US economic growth appears to be positive again

US Overview

US Economic Growth Appears To Be Positive Again

Real GDP data that are scheduled for release at the end of this month should show that output nosedived at an extraordinary rate of roughly 35% (annualized) in the second quarter. But recent monthly data suggest that the economy hit bottom in May, and that GDP should bounce robustly in the third quarter. That said, we have dialed back our growth forecast for Q3 due to the recent acceleration in COVID-19 cases that have led some states to hit pause on the re-opening process or to implement some modest new restrictions. Our forecast for the rest of the year is predicated on the assumption that a generalized lockdown of the economy, such as which occurred in March and April, does not reoccur. We also assume that the eventual development of an effective vaccine will allow economic life to gradually return to some semblance of "normal" next year. But we readily acknowledge that a generalized re-imposition of restrictions represents a downside risk to our forecast. It likely will take a few years before the economy bounces back to the level that prevailed before the pandemic struck. In that regard, we look for the unemployment rate, which had been as low as 3.5% in February, to recede to only 8% by the end of this year and to 6% by the end of 2021. An elevated rate of unemployment and benign inflation should keep the Fed on hold through at least the end of next year. Consequently, longterm interest rates should also remain depressed for the foreseeable future.

International Overview

Global Recovery Underway, but a Bit Uneven

There continues to be significant uncertainty around the pace of the global economic recovery. Activity and sentiment data suggest the worst of the COVID-19 led slowdown may be over; however, we believe certain countries may be on track to rebound faster than others. In that context, we forecast a less severe Q2 contraction in the Eurozone as retail sales data as well as manufacturing and services PMIs signal a quicker recovery could be underway. In addition, we expect a sharper bounce back in Q3 and now forecast a 7.7% annual contraction, revised up from an 8.9% contraction a month ago. On the other hand, we forecast a sharper downturn in Japan. Despite a large fiscal stimulus program, consumer spending activity has not picked up as retail sales data are still underwhelming and signal a slower than expected recovery. Part of the issue in Japan is the higher consumption tax; however, even compared to the prior tax hike in 2014, consumer spending is extremely subdued.

The recovery is also expected to be uneven in the emerging markets, and Mexico is one country we are particularly worried about. We revised our GDP forecast for this year lower again as the virus continues to spread and the government defers fiscal stimulus efforts. Our forecasts remain steady in China and India, although risks are tilted towards slower growth, especially in India as the country struggles to contain the spread of the virus. Despite some adjustments, our global GDP forecast remains relatively stable as we made only a slight downward revision and forecast a 3.8% annual contraction this year.

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