Global economy passing the worst

US Overview

More Pronounced Version of Similar Theme

Since this unprecedented pandemic took the world by storm, our theme has been for a sharp downturn in the first half of the year followed by a quick snapback in activity in Q3 and Q4 before the economy settles back into a trend-like pattern of growth in 2021. That theme still appears to be intact, although as the high frequency data come into focus, we have made more than just fine-tuning adjustments. What we present in this update is essentially a more pronounced version of our theme.

The contraction in Q2 GDP remains although we now see an annualized pace of decline 38% due to an even bigger drop in consumer spending than we had forecast previously. On the upside, we still see things turning sharply for the better for the economy in the third quarter with an upwardly revised growth rate of 24%.

Still, by the end of this year, the US economy will be about 5% smaller than it was at the end of 2019, and even by the end of 2021 the level of real GDP will still be about 2.5% shy of the pre-recession peak. It's a V-shaped bottom, but a full recovery is at least another year and a half away; and that is predicated upon the reopening going smoothly without the virus making a comeback and necessitating another lockdown.

One key driver of the revisions is what is happening with household finances and what that means for consumer spending. We expect the rebound is business spending to be at least another six months or so away at this point, although some inventory rebuilding will boost growth in the second half.

International Overview

Global Economy Passing The Worst

Although the second quarter will almost certainly be another tough one for the global economy, there are nascent signs we may be passing the worst. Global manufacturing and services PMIs improved in May reflecting improved sentiment across several countries, while there were unexpected employment gains for some major economies. Given these developments, our 2020 outlook appears to be stabilizing. We expect the global economy to contract 3.7% in 2020, the first time since February we have not revised our 2020 growth outlook lower.

The stabilization of growth has been assisted, at least in part, by an aggressive response from global policymakers. Europe has been a center of policy activity in recent weeks. On the fiscal front the European Commission proposed a region-wide €750 billion rescue fund, including €500 billion in grants and €250 billion in loans. While a final agreement may differ and is likely many months away, this is still a positive step. For monetary policy, the European Central Bank increased its Pandemic Emergency Purchase Program by €600 billion, while we expect the Bank of England to raise its asset purchase target a further £200 billion later this month.

As is often the case around turning points, the news is mixed. Our 2020 GDP forecast for China has improved and we expect growth of 1.2% this year. However, we have revised our 2020 GDP outlooks for the Eurozone and Canada lower, to declines of 8.9% and 7.4%, respectively.

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