Macro forecasts: charts and commentary

5 minute read

US

Despite the resurgence of COVID-19 cases in the summer, and associated restrictions on mobility, the US economy remains on track for recovery from the slump in 2020 H1. In aggregate, the income support provided to households has, so far, more than offset the negative impact of job losses. Meanwhile the easing in monetary policy has materially reduced borrowing costs, supporting consumer spending and the housing market. While much of the ongoing additional income support for households expired at the end of July, there remains an expectation of further significant fiscal stimulus before the end of the year, irrespective of the election outcome. The prospect of a Democratic clean sweep across the presidential and congressional elections would likely further boost fiscal spending. Alongside the changes to the Federal Reserve’s inflation targeting regime, prospects for a strong recovery in 2021 look to have improved. As ever, the timing and magnitude of that recovery will partly depend on the availability and widespread use of a COVID-19 vaccine.

Figure 1. US

Eurozone

Eurozone activity rebounded sharply as economies re-opened in May and June. Some spending – retail sales for example – has returned to previous levels, as households have found alternative ways to shop. But others – consumption of services that are associated with social interaction as well as investment – are still 10 per cent or more below previous highs. Second waves of the virus, especially severe in France and Spain, are hurting sentiment and highlight downside risks to recovery. It is hoped that renewed national lockdowns can be avoided and that looks a reasonable assumption, but there is considerable uncertainty. The ECB has signalled ongoing policy support and may yet deliver additional stimulus in the form of more QE. Fiscal assistance packages have also been extended as Europe has shown a more enlightened approach to support than some other nations. Inflation has moved into negative territory, but this is largely due to a combination of one-off effects. Even so, it is expected to stay low in coming years. The ECB will face growing pressure to follow the Fed and review and amend its inflation-targeting mandate.

Figure 2. Eurozone

UK

The UK saw one of the largest declines in GDP in Q2 (-20.4 per cent) compared to its peers. But the strange growth patterns are the same everywhere. Q3 will see some extraordinarily large gains, reflecting the re-opening of economies that began in May but continued over the summer months. GDP could increase by 15 per cent or more in the quarter. But that is all history now. It is what happens in Q4 and Q1 that really matters and the prospects there are mixed. A second wave of virus infections have been followed by localised restrictions on activity and more recently by a modest but significant tightening of required conduct among the population. More importantly, worries about the resurgence of the virus – especially over the autumn and winter months – may well restrain demand and activity. As a result, pre-COVID levels of GDP are unlikely to be restored until late 2021 or 2022. The additional headwinds of planned fiscal retrenchment (policy may have to change here) and Brexit add to downside risks in the UK. Further stimulus from the Bank of England is possible.

Figure 3. UK

China

China is already achieving levels of economic activity that exceed the pre-COVID period in many sectors. This is led by exports (+9.5 per cent y/y in dollar terms in August), fuelled by demand for healthcare and some catch-up after H1 disruptions, but Industrial production was +5.6 per cent y/y in that month, and even retail sales, which have lagged, edged into positive territory. The credit-driven fiscal and monetary stimulus is past its peak, but will support manufacturing, consumers and investment. Beyond near-term recovery, the state will aim to decouple China from its technological and energy dependencies; the details of top-down plans will be unveiled in October’s Five-Year Plan. Inflation continues to be weak, CPI + PPI averaging close to zero, and core CPI under one per cent, as the recovery is not yet robust enough to cause demand pressure, and unemployment and the output gap are yet to fall back to normal. With debt levels high, the PBOC will keep monetary policy loose, but has effectively raised yields by 75-100bps since the lows in Q2 and is likely to lower them only incrementally to ease corporate financing needs.

Figure 4. China

Japan

Japan’s COVIDrecession and rebound are slightly out-of-sync with the rest of the world, as the lockdowns happened slightly later. The Q2 contraction of -7.9 per cent was a recession within a recession: the third consecutive negative reading, after the consumption tax hike set off a contraction in Q4-2019. A large rebound in Q3 is unsurprising, but even with a new fiscal stimulus package likely as one of the first moves for the new administration of PM Suga, recovery will be incomplete for years: we see economic output achieving pre-COVID levels only in late 2022. CPI has slipped back to around zero, but “Suganomics” is likely to be focussed on administrative reform and regulatory improvements – some of these are major but will probably not be the kind of sea change inaugurated by former PM Abe. The BoJ is unlikely to ease significantly, but will keep rates only slightly in negative territory; of course QE will continue to monetise the deficit used to support the weak economy, but the BoJ has been unable to prevent the real rate of interest from rising.

Figure 5. Japan

Canada

The strong growth rebound expected in Q3 has materialised and looks faster than was anticipated. Looking ahead, the strong growth of the reopening phase is expected to be followed by a slow and choppy recuperation phase that will remain largely determined by the path of the virus and the subsequent policy response. Given the uncertainty around the economic outlook, the Bank of Canada (BoC) is expected to remain dovish, keeping rates at 0.25 per cent and continuing the asset purchase programme until the recovery is well underway. The BoC continue to stress a “sustainable two per cent inflation target” and there is potential that the BoC looks to implement an average inflation target similar to the Federal Reserve. Fiscal policy remains supportive with September’s Throne speech outlining several ambitious proposals, with the government declaring it would support people and businesses affected by the crisis “as long as it lasts, whatever it takes”. These announcements, including the extension of the wage subsidy programme (CEWS), will be followed by a fiscal update and projections in Q4. The outlook for fiscal policy, therefore, remains one of expansion over the medium term.

Figure 6. Canada