Macro forecasts: charts and commentary

5 minute read

US

The US economy bounced back more rapidly than expected following the period of COVID lockdown in 2020 H1. The level of activity was only around three per cent lower in Q3 than pre-COVID. Massive fiscal and monetary support provided the bridge that households and businesses needed to get through the worst of the economic crisis. With the roll-out of a highly effective vaccine to start in late 2020, the prospects for growth in 2021 are strong. Households have a savings buffer that they can potentially recycle back into the economy, and businesses need to re-stock depleted inventories. Pent-up demand for services should also drive consumption growth higher. That said, more fiscal support will be needed to bridge through the economic restrictions that will likely still be in place in early 2021. Meanwhile, monetary policy is set to remain highly accommodative for several years, with little near-term pressure on inflation.

Figure 1. US

Eurozone

The immediate growth outlook for Europe is dominated by the second wave of virus infections and policy responses to those. After the strong rebound in activity over the summer, growth had already slowed before COVID trends compelled governments to reimpose restrictions. The latest measures are more targeted, and companies and households have become more adept at working round them (while still complying). The virus itself is also less of a shock than it was in the early part of the year and the eventual endgame is clearer. The bottom line is that the hit on growth in Q4 should be far less than in the spring, but it will still be negative. Thereafter, gradual re-opening will allow activities to resume although the earlier experience may make governments more cautious about the pace of easing (of containment measures), especially with effective vaccines on the horizon. Recovery during 2021 looks reasonably assured, but it may stretch out throughout the year. Ongoing policy support – fiscal and monetary – will therefore be needed for a while yet and looks set to be provided.

Figure 2. Eurozone

UK

The UK reacted slightly later than others to the onset of COVID-19 and as a result had to impose fiercer lockdown measures and keep them in place for longer. This experience highlights the importance of early and robust actions to control the virus, a lesson that should influence responses to any subsequent waves. The decline in UK GDP (in Q2) was therefore one of the largest among developed economies, although the peculiarities of national income accounting also explain some of the difference. As elsewhere, the strong rebound since May has now slowed and could reverse temporarily in Q4. Vaccine deployment has begun early, and while that will help in the long run, the shorter-term outlook is less good. The UK fiscal response has contrasted somewhat with that elsewhere: often late, minimal and provisional rather than openended. The winter months and early part of next year in particular are likely to see laboured growth, compounded by the idiosyncratic damage created by Brexit, whatever its exact form, although there are some upside risks thereafter. Additional policy support may be merited in early 2021.

Figure 3. UK

China

Successful containment of the coronavirus combined with aggressive fiscal and monetary support has boosted China’s H2 GDP so that it is nearly back to its previous trend; sequential annualized growth of 5.5 per cent in 2021 is expected to lift annual GDP to 9 per cent above 2020’s depressed level. Soaring exports and portfolio inflows mean the CNH should be kept under pressure to appreciate. CPI inflation should stay relatively low, at around one or two per cent.. We expect the policy mix to remain accommodative, but shift towards a more neutral stance. Authorities will look to rein in extremely fast credit growth with local government financing vehicle (LGFV) issuance used to fund infrastructure investment; worries about repayment continue to escalate. The Communist Party leadership will aim to decouple China from its technological and energy dependencies, as determined in the 5th Plenum. Achieving a peak in carbon emissions by 2030 is ambitious, and committing to net zero in 2060 means the coal plants being built today will need to be counteracted with large investments in low-carbon technology.

Figure 4. China

Japan

Japan’s Covid recession was severe despite limited numbers of cases. 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. The rebound in H2-2020 is unsurprising, but even with a supplementary budget recently announced by PM Suga, recovery will be incomplete. Output will end 2020 around 3 per cent below last year, and growth of two per cent means GDP will achieve pre-COVID levels in mid-2022 (an upgrade from our expectations before vaccine announcements). The BoJ is unlikely to do much besides monetize the fiscal deficit that has supported the recovery. With CPI around zero and inflation likely to stay anemic, real rates are too high and the Yen is under appreciation pressure – also thanks to strong exports and income. “Suganomics” is likely to be focused on administrative reform and regulatory improvements, as well as unlocking potential growth from digitization, in which Japan lags many G10 countries; reforming small banks and price caps on telcos could be damaging to those special interests.

Figure 5. Japan

Canada

Canada has had the same GDP experience as many others during the COVID pandemic: steep declines in Q2, rebound in Q3 and slowing growth in recent months as case numbers rise again and restrictions are re-imposed. Virus trends in Canada are worrying and point to the need for further – or continued – containment measures in coming months which will impede growth further. The government has stepped in to provide critical income support and stands ready to continue to do so, while the Bank of Canada has increased its QE programme and issued clear guidance that policy will stay loose for longer, and could, if conditions warranted, be loosened further. Inflation is not really a significant policy concern at present but remains contained in any case. Any recovery in global trade flows will benefit open economies such as Canada, as will any bid to the oil price which has recovered to pre-COVID levels and should be supported by stronger global growth and the loose policy backdrop.

Figure 6. Canada