Macro forecasts: charts and commentary

Our round-up of major economies; featuring charts and commentary.

3 minute read

US

US growth prospects for 2020 are the weakest in the post-war era. The impact of COVID-19 and the associated measures to prevent its spread will have a debilitating effect on the economy for a period of time.

Quite how long is hugely uncertain, and therefore makes any assessment on growth for the year as a whole extremely difficult to assess. However, we do expect the worst of the crisis to pass by the end of 2020 and therefore expect a bounce-back in growth in 2021.

The inflation outlook is weak given both the negative impact of the COVID-19 crisis on demand, but also because of the sharp decline in oil prices.

In terms of policy, an initial fiscal package of US$2 trillion will help to mitigate the decline, but more is likely needed. The Federal Reserve has cut rates to the lower bound and undertaken quantitative easing and other liquidity measures. We expect these will remain in place for the course of 2020 and into 2021.

Figure 1. US
Figure 1. US

Euro zone

Expectations of a growth revival, including a boost to trade following the significant thaw in trade tensions, have been dashed by the spread of the COVID-19 virus and the reaction to it. A deep recession is now inevitable, although it is hoped that activity can revive in the second half of the year as containment measures are relaxed. For now, any upswing looks a long way off.

Policy makers must focus on mitigating as far possible the worst aspects of the downturn. The scale of fall in activity that is expected has not been seen since the Great Depression.

A range of extreme monetary and fiscal measures has been undertaken, but there will still be widespread economic damage in the form of business failures and large rises in unemployment. There must be enormous transfers from the public to the private sector.

Unfortunately, on the fiscal front the euro zone is, once more, vacillating rather than showing the united and bold collective effort that is required and would be forthcoming in a single country. Ongoing European Central Bank support will be vital again.

Figure 2. Euro zone
Figure 2. Euro zone

UK

Headline growth numbers for 2020 and 2021 bear no relation to Britain’s post-war history. GDP is set to collapse this year, before reviving next as people and businesses return to “normal” work.

For now, sadly, only the downturn is certain. Without direct and immediate cash-flow governmental assistance, firms will go under and people will lose their livelihoods in coming weeks and months.

Some of this will happen anyway. But policy must try and offset the financial impact from the induced slowdown and preserve as much productive capacity as possible to minimise permanent losses.

As elsewhere, the central bank balance sheet will swell, and public sector deficits and debt will soar. Any problems resulting from these trends can be addressed in the future.

Now is the time for bold and decisive actions to address the crisis. The UK’s policy initiatives will help alleviate the economic pain, but they cannot prevent much of it. And recessions can always generate their own downward momentum. There are dark times ahead.

Figure 3. UK
Figure 3. UK

China

China was anticipating an improvement in trade relations when the COVID-19 shock hit. After initially covering up and bungling the response, a major effort has contained the virus, for now, earlier than the rest of the world. This has had a severe economic cost, with February’s dire retail sales, investment, export, and industrial numbers showing the economy contracted around ten per cent.

Even with additional stimulus, the normalisation appears slow, with a drag from the rest of the world’s demand hitting hard in Q2. Some supply chain problems will cause inflation, and food prices remain high, but other trends are deeply disinflationary.

Annual output growth for 2020 will be zero or negative for the first time in decades, despite a policy-induced rebound in H2 that will include lowering LPR and other policy rates by 50-100bps. We expect a weaker currency, at least against the US dollar, but for depreciation to be tightly controlled.

Figure 4. China 
Figure 4. China

Japan

Postponement of the 2020 Olympics is a severe blow, but the impact of the coronavirus pandemic on Japan has thus far been minor. Tracking and testing have enabled better containment, but most likely this slows, but does not prevent, total cases from taking off. This will help keep the hospitals from being overwhelmed as they have been in some cases, but the key question is whether some sort of lockdown, which has been avoided until now, becomes inevitable.

With 25 per cent of economic activity in travel, leisure, and restaurants, a harsh contraction in Q2-2020, also combined with falling demand for exports, is our base case (with both upside and downside risks), followed by a steady rebound in activity.

A large stimulus package, of around ten per cent of GDP, will cushion the blow, but much of the subsidies and handouts may be saved. Rates are at their effective lower bound already, and real rates are too high, with inflation stuck around zero, though headline rates may decrease because of a strong yen and weak commodity prices.

Figure 5. Japan
Figure 5. Japan

Canada

Coronavirus containment measures and the significant fall in oil prices have dramatic economic repercussions for the Canadian economy.

The Bank of Canada has acted to ensure that credit remains “available and affordable”. The policy rate has been cut by 150bp cumulatively year to date, bringing it to 0.25 per cent and the central bank has implemented a Large-Scale Asset Purchase (LSAP) programme. The LSAP will be implemented across the yield curve and will remain in place until the “economic recovery is well underway”. This comes alongside a host of liquidity measures such as the Commercial Paper Purchase Program (CPPP) to improve liquidity in short-term funding markets, various term repo facilities and purchases of Canada Mortgage Bonds, banker’s acceptances, and of provincial money market instruments.

The government’s fiscal stimulus package has expanded considerably in recent weeks and now totals C$202 billion. The package includes tax deferrals, direct spending to individuals, government-backed credit and wage subsidies for business. Further announcements are expected with the next move likely to be relief measures for the oil and airline sectors.

Figure 6. Canada 
Figure 6. Canada

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