negative interest rates. The Treasury’s generous job schemes (topping up workers' salaries) have helped but it is being pushed to extend them, as job vacancies are at record highs, and jobless claims are at a 26-year high. But as Chancellor Sunak admitted, they’ll be “unable to save every job”. Meantime, trade negotiators from London and Brussels are engaged in intensified talks as the end of transition period is two months away. Crashing out of the EU without a trade deal (a hard Brexit)—which Prime Minister Johnson has euphemistically called an Australian-style deal—will mean that WTO rules will kick in on January 1. And that means consumers will face much higher prices at a time when incomes have already been slashed by job cuts. It will be difficult to see how PM Johnson can assure the country that they will “prosper mightily”. In the event, the U.K. will also see growth marked down next year. Bottom Line: So, where does this leave us as we head into the U.S. election, and its aftermath? Even before the recent rise in cases, we have been assuming that, after the initial Q3 burst in activity as economies reopened, growth would cool markedly. At the very least, we will see some real moderation in coming months, with even a small pullback for a spell in some economies possible, before a more complete recovery takes hold. However, we believe that the North American economy will avoid a full-on double dip (or W shape), even if the road is about to get much bumpier. For global growth overall, we remain comfortable calling for a 5.5% snapback after this year’s historic 4% setback. |