The Global Economy Begins A Slow Mend As COVID-19 Eases Unevenly
Published: July 6, 2020
Our updated global and regional economic forecasts see a severe—but short—slump for most major markets. Still, given the magnitude of output that has been permanently lost, it could be years before some countries get back to where they were before COVID-19.
The Global Economy Begins A Slow Mend As COVID-19 Eases Unevenly
The COVID-19 health and economic shock appears to have peaked in most developed countries and China while many emerging markets struggle to contain the virus and the economic fallout. The focus has shifted to the recovery, which will be longer and more complicated than the downturn.
We now forecast global GDP to contract 3.8% in 2020, worse than the 2.4% contraction we previously expected, mainly reflecting a deeper, longer hit to emerging markets, led by India. We see a reasonably strong bounce in 2021-2023 with global growth averaging above 4%, but with permanent lost output from the COVID-19 shock.
The risks to our baseline are varied and remain on the downside. Health developments and related restrictions are key in the next year; productivity and public balance sheet risks lie further out.
The U.S. Faces A Longer And Slower Climb From The Bottom
Just as fast as the U.S. economy entered recession, it may have already reached a bottom, in May. We now see full-year GDP contracting 5.0% (was down 5.2% in our April forecast).
However, the recovery will be slow, as the lingering effects of COVID-19 severely limit growth. We expect a modest rebound of 5.2% in 2021, a full percentage point weaker than our previous estimate of 6.2%.
We expect a slower drift down for the unemployment rate later this year, to 8.9% in the fourth quarter, almost one percentage point higher than in our April baseline forecast. The unemployment rate won't reach precrisis levels until fourth-quarter 2023.
The recovery remains fragile--in particular because of uncertainty about when an effective vaccine will be readily available, fears of another wave of COVID-19, and businesses that survive being reluctant to quickly rehire workers.
Eurozone Economy: The Balancing Act To Recovery
We now expect eurozone GDP to decline a deeper 7.8% this year and rebound 5.5% next year, because the contraction in business activity has been more pronounced than we expected--even though the economy appears to be recovering as lockdowns are easing.
The initial fiscal and monetary policy response to the coronavirus crisis has been successful at protecting workers' jobs and ensuring companies' access to liquidity in spite of the sudden stop in cash flow.
Fiscal policy during the recovery will be a tricky balancing act because removing extraordinary measures too early could stop it in its tracks: Households might hold onto their savings, depressing consumer demand for longer and exacerbating firms' reluctance to invest.
Economic divergence in Europe is set to grow, given that Germany has responded with a bigger fiscal stimulus than its neighbors. The EU recovery fund will likely help reduce divergence but in its current form will not be disbursed in time to finance the recovery.
Asia-Pacific Losses Near $3 Trillion As Balance Sheet Recession Looms
We expect the COVID-19 pandemic to leave lasting scars on Asia-Pacific, with the extraordinary measures needed to shore up economies leading to higher debt, weaker balance sheets, and less appetite for spending in the future.
Investment is likely to stay sluggish, especially in the private sector; and even if state-owned enterprises spend more, we still anticipate less productive capital, lower potential output, and a permanent 2%-3% shrinkage of most economies compared to the pre-COVID trend.
We project Asia-Pacific's economy will contract by 1.3% in 2020 but show 6.9% growth in 2021, implying $2.7 trillion of lost output over these two years, even assuming broad containment of the coronavirus. We still see China's economy expanding 1.2% in 2020 before growth surpasses 7% next year.
The largest downward revision of our growth estimates is for Japan, where we now expect a 5% contraction in 2020 as consumers save more. India's economy will also shrink 5% this year as lockdowns compound underlying vulnerabilities, followed by a rebound next year.
Note: PPP weighted real seasonally-adjusted GDP for Asia-Pacific excluding China and India. Forecast for COVID-19. Source: National Statistical Authorities, International Monetary Fund, CEIC, and S&P Global Economics.
Latin American Economies Are Last In And Last Out Of The Pandemic
The worsening COVID-19 pandemic in Latin America has extended stringent lockdowns in some countries and slowed the relaxation of such measures in others--prompting us to reduce our growth expectations for the major economies in the region.
We've lowered our 2020 GDP forecast for Latin America by just over 2 percentage points to a contraction of roughly 7.5%. We expect growth to be just shy of 4% in 2021. Risks are mostly to the downside.
Our projected economic recoveries have worsened across the board, and we now expect permanent GDP losses of 6%-7% for most major Latin America countries compared with their pre-COVID-19 projected GDP, about 1% worse than in our previous baseline forecast.
We still see economies with stronger policy support, such as Chile and Peru, having smaller permanent GDP losses than those where support has been limited or ineffective, such as Mexico.
Note: Q120 to Q423 are S&P Global Ratings' forecasts. The Latin America GDP growth aggregate represented is a PPP weighted average of Argentina, Brazil, Chile, Colombia, and Mexico. SAAR--Seasonally adjusted annual rate. Sources: Oxford Economics and S&P Global Ratings.
Canada's Economy Faces A Patchy Recovery
S&P Global Economics forecasts Canada's real GDP will contract 5.9% in 2020 before rising 5.4% in 2021. In the process, the Canadian economy would go through its worst back-to-back quarterly contraction in the modern era, reflecting a real GDP contraction of more than 13% peak to trough.
The economy likely troughed in late April/early May. In the coming months, we expect an economic recovery in two stages: a near-term bounce in aggregate demand and employment activity as lockdown restrictions ease, followed by a more gradual, protracted, and uneven improvement in the economy. The risks to our central estimate of the recovery are squarely tilted to the downside.
Lingering scars in the form of coronavirus fear, bankruptcies, below break-even oil prices, and regulated social distancing will limit capacity utilization and growth for a quarter of the economy in the next year or so. House price correction is in the cards despite lower mortgage rates, and the central bank is expected to remain at an effective lower bound until close to the end of 2022.
The nature of the shock means there will be permanent losses. The economy will still be 2.5% smaller in 2023, compared with the pre-COVID anticipated size. With duration, there is also a building risk of scarring the labor force and capital formation, and the efficient allocation of the two in the long run, therefore eroding sustainable growth rates that maintain low and stable inflation.