Growth Prospects and Challenges Ahead for the U.S., U.K., Eurozone, China, and Japan

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• A Long Road

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A synchronized global economic recovery has taken hold. The initial phase of the recovery has been robust, with a sharp rebound in gross domestic product (GDP) expected in the third quarter despite episodic outbreaks of COVID-19.

Unfortunately, the current quarter’s strength is unlikely to be sustained. The virus continues to defy containment, and government support is starting to wane. Some sectors already appear to be losing momentum. A return to pre-pandemic levels of output is a long way off for most countries.

Following are our views on how major world markets will fare during the balance of this year and next.

United States

• Growth in the third quarter is shaping up to be strong, and rehiring is continuing at an encouraging pace. But the most impactful elements of fiscal support have ended, and the flu season is near. Elections are gaining more attention, but we believe the recovery from COVID-19, not political outcomes, will determine the path of the economy.
• The unemployment rate improved notably from 10.2% in July to 8.4% in August, but as we discussed in a recent weekly commentary, questions surround the degree of labor market improvement. We expect a more tepid labor market recovery going forward. Stalled negotiations on further support for U.S. consumers and businesses are putting the recovery at further risk.

Eurozone

• Incoming data like the Purchasing Managers’ Indices (PMIs) support our view that the eurozone is likely to see a slow and divergent economic recovery. The composite PMIs for August dropped in all four of the region’s major economies. Germany and France are still expanding, while the Spanish and Italian PMIs fell back to contraction. Surges in infections are impacting nearly all markets, with Spain and France at the forefront. Containment measures may be in the offing, which would slow economic recovery.
• Labor market support schemes have limited increases in headline unemployment rates across Europe. With an exception of Spain, all core economies are likely to extend or run their support schemes through 2021, hiding the real hit to labor markets. Nevertheless, we expect unemployment rates to rise as companies carry out downsizing plans in a bid to offset a drop in business from the outbreak. The European Central Bank maintained its monetary policy stance at this month’s meeting, revising its economic outlook up and talking down deflation concerns.

United Kingdom

• Brexit uncertainty has returned. With less than four months until the end of the transition period, the U.K. government has published a provocative draft bill that contravenes some key provisions of the 2019 Withdrawal Agreement. The U.K. intends to follow World Trade Organization state-aid rules, instead of those of the stricter regime offered by Europe in exchange for better market access. Though our central view remains that Brexit negotiations will resume, leading to a thin free trade agreement with Europe this year, it is going to be an extremely close call. Under a no-deal Brexit, British exports to the rest of Europe would be subjected to tariffs and non-tariff barriers along with the potential of a hard border on the island of Ireland.
• Economic activity indicators are pointing toward a strong third quarter rebound, but a look beneath the surface reveals concerns about the resilience of the recovery beyond the current quarter. Resurgent infections, the breakdown in Brexit talks and withdrawal of the Job Retention Scheme in October will all weigh on sentiment.

Japan

• In line with broader market expectations, former Chief Cabinet Secretary Yoshihide Suga won the Liberal Democratic Party’s presidential nomination and is set to succeed Shinzo Abe as Japan’s prime minister. Mr. Suga is expected to continue “Abenomics,” the combination of fiscal stimulus, monetary easing and structural reforms.
• The revised estimate of Japan’s real GDP confirmed the historic drop in second-quarter economic activity. While spending and other activity indicators have regained some lost ground since then, forming the basis of a notable rebound in the third quarter, Japan will have a gradual and protracted recovery thereafter. A bleak external demand outlook and deflationary forces are among the key challenges in front of the country’s new leadership.

China

• While most world economies have a long way to go in order to attain full recovery, China is an exception. The Chinese economy recovered early and quickly from the pandemic, thanks to strict quarantine measures and state-financed investments. On the other hand, the resilience of Chinese exports has been the most salient feature of the recovery. Slow recoveries in many world economies may limit China’s export growth going forward, though, and geo-political tensions with major trade partners could further hinder global sales in the years ahead.
• The outcome of the upcoming U.S. elections will not change our forecast for China. Although their approaches to negotiations differ, both U.S. presidential candidates share strategic objectives surrounding relations with China.

Global Economic Forecast – September 2020