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Triage Begins - June 2020
Economic measurements demonstrate how severe the downturn has been, but give a glimmer of hope for recovery.
- Triage Begins
COVID-19 is a global pandemic, and while the experience has varied across countries, we are seeing some common threads. Indicators over the past month have suggested that the worst of the downturn is behind us. Industrial activity is resuming, businesses are reopening, and consumers are leaving their homes for work and even for pleasure.
With that glimmer of hope has come a sobering reminder of how severe the downturn has been. Employment and economic activity remain deeply depressed. Sluggish external sectors will be a challenge for all economies. The recovery will not occur as rapidly as the contraction did, and a resurgence of the virus may derail progress. Policymakers must be ready to pass more initiatives to support the nascent recovery.
The following are our views on how major world economies will fare this year and next.
- Economic data for April has revealed significant damage to the U.S. economy from COVID-19-related lockdowns, but early signs of recovery are emerging. We expect real gross domestic product (GDP) to fall at annualized pace of about 40% in the second quarter before returning to a positive trajectory. The U.S. economy won’t recover all of its lost output until well into 2022.
- The Federal Open Market Committee, at its June 9-10 meeting, made no major policy adjustments and affirmed it will maintain its current pace of asset purchases. While the Fed has helped ease financial conditions and offset some economic shocks, more will be needed to support the economy. We do not, however, expect the Fed to adopt negative interest rates. Additional fiscal measures are expected before the summer break, but of a smaller magnitude than the bills passed in March.
- The eurozone has suffered years of sluggish growth, in which domestic demand was sufficient to offset faltering exports. This year, that balance has collapsed, as all sectors of all member nations will be challenged by slow demand. Tourism will be impaired by travel restrictions and traveler precautions, while a global slowdown will weigh on manufacturing. Labor interventions are helping to keep workers connected to the workforce, preventing an unemployment spiral.
- The European Central Bank has expanded its pandemic emergency purchase program, committing to purchase €1.35 trillion of bonds through June 2021. The increased scale of quantitative easing will provide increasing space for member nations to issue more debt. Eurozone members are attempting to overcome long-running challenges and cooperate in their response to COVID-19. The bloc is debating a stimulus package offering €750 billion to support the recovery. Because the proposal would be funded by bonds issued by the EU, it will require unanimous consent from member states. Objections have already been raised, placing the program at risk.
- Real GDP in the U.K. declined by 20% month-over-month in April. The hospitality sector experienced a near-total collapse as the U.K.’s lockdown took hold. The delayed public health response by U.K. officials has led to a longer-lasting slowdown than we are witnessing elsewhere in Europe. Activity will rebound, but the upturn will come later than that of most other developed markets.
- The initial fiscal response by U.K. leadership was strong. Policymakers’ attention has since been redirected unproductively toward Brexit negotiations; absent any breakthroughs, the U.K. and its trading partners must plan for an exit at the end of 2020 with no trade deals in place. Monetary policy has some room to run. Members of the Bank of England’s Monetary Policy Committee have expressed support for increased asset purchases, and we believe this policy is more appropriate than a venture into negative rates.
- Japan is an emerging success story of virus containment. COVID-19’s spread has remained admirably low. But this is not a boost; successful mitigation only allows the Japanese economy to return to its rather subdued baseline. Japan started the year in a mild recession, and its outlook remains bleak. Continued social distancing will impair domestic activity, and the lifeline of hosting the Olympics is now a year away.
- Japanese leaders are likely to pass more fiscal support to ensure solvency of its corporate and medical sectors. The Bank of Japan will also continue to support corporate credit markets, but we see no case for cutting interest rates any further.
- China was the first to reckon with a COVID-19 lockdown, and it is the first to see a recovery. Its contraction of 6.8% in the first quarter is likely to be followed by a return to growth. Manufacturers have caught up on lost production during China’s quarantine, but they are finding a weakened pipeline of new orders as global demand has fallen off. Domestic consumption will help growth in 2020, but a recovery in exports will be critical if China is to return to its former levels of economic advancement.
Recent decisions by China, including its poor cooperation with COVID-19 investigations, intervention in Hong Kong and border confrontation with India, are diminishing the country’s goodwill. These do not weigh on our near-term focus but may cause China to lose business as global value chains are reconsidered.
Global Economic Forecast – June
Carl R. Tannenbaum
Executive Vice President and Chief Economist
Ryan James Boyle
Vice President, Senior Economist
Second Vice President, Economist
June 10, 2020
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