Predictions for the global economic recovery
We predict a long and difficult path to recovery as economies start to shake off the weight of COVID-19. A V-shaped recovery is probably too optimistic – we predict a situation where the rising V will flatten out, similar to a swoosh or square root sign.
The outlook for the US and China – the world’s largest economies - is crucial to the global recovery: the US has likely fallen into recession in 2020 and GDP growth in China is expected to slow to 2.5 per cent, highly supported by monetary policy.
In Asia, inflation has declined so central banks can ease monetary policy further. The combination of monetary easing and fiscal stimulus has created steeper interest rates curves in many Emerging Markets (EM), which have been relatively more insulated from COVID-19 so far. While economic downgrades have been sharp across the board, major economies are not expected to contract as much as their counterparts in less developed markets.
Where do we stand?
Around the world, there has been unprecedented monetary and fiscal easing to deal with the economic ramifications of the virus. The G3 (United States, Japan and the eurozone economies) central bank balance sheets have reached nearly USD20 trillion – a new record. In the US, the Fed balance sheet now stands at over 30 per cent of GDP. Meanwhile, the European Central Bank’s efforts have earned it a balance sheet that makes up roughly 45 per cent of GDP. Global debt/GDP ratios are expected to reach new records well in excess of 260 per cent of GDP by the end of the year which could be problematic if inflation rates rise and lead to an increase in interest rates.
While policy support has been strong, it will have a divergent impact across economies and asset classes, skewed towards large liquid economies and investment grade credit. This has widened the gap between the ‘haves’ and ‘have nots’. For instance, many governments can only support their economies based on their ability to ramp up fiscal spending, while many sovereigns and over-leveraged companies still have trouble accessing the capital markets for liquidity support.
The USD lost significant interest rate support compared to the rest of the G10 (, and a weaker USD would be beneficial to the global recovery. In China, the story is more constructive: industrial production has rebounded, and investments have picked up according to our latest Purchasing Manager’s Index (PMI). And despite the shifts in supply chains caused by COVID-19, we still expect China to remain a dominant force in global trade.
Across the US, the Eurozone and China, Manufacturing PMIs have recovered to pre-COVID levels but non- manufacturing has not fared as well. We expect the hospitality sector to be the slowest to recover.
During a recent webinar with Bloomberg to discuss our outlook for H2 2020, we polled corporate clients to see how their recovery efforts were going. For almost 40 per cent, current levels of business were up to 25 per cent lower than last year. Over 39 per cent believed their business would recover to 2019 levels by the second half of 2021. So, they expect to recover but it will take many months.
The key risks for the second half of this year stem from a resurgence of infections, something that worried 54% of those on the webinar.
The US election campaign will also have significant impact on the recovery – for instance, if Trump’s position weakens during the campaigning period, he may adopt a harder stance towards the US’s trading partners as he pursues a more nationalist agenda.
The optimists vs. the pessimists
Given where we stand, we can predict two scenarios for the recovery:
1. The optimistic scenario
A best-case scenario will entail global growth and corporate earnings recovering faster than expected. This scenario would include a depreciation in the USD due to the declining fundamentals of the US economy and better growth from the rest of the world. EM equities, which trade at a nearly 40 per cent discount to the S&P 500, would also outperform.
2. The pessimistic scenario
A more conservative outlook has global equities and investment-grade (IG) credit giving up their gains, alongside the USD rallying further due to global risk aversion. In this scenario, safe haven assets will outperform, and US Treasury yields will remain low.
Both scenarios depend on the current trends in the COVID-19 infection rates - a second wave could derail them, depending on its severity.