Sep 08, 2020 (LBO) – Fitch Ratings in its latest Global Economic Outlook (GEO) released Monday expects global GDP to fall by 4.4% in 2020, a modest upward revision from the 4.6% decline expected in the June GEO. The recovery in economic activity after the unprecedented severe coronavirus-related recession in March and April has been swifter than anticipated, but we expect the pace of expansion to moderate soon.
“China has already regained its pre-virus level of GDP and retail sales in the US, France and the UK now exceed February levels, but we doubt this will become the much-lauded ‘V’-shaped recovery. Unemployment shocks lie ahead in Europe, firms are cutting capex, and social distancing continues to directly constrain private-sector spending”, said Brian Coulton, Chief Economist, Fitch Ratings.
We now expect the US economy to contract by 4.6% this year compared to a fall of 5.6% in the June GEO. Our 2020 China growth forecast is +2.7% (this was revised in late-July at the time of our most recent China sovereign rating review) compared to +1.2% in the June GEO. These revisions have been partly offset by cuts to our 2020 GDP forecasts for the eurozone to -9.0% (-8.0%), the UK to -11.5% (-9.0%) and for emerging markets (EM) excluding China to -5.7% (-4.7%). The latter primarily reflects a huge change in our India forecast for the fiscal year-ending March 2021 (FY21) to -10.5% from -5.0%.
Official data have now revealed the extent of the economic dislocation in 2Q20 with world GDP falling by 8.9% yoy and many countries seeing falls in output of a fifth or more. The UK, India, France, Italy and Spain stand out, having experienced stringent and/or lengthy lockdowns in 2Q20 which saw mobility (visits to retail and recreation venues) levels fall very sharply and 2Q20 GDP surprise on the downside compared with our June GEO estimates.
But in addition to its severity, the coronavirus-related recession was also very short, with activity falling precipitously in March and April before recovering quite quickly from May. A host of indicators across the majority of GEO economies point to a faster sequential increase in GDP in 3Q20 to date than we were previously anticipating.
“We do not expect the pace of expansion in recent months to continue, as the boost from reopening fades, labour market dislocations constrain consumer spending, and firms retrench on capex. And with the virus outbreak not yet contained, social distancing behaviour and ongoing restrictions will drag on activity,” added Coulton.
The transport and leisure sector – which typically accounts for 8%-10% of GDP in the US and Europe – remains deeply depressed and has not undergone the post-lockdown recovery seen in manufacturing, construction or retail trade. We expect unemployment to rise significantly in 2H20 in the eurozone and the UK as job subsidies are scaled back and labour-intensive sectors, which are vulnerable to social distancing (including tourism), struggle.
Further fiscal policy easing announcements since June will help to offset the weakness in private demand but we see the recovery pace moderating from late-2020, such that the pre-virus level of GDP is not reached until 4Q21 in the US and 4Q22 in the eurozone.
“We still see the recovery path being decidedly ‘swoosh’-shaped. Off the back of a two-month recession we think it will take 18 months from the low-point in April for the US to get back to 4Q19 GDP and 30 months in the eurozone”, said Coulton.
The GEO forecast now assumes that UK-EU trade will move to WTO terms in January. There are huge uncertainties as to exactly how this will play out but we have lowered our UK GDP forecast for 2021 by around 2pp relative to a smooth FTA transition and see the UK recovery stalling in 1H21.
Emerging markets are in many ways facing tougher economic challenges from the pandemic, given more-limited social safety nets and healthcare capacity and less scope for aggressive macro policy easing. Many EMs now face economic contractions on a scale comparable to or larger than those seen in Europe despite much higher underlying growth rates. Nevertheless, the easing in global credit conditions following massive central bank liquidity injections in 1H20 has provided some relief.
The GEO forecasts assume that a reversion to highly stringent, nationwide lockdown approaches to virus containment will be avoided, but this is a key downside risk. Such a scenario could prompt renewed falls in GDP although likely on a more limited scale than that seen in 2Q20.