Global growth: negative and uncertain but likely to rebound

Global Growth macro flash notes.JPG
89 days ago (17 Apr 2020)  |  

The rapid spread of Covid19 over the past few months has created a worldwide health crisis that has severely affected global economic activity. As noted by the International Monetary Fund in its recently published World Economic Outlook (WEO)1, this crisis is unlike anything seen in living memory, resulting in a huge deterioration in economic prospects for the year. In this Macro Flash Note, Daniel Murray and Joaquin Thul discuss the IMF’s latest forecasts and compare with some recently produced private sector estimates. The numbers are also discussed in the context of a recent OECD report that addresses the outlook for global growth.

The sudden and large recent decline in activity around the world has been associated with various government mandated measures to restrict the movement of people and minimise person-to-person contact. This has had a profound impact on the economic outlook. In its January WEO Update the IMF expected the world economy to expand by 3.3% in 2020. The IMF is now forecasting a contraction of 3% for the year as a whole, a downward revision of over 6.0%, as shown in Table 1.

Table 1. The IMF’s latest World Economic Outlook projections (% change)

Source: IMF

The IMF has downgraded the 2020 growth outlook for all 193 countries for which it produces estimates; it is doubtful whether this has ever happened before. Somewhat unusually for a global crisis, the impact is thought to be greatest for developed economies, which are expected to contract by 6.1% in 2020, while emerging and developing economies are expected to shrink by 1% this year. The better projected performance of emerging countries is largely because the IMF expects the economies of both China and India to expand gently this year, by 1.2% and 1.9% respectively. This reflects downgrades of 4.8% and 3.9% relative to the January 2020 forecasts.

While the IMF does not provide quarterly growth estimates, we can deduce from the WEO commentary and from work produced by the OECD and others that the major impact on economic activity is expected to be concentrated in Q2. For example, in the IMF’s baseline scenario, the pandemic is expected to fade in the second half of 2020, during which time containment measures should be gradually eased. Because very little data has yet been released that pertains to the lockdown period, analysis of the economic damage in Q2 is typically based on the share of GDP devoted to activities that have been curtailed. Forecasts for the rest of the year depend on assumptions regarding the timing and pace of the subsequent recovery.

Recent analysis from the OECD provides a breakdown of the expected initial hit to activity resulting from the crisis2. In most cases the shock to economic output is thought to be of the order of 25%; in Germany it is believed to be closer to 30%. The data are shown in Table 2.

Table 2. OECD estimates of the initial impact on GDP

Source: OECD via OBR

The OECD’s work is helpful in quantifying the sudden step down in activity that has occurred as a consequence of lockdown measures. But it says nothing about the subsequent path of GDP. Private sector estimates help to fill this gap. Table 3 provides average estimates of growth by quarter and for the year as a whole. These numbers are derived from Bloomberg’s surveys of economic activity3. For convenience the IMF’s latest numbers are shown on the right hand side of the table.

The data in the table demonstrate clearly that the bulk of the impact is expected to be felt in Q2, following which rebounds of varying size are expected. Of the countries included in the table, the UK economy is expected to suffer the largest Q2 decline but it is also expected to experience one of the strongest recoveries. China is slightly different to the other countries because the major impact on GDP was felt in Q1 and the rebound is expected in Q2, reflecting the fact that the outbreak started a bit earlier there.

Table 3. Quarterly and annual growth forecasts: private sector v. IMF

Source: Bloomberg, IMF, EFG calculations

The rebound in activity in the second half of 2020 will be supported by a slew of extraordinary policy initiatives that will continue to provide a tailwind to growth in 2021, when the IMF expects world output to grow by 5.8%4. Whilst there is always uncertainty associated with any economic forecasts – including those produced by the IMF - there is a much greater-than-normal degree of uncertainty associated with forecasting in the current environment. This is because there are so many unknowns. There could, for example, be a second wave of infections, some countries might try to lift the lockdown too early or impose lockdown measures for an unnecessarily long period of time or there could be a permanent shift in working and recreational habits. Furthermore, much of the outlook is dependent on medical and scientific matters that monetary and fiscal policy has only very limited ability to influence.

It remains useful nonetheless to form expectations about possible ways in which the world might evolve. This allows us to assess incoming data against the forecasts and by doing so assign probabilities to different economic paths and adjust our views accordingly. Similarly, there is value in examining consensus expectations of different economic outcomes to enable us to understand what is priced into markets. In turn this helps us think about ways in which those expectations might be challenged and where investment opportunities and risks lie. Furthermore, forecasts are useful not necessarily because they turn out to have been correct, but because they help to inform us about what policy makers are thinking.

In summary, the recent sudden stop to economic activity brought about by lockdown measures is completely unlike anything most people have ever experienced. As such, there is a huge degree of uncertainty associated with the economic outlook, something that has contributed to an increase in market volatility. Current market expectations have coalesced around a sharp drop in economic activity in Q2 followed by a recovery of some sorts in the second half of the year and above trend growth in 2021. This is broadly consistent with EFGAM’s view of the world. While there are likely to be large errors between current forecasts and the outturn, it remains helpful to form expectations about the future path of the economy as a means of assigning probabilities to different outcomes and identifying market risks and opportunities.



“Evaluating the initial impact of Covid-19 containment measures on economic activity” OECD 26th March, 2020

Once a month private sector companies – typically banks, asset managers, economists, strategists etc - submit estimates for a range of economic variables. The reference period and the number of companies submitting estimates is shown in the table

Despite the strong rebound in 2021, the level of GDP at the end of next year is expected to be approximately 4% below the previous baseline set out by the IMF in their January WEO Update.

Important source information: The sources for data used in this publication are EFG Research or Bloomberg, as at publication date, unless otherwise stated.

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Global Growth macro flash notes.JPG