Global Macro: A longer period of weakness as the virus spreads – We have downgraded our economic growth forecasts further given the spread of the coronavirus around the world. We now see even more weakness in global economic growth in the first half of this year and to a lesser extent in the third quarter. This should be followed by a strong rebound in the fourth quarter and the start of next year. We will likely see global GDP growth somewhat below the IMF’s 2.5% threshold for recession for the year as a whole, though the period of weakness will be relatively short-lived. The US flirts with recession, while the eurozone experiences a modest technical recession in our updated scenario. We have set out the changes to our forecasts in the table below, as well as more details for the main economic regions. We published changes to our central bank calls yesterday, and we will follow up with revised market forecasts in the coming days. There are a number of considerations behind this change of view:
- Our previous base case included only the direct effects on China’s economy and modest spillovers from China to other economies. However, the virus has spread and is now significant in economies that account for 8% of global GDP (Italy, Korea, Japan and Singapore). So we have incorporated larger direct effects for these economies. Anecdotal evidence suggests the direct effects in these economies could be larger than first thought. For instance, there are reports that hotel room cancellation rates in Rome (not in one of the most affected Italian regions) are running at 90%.
- There has been a further more modest rise in cases through much of the world. We will likely see some additional effects on GDP in most economies. Tourism (worth 10% of global GDP on some measures) will likely be generally impacted even to countries that do not have a high number of cases currently. There will also be some modest restrictions in some countries. For instance, France is banning large indoor gatherings. There will be some change in the public’s behaviour in terms of going out. Companies are also changing work schedules. Finally, the impact on international trade due to both supply-chain and demand effects might be greater given more countries are impacted.
- We have seen a major tightening of financial conditions due to the sell-off in markets, notwithstanding very aggressive expectations that have also been built in for central bank monetary easing. This will hurt global demand unless financial conditions reverse quickly. In addition, we could see a significant impact because of a decline in confidence given all of the above, which could hurt capital spending and new orders.
- It is difficult to know how the virus will develop further. We do not claim to have superior knowledge about that. However, communication from the WHO and various governments suggest that a further spread is more likely than not. In our new base case, we continue to assume that the virus is on the way to being contained in China and that economic activity will return close to normal levels by the end of this month. However, we assume it will take until the end of the second quarter for the number of cases to peak and be on a clear downward trend in most other countries.
- We expect policymakers to respond. As noted in yesterday’s Global Daily Insight (see here), we expect all major central banks to ease policy in March. Indeed, the Fed already kicked off the more aggressive global easing cycle with a 50bp cut in its target range for the fed funds rate reflecting that ‘the coronavirus poses evolving risks to economic activity’ in line with our forecast. Some commentators have argued that what we are witnessing is a supply shock and therefore central bank action is pointless. We disagree. The shock has always been of both demand and supply in nature, and if anything, we think we are now predominantly witnessing a demand shock. Monetary easing will not cure a virus, but it can help cushion the economic fall-out. This takes nothing away from the view that fiscal measures would be highly desirable and really should be taking more of the lead. Indeed, we expect a stepping up of fiscal stimulus in the coming months, though the extent remains to be seen. As well as general stimulus, alleviating a possible liquidity crunch for businesses should be a priority. (Nick Kounis)
US: Skirting recession in H1, recovering in H2 – Following the continued spread of the coronavirus beyond China, and the likelihood of more significant disruption to US economic activity, we have downgraded our already below-consensus GDP growth forecast for 2020 to 1.0%, from 1.3% previously. In addition to the existing drags from weaker global growth and the Boeing 737 production halt (which will hit Q1 growth), the US now faces similar headwinds to those we have seen elsewhere, including possible school closures, reduced travel, and reduced public gatherings. All of this will weigh on consumption, perhaps significantly, although the magnitude is very difficult to predict at this stage. As a base case, we expect growth to essentially stagnate in Q1 and Q2, with a possible mild contraction in Q2. Thereafter, growth is likely to quickly rebound – supported by pro-active monetary and fiscal policy (as we saw with today’s emergency 50bp cut by the Fed) – should the outbreak be contained and activity normalises. (Bill Diviney)
Eurozone: Mild recession likely – The spreading of the coronavirus to the eurozone will weigh on growth in the coming quarters. We had already revised our forecasts for Q1 significantly lower before, on the back of the outbreak of the virus in Asia, but the spreading of the virus to the eurozone will give an extra blow to the economy. Italy, which is the country where the virus has spread the most so far, will be relatively hard hit, also because of its relatively high dependence on income from tourism. For the eurozone as a whole, we now expect a mild technical recession in the first half of the year (we have pencilled in -0.1% qoq in Q1 and Q2, respectively). Besides our expectation for extra monetary policy stimulus, we also expect some extra fiscal stimulus to compensate for the economic damage from the virus. As the policy stimulus in the eurozone will kick in with some delay, we have raised our growth forecast for the end of this year and start of 2021 somewhat. Consequently, our annual growth forecast for 2021, has risen from 1.4% to 1.6%. (Aline Schuiling)
Emerging Asia: China rebound in Q2 still likely – We still assume that the disruptions from the corona crisis to China’s economy will prove temporary, and that economic activity will normalise in the course of March. We now foresee negative qoq growth in Q1, still followed by a clear pick-up in quarterly growth in subsequent quarters (partly helped by the frontloading of monetary and fiscal stimulus, targeted support for certain sectors and companies and a relaxation of macroprudential regulation). We have revised down our annual growth forecast for 2020 slightly, to 5.3% (from 5.5%). Reflecting spillover effects from a stronger second half of the year, we have revised our 2021 growth forecast a bit upwards (to 6.0%, from 5.8).
Taking into account the spread of Covid-19 into several EM Asian economies and also reflecting our assumption that the drags from the corona crisis on global growth (apart from China) will extend into Q2, we have cut our growth forecasts for several countries (in particular South Korea, Singapore, Malaysia, Hong Kong and India) down further. We now expect growth in EM Asia to fall to 4.8% this year (old forecast: 5.1%), down from 5.2% in 2021. The stepping up of fiscal and monetary stimulus will help to cushion the blow somewhat. (Arjen van Dijkhuizen)