With the economic rebound underway but so much still in flux, what is the latest outlook for global growth? Co-Heads of Global Economics Michelle Girard and Ross Walker outline our key global calls.
Fiscal yin and yang
A key theme to emerge from the coronavirus crisis has been the changing role of fiscal policy, which now has been restored as the principal lever of macroeconomic policy – or at least it’s being deployed with unprecedented force in tandem with quantitative easing monetary policies. While radical fiscal easing is warranted to guard against a depression, there has historically been acceptance at least in principle of a reversal once an economic recovery was secured.
However, in today’s political marketplace, we do not see a quick return to fiscal responsibility.
The yin of fiscal tightening (or at least restraint) is necessary to allow the yang of expansionary policies during a downturn. There are strong grounds for believing that fiscal policy, for the foreseeable future, will never be truly countercyclical – either because political populism prevents any material tightening (no one votes for austerity) or because the good times simply prove elusive.
Economic growth: looking better
We’ve become slightly more optimistic about the global economy since the end of June. We now expect it to shrink by 4.0% in 2020, down from our previous estimate of 4.4%. Our projection for the global economy is roughly in line with the forecast of a 4.5% contraction from the Organisation for Economic Cooperation and Development.
Global Growth vs. Pre-COVID level and trend
Source: NatWest Markets. Trend is prior 10-year growth rate. 2020 Q3-2021. Q4 =Forecast.
But post-coronavirus economic performance won’t be uniform around the world. China (along with much of East Asia) looks set to emerge from the crisis stronger than other regions thanks to its solid virus case management. It also produces goods that are in high demand in the coronavirus world, such as personal protective equipment and consumer electronics.
Estimated change in real Gross Domestic Product vs. 2019 Q4 level
Source: NatWest Markets plc
In fact, China could be the only major economy to actually grow this year, and by the end of 2021 its economy could be double-digits bigger in percentage terms than its pre-virus size, as we show in the chart below.
At the other end of the growth spectrum, we expect the US and the UK to underperform in the face of growing political risks, which we discuss below.
Inflation: up, down, up again
Core inflation rates across advanced economies have been higher than expected over the past four months. We put this down to a rebound in the prices of coronavirus-impacted goods and services – such as recreation, hotels, public transportation and clothing – which had dropped sharply.
Away from these Covid-driven upticks, however, inflationary pressures appear subdued, and may remain so over the coming months. We expect inflation to stay low over the remainder of 2020 before recovering next year, helped by base effects and a normalisation in economic activity.
Over the medium to longer term, the supply-side shock in the form of capacity reductions triggered by coronavirus, combined with stronger demand (bolstered by continued monetary and fiscal policy accommodation), should put upwards pressure on inflation.
The policy response and the implications for a post-coronavirus world
The monetary and fiscal policy response to Covid has been unprecedented in both its speed and magnitude. Looking ahead, monetary and fiscal policy accommodation looks set to remain in place far longer than was the case after the global financial crisis: perhaps until the consequences of maintaining excessive accommodation – higher inflation and / or higher bond yields – become evident.
In fact, central banks are shifting towards policy approaches that accept – or even target – periods of higher inflation. Unlike after the global financial crisis, when economic activity failed to return to its pre-crisis trend, inflation was muted, and bond yields remained low, we remain sceptical that these trends will repeat themselves in the years ahead. When it comes to inflation and market volatility, we believe the next decade could look very different to after the previous crisis.
Political risk – rising and diverging
With the US presidential election and the Brexit trade deal deadline looming, near-term political risk is most evident in the Anglosphere: the German federal and French presidential elections are too far in the future to hold much sway over the markets during the remainder of 2020.
Despite pockets of instability, Asia remains characterised by broad political – or at least policy – stability. Expectations that the new prime minister of Japan, Yoshihide Suga, will preserve the main features of Abenomics, his predecessor’s economic policy, are a case in point.
In the US, it’s well known that the electorate will be presented with a stark political and economic choice come election day. But whoever wins, larger, more persistent fiscal deficits over the cycle look likely. Find our full coverage in our US Election Watch hub.
And there are major risks facing the UK in the form of a no-deal Brexit. But while the precise nature of the post-Brexit trade settlement remains unclear, deal or no deal, the trading arrangements are in our view likely to be significantly less beneficial for the UK than those prevailing under full EU membership.
- UK: We’ve made a downwards revision to our 2020 forecast from -7.8% to -9.1%. This reflects a worse-than-expected contraction in Q2 and a smaller-than-expected rebound in Q3. And while we still expect a post-Brexit trade deal, the risk of no deal is increasing.
- US: We expect the US economy to shrink by 3.9% in 2020, followed by a 4.2% rebound next year. While the outlook for 2021 depends on the outcome of the presidential election, both monetary and fiscal policy will remain focused on boosting the economy for the foreseeable future.
- Europe: We now expect the euro zone economy to contract by 7.4% this year (0.75 percentage points less than in our previous estimate), although we’ve revised our 2021 growth forecast down by 0.25 percentage points to 6.5%. There’s likely to be further policy support for the regional economy into 2021 and beyond, with Germany in the driver’s seat.
- China: Our forecast is for the Chinese economy to grow by 1.9% in 2020. Consumer demand has lagged in China, but we export exports to continue to outperform in the short run. In contrast to its Western counterparts, we expect monetary and fiscal policy easing to remain measured and targeted.
- Japan: We expect the Japanese economy to shrink by 5.1% this year, and with both domestic and global demand likely to be restrained, we believe only a moderate rebound is likely in 2021. The Bank of Japan might adjust its monetary policy further to demonstrate its coordination with the government.