Worst global recession since WWII - Capital Economics
Global Economics

Worst global recession since WWII

Global Economic Outlook
Written by Global Economics Team

The disruption relating to the coronavirus is set to cause the steepest fall in global GDP since the Second World War. We are forecasting a 5½% contraction this year, far bigger than the 0.5% fall seen during the global financial crisis. Once the virus is under control output should rebound, but it will take years to return to its pre-virus path. Central banks are acting boldly and could yet resort to more drastic measures, while fiscal support will see public debt surge. This might imply a danger of future inflation. But we think that the disinflationary effects of weaker demand will dominate, at least over our forecast horizon.

  • Table of Key Forecasts
  • Global Overview – The disruption relating to the coronavirus is set to cause the steepest fall in global GDP since the Second World War. We are forecasting a 5½% contraction this year, far bigger than the 0.5% fall seen during the global financial crisis. Once the virus is under control output should rebound, but it will take years to return to its pre-virus path. Central banks are acting boldly and could yet resort to more drastic measures, while fiscal support will see public debt surge. This might imply a danger of future inflation. But we think that the disinflationary effects of weaker demand will dominate, at least over our forecast horizon.
  • US – This year’s slump will be less pronounced than in Europe, due partly to weaker reliance on the hardest hit sectors. While unemployment is surging, we expect it to fall quickly once workers are recalled from layoffs. Nonetheless, GDP is unlikely to have returned to its pre-crisis path even by the end of 2022.
  • Euro-zone – The lockdown has caused activity to collapse and even once the epidemic passes, remaining restrictions and damage to private sector balance sheets will weigh on spending more so than in the US. The uneven impact of the crisis, and pressures on Italy in particular, will put huge strains on the currency union.
  • Japan – Less stringent containment measures mean that Japanese output should not fall as far as in euro-zone economies. But inflation will fall deeper into negative territory, potentially pushing the Bank of Japan towards interest rate cuts, and possibly even a helicopter drop.
  • UK – Huge policy support should help GDP to rebound once intense restrictions are eased. But some demand weakness will persist, particularly given a likely extension to the Brexit transition and associated uncertainty.
  • Canada – Containment measures less severe than elsewhere, but lower oil prices are a strong headwind.
  • Australia & New Zealand – Virus may be coming under control, but Australia’s household debt is a concern.
  • The Nordics & Switzerland – Low levels of government debt leave these economies well-placed to cope.
  • China – China will outperform other major economies. Its shutdowns, while severe, were shorter than seems likely elsewhere and its recovery will be aided by the state control of its industrial and financial sectors.
  • India – The recent spread of the virus is a big concern as the country is particularly ill-placed to cope with it.
  • Other Emerging Asia – Cambodia, Thailand and Malaysia are vulnerable to sustained weakness in tourism.
  • Emerging Europe – The oil price slump will hit Russia hard and Turkey is at risk of a banking crisis.
  • Latin America – Limited policy responses in Brazil and Mexico will mean particularly slow recoveries.
  • Middle East & North Africa – Exposure to tourism will take a toll, compounded by turmoil in oil markets.
  • Sub-Saharan Africa – The fiscal costs of the crisis will push many countries towards debt defaults.
  • Commodities – We do not expect prices to return to their pre-virus levels until 2022 at the earliest.

GDP Forecasts

Table 1: Real GDP (% Annual Change at PPP Exchange Rates)

 

World

Average

     

Forecasts

 

Share1

2007-2016

2017

2018

2019

2020

2021

2022

 

               

World (CE China estimate)

100

3.3

3.7

3.6

2.9

-5.5

8.0

3.0

World (Official China data)

100

3.9

3.9

3.6

3.1

-5.0

7.5

3.0

                 

Advanced Economies

40.3

1.3

2.4

2.2

1.7

-8.5

8.0

2.7

                 

US

15.2

1.2

2.2

2.9

2.3

-5.5

7.0

3.3

Euro-zone

11.7

0.7

2.4

1.9

1.9

-12.0

10.0

1.8

– Germany

3.2

1.3

2.5

1.5

0.6

-8.0

4.5

2.0

– France

2.2

0.8

2.2

1.7

1.3

-10.0

7.5

1.5

– Italy

1.8

-0.3

1.6

0.7

0.3

-18.0

15.0

0.5

                 

Japan

4.1

0.5

1.9

0.8

1.6

-7.0

5.0

2.0

UK

2.2

1.2

1.8

1.4

1.4

-12.0

10.0

3.7

Canada

1.4

1.5

3.0

2.0

1.6

-8.0

8.0

3.0

Australia

1.0

2.8

2.4

2.7

1.8

-8.0

7.8

4.0

                 

Emerging Economies2

59.7

5.2

4.5

4.4

3.7

-4.0

9.3

4.3
                 

Emerging Asia2

37.3

6.6

5.7

5.5

4.9

-3.1

11.7

5.1

China (CE estimate)

18.7

8.2

5.8

5.4

5.5

-5.0

15.0

4.5

– China (Official data)

18.7

9.3

6.8

6.6

6.1

-1.0

12.0

4.5

– India3

7.8

7.5

6.9

7.4

5.3

1.0

9.0

6.5

– S. Korea

1.6

3.5

3.1

2.7

2.0

-3.0

6.0

3.5

                 

Emerging Europe

7.3

2.5

4.0

3.1

2.1

-6.7

5.5

2.4

– Russia

3.1

2.0

1.6

2.3

1.3

-6.0

4.5

1.5

– Turkey

1.7

4.8

7.4

2.8

0.9

-8.3

8.0

3.0

                 

Latin America4

6.9

2.5

1.7

1.5

0.7

-6.0

3.7

2.0

– Brazil

2.5

2.1

1.1

1.1

1.1

-5.5

2.5

2.0

– Mexico

1.9

1.8

2.1

2.0

-0.1

-8.0

5.0

2.0

                 

MENA

4.5

3.9

1.1

2.7

1.7

-5.2

4.6

3.3

– Saudi Arabia

1.4

3.9

-0.7

2.2

0.3

-5.0

2.8

1.3

– Egypt

1.0

4.3

4.2

5.4

5.6

-2.3

6.3

4.8
                 

Sub-Saharan Africa

2.3

4.9

2.4

2.9

3.0

-2.6

3.9

3.5

– Nigeria

0.9

5.6

0.8

1.9

2.2

-3.0

2.5

2.0

– South Africa

0.6

2.1

1.4

0.8

0.2

-6.5

3.5

1.8

Sources: Refinitiv, IMF.

1) % of world GDP in 2019 PPP terms, 2) We use our own China Activity Proxy (CAP)-derived GDP estimates for China in aggregates for emerging Asia, emerging economies, and the world, 3) CE estimates from 2012 using old accounting methodology, 4) Excluding Venezuela.


Other Main Forecasts

Table 2: Other Main Forecasts

 

Latest

Average

     

Forecasts

 

23rd Apr

2007-2016

2017

2018

2019e

2020

2021

2022

                 

Inflation1

               

World2

3.6

3.6

2.9

3.0

2.8

2.0

2.6

2.6

Advanced economies

1.5

1.5

1.7

2.0

1.5

0.2

1.1

1.5

Emerging economies2

5.2

5.2

3.7

3.7

3.6

3.1

3.4

3.5

                 

US

1.8

2.0

2.1

2.4

1.8

0.4

2.0

1.9

Euro-zone

0.8

1.5

1.5

1.8

1.2

0.0

0.7

1.0

Japan

0.4

0.3

0.5

1.0

0.5

-1.1

0.0

0.3

UK

1.7

2.3

2.7

2.5

1.8

1.0

1.0

1.6

China

5.2

2.9

1.6

2.1

2.9

1.5

1.5

2.0

                 

World Trade1,3

-2.1

3.0

4.8

3.4

-0.4

-20.0

17.0

4.0

                 

Exchange Rates4

               

US$ / €

1.10

1.32

1.20

1.14

1.12

1.10

1.05

1.05

Yen / US$

109

100

113

110

109

110

110

110

US$ / £

1.31

1.67

1.35

1.28

1.33

1.25

1.30

1.30

RMB / US$

6.94

6.75

6.51

6.88

6.97

7.20

7.00

6.80

                 

Interest Rates4

               

US5

0.00-0.25

1.08

1.25-1.50

2.25-2.50

1.50-1.75

0.00-0.25

0.00-0.25

0.00-0.25

Euro-zone6

-0.50

0.80

-0.40

-0.40

-0.50

-0.70

-0.70

-0.70

Japan7

-0.10

0.14

-0.10

-0.10

-0.10

-0.20

-0.20

-0.20

UK8

0.10

1.60

0.50

0.75

0.75

0.10

0.10

0.10

                 

Bond Yields4,9

               

US

0.57

2.90

2.40

2.70

1.92

1.00

1.00

1.00

Germany

-0.49

2.40

0.40

0.20

-0.19

-0.25

-0.25

-0.25

Japan

0.02

1.00

0.10

0.00

-0.01

0.00

0.00

0.00

UK

0.31

3.10

1.20

1.30

0.80

0.25

0.25

0.50

                 

Equity Index4

               

S&P 500

2,823

1,402

2,239

2,674

3,231

2,900

3,200

                 

Commodities4

               

Oil10

21.7

78

67

54

66

45

55

60

Copper11

5,159

6,693

7,207

5,949

6,149

5,500

6,500

6,625

Gold12

1,681

1,153

1,302

1,283

1,517

1,600

1,600

1,550

Sources: Refinitiv, IMF.

1) Year-average, 2) Exc. Argentina and Venezuela, 3) CPB goods volumes, 4) End-year, 5) Federal Funds target rate, 6) ECB deposit rate, 7) Bank of Japan overnight rate until 2015, interest on excess reserves thereafter, 8) Bank Rate, 9) 10-year government bond yields, 10) Brent ($ per barrel), 11) $ per tonne, 12) $ per ounce.


Global Overview

Worst global recession since WWII

  • The disruption relating to the coronavirus is set to result in the steepest fall in global GDP since the Second World War. (See Chart 1.) We are forecasting a 5½% contraction this year, far bigger than the 0.5% fall seen during the global financial crisis. Once the virus is under control output should rebound quickly. But it could take a few years to return to its pre-crisis path – if indeed, it ever does.
  • We have pencilled in falls in real GDP in the second quarter of as much as 20% q/q in some advanced economies. A rebound in China will only partly offset these. So global GDP in Q2 will fall by around 5% q/q, similar to the China-driven drop in Q1. (See Chart 2.)
  • Unlike in previous downturns, services will suffer more than industry. Containment measures are having a disproportionate effect on consumer-facing sectors in particular.
  • The wage subsidy schemes deployed by many countries to encourage firms to retain workers will prevent unemployment from rising as much as it would otherwise have done. But it will still rise sharply. And furloughed workers who keep their jobs will nonetheless suffer cuts in pay.
  • Policymakers’ bold action should prevent this recession from turning into a depression. Fiscal support has included big loan guarantees and direct giveaways. And most countries’ banking sectors are healthy enough to stop this morphing into another financial crisis.
  • Indeed, once the “shutdowns” are eased, the global economy’s capacity to produce goods and services should rebound strongly. Firms will re-open and people who were temporarily laid off will go back to work.
  • That said, restrictions may be eased in a gradual and piecemeal manner. On this front, there is a risk that some of the rebound that we expect in Q3 ends up coming later than that.
  • Moreover, we suspect that some demand weakness will linger. Consumer and business confidence might well remain subdued for some time, not least if fears of a second wave of the virus linger. In some countries, there might be the prospect of a new wave of austerity to repay the rise in public debt. In most countries, we expect debt to GDP ratios to rise by 20pps or so. (See Chart 3.)
  • Overall, then, the recovery will still come through quicker than after past recessions. (See Chart 4). But while we will see some impressive growth rates during the initial stages of the recovery, GDP may take a long time to return to its pre-crisis path. By the end of 2021, we think that GDP will still be below where it would have been without the virus. (See Chart 5.) However, we expect the emerging world to recover more quickly compared to advanced economies. (See Chart 6.)
  • Over the next year or so, the disinflationary effects of weaker demand should easily outweigh any boost to inflation from the constraints to supply. The fall in the oil price will put additional downward pressure on inflation in the near term. Advanced economies may well experience a short bout of deflation, although the impact of currency depreciations on import prices may prevent inflation in EMs from falling as much. (See Chart 7.)
  • The bigger risk in the medium term, though, is inflation. The global economy has received an enormous policy stimulus, not just from fiscal policy, but from monetary policy too. (See Chart 8.) Meanwhile, governments may start to view inflation as a way of reducing the burden of debt accumulated during the crisis.
  • There is clearly tremendous uncertainty about the evolution of the virus and therefore our economic forecasts. The risks are mainly to the downside, including the possibility of a second wave of the virus.

Global Charts

Chart 1: World Real GDP (% y/y)

Chart 2: World Real GDP

Chart 3: Government Debt As a % of GDP

Chart 4: World Real GDP (% y/y)

Chart 5: World Real GDP (Q4 2019 = 100, CE forecasts)

Chart 6: Real GDP (100 = Q4 2019)

Chart 7: Inflation (%)

Chart 8: Major Advanced Economy Asset Purchases ($bn)

 

Sources: Refinitiv, Bloomberg, Markit, OECD, CEIC, IATA, CE


United States

Virus disruption will only be partly reversed in H2

  • We now anticipate an unprecedented 40% annualised decline in second-quarter GDP, with the unemployment rate spiking to between 15-20% within a few months. Even allowing for a recovery in the second half of the year, we estimate that GDP growth for this year as a whole will be -5.5%. (See Chart 9.)
  • We expect the recovery to continue into next year, with GDP growth of 7.0% in 2021 and 3.2% in 2022. Nevertheless, even by the end of 2022, our forecasts imply that the level of real GDP will still be 2% lower than we previously projected three months ago. (See Chart 10.) We also anticipate some permanent scarring in the labour market, with the unemployment rate still above 5% at end-2022.
  • Our assumption is that most shutdowns begin to be lifted gradually from May and that the damage will be less severe than in Europe given less exposure to the hardest hit sectors such as tourism. But there is tremendous uncertainty about exactly how bad the damage will be. In contrast to usual downturns, the impact of this recession will be concentrated in the services sector rather than manufacturing, with activity in non-food retail, food services, accommodation and air transport decimated by the containment measures. (See Chart 11.)
  • The surge in unemployment will be particularly pronounced because those sectors account for a much higher share of total employment than total GDP. (See Chart 12.) Over 20 million jobless claims have been lodged in the past month alone, as workers have been furloughed, and we expect that figure will continue rising over the next month or so. (See Chart 13.)
  • That suggests the unemployment rate will surge to between 15-20% in April. (See Chart 14.) As the economy re-opens, we expect the unemployment rate to drop quickly as many workers will be recalled from temporary layoffs.
  • The crisis has triggered an unprecedented response from monetary and fiscal policy, which will mitigate the medium-term damage rather than lessen the hit to GDP during the pandemic. The $2.2trn fiscal stimulus is a mix of direct support to households and businesses, loan guarantees and funds to allow the Fed to leverage its various loan and asset purchase programs. The latter could see the Fed’s balance sheet expand from $4trn pre-virus to up to $10trn, equivalent to 50% of GDP. At the same time, the Federal budget deficit is on track to hit 10% of GDP this year. (See Chart 15.)
  • In the near-term, the collapse in energy prices will drive headline inflation below zero, with only a limited decline in core inflation. (See Chart 16.) In the long run, the big question is whether the unprecedented policy support eventually triggers a return to higher inflation.

Table 3: United States

% y/y unless otherwise specified

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

           

Private cons’ptn

2.0

2.6

-5.2

8.0

3.5

Total fixed invest.

2.3

1.8

-8.7

2.8

5.1

Gov’t cons’ptn

0.3

1.8

1.9

0.7

0.2

Stockbuilding1

0.1

-0.5

-0.6

0.8

3.2

Domestic demand

1.9

2.4

-5.6

6.7

3.2

           

Exports

2.9

0.0

-1.8

2.0

2.3

Imports

3.2

1.0

-3.8

1.9

2.4

           

GDP

1.8

2.3

-5.5

7.0

3.3

           

Consumer prices2

1.6

1.8

0.4

2.0

1.9

           

Real disp. income

2.3

2.9

-3.6

2.8

3.1

H’hold sav. ratio3

7.1

7.9

9.5

5.1

4.7

Employment

0.7

1.1

-3.7

2.8

1.6

Unemployment4

6.8

3.7

7.7

6.2

5.6

           

Interest rate5

0.6

1.63

0.13

0.13

0.13

Fed gov’t bal.1

-5.3

-4.6

-10.0

-8.0

-6.0

Current account 1

-2.4

-2.3

-2.1

-1.9

-1.9

 

Sources: Refinitiv, Capital Economics. 1) As a % of GDP, 2) Year average, 3) As a % of disposable income, 4) Unemployment rate, year average, 5) Mid-point of fed funds target range, end-year

United States Charts

Chart 9: US Real GDP (%q/q Annualised)

Chart 10: US Real GDP ($bn)

Chart 11: Markit US Survey-Based Activity Indices

Chart 12: Selected US Industry Shares

Chart 13: US Initial Jobless Claims (000s)

Chart 14: US Insured & Official Unemployment Rate (%)

Chart 15: US Federal Budget Balance (% of GDP)

Chart 16: US CPI Inflation (%)

 

Sources: Refinitiv, CE, BEA, BLS, CBO


Euro-zone

Slump puts new strains on currency union

  • The huge and uneven slump in economic activity is likely to be followed by only a partial recovery. With GDP remaining well below its pre-crisis level for a long time to come, and the crisis hitting southern economies much harder than those in the north, the future of the currency union will be tested again in the coming years.
  • The slump is so severe that the normal business surveys can provide only a rough indication of its scale. For example, the Composite PMI for March looks consistent with GDP falling by 4% y/y. (See Chart 1.) But given that many of the responses were collected before the severe lockdowns were in place, this almost certainly underestimates the downturn. The slump in the manufacturing sector so far appears to be smaller than that in services, though manufacturing in many sectors has been largely closed. (See Chart 2.)
  • Household spending appears to have dropped by 20-30% since mid-March. Spending on entertainment and travel has stopped completely. (See Chart 3.) So far, there is not much aggregate data for private consumption in the euro-zone. However, the Bank of France reports that payments via bank cards halved in late March, which is consistent with a 30% fall in household consumption.
  • The sudden stop in the economy has slashed demand for labour (see Chart 4) and has led to a surge in applications for government-subsidised short-working schemes. Even so, we think the unemployment rate will jump to record levels in the coming months, before dropping back later in the year. Many people will not be eligible for the wage subsidy schemes, particularly in countries such as Spain where there are most temporary and part-time employees. Moreover, many companies will inevitably go bankrupt in the coming months.
  • Fiscal deficits are set to balloon throughout the region. National governments are unveiling fiscal support which we think will average at least 5% of GDP. On top of this, tax revenues are collapsing with the slump in economic activity. As a result, budget balances will probably deteriorate at least 10% of GDP this year. And this does not take account of the cost of loan guarantees. In all, we think that public debt ratios will rise by 20-30% of GDP, though the cost will vary. (See Chart 5.)
  • In order to stave off a fresh sovereign bond crisis, the ECB has launched a €750bn Pandemic Emergency Purchase Programme and torn up its self-imposed issuer limits and other rules which have limited rules which have limited. This has already pushed its balance sheet above €5trn. (See Chart 6.)
  • This should be enough to keep a lid on government bond yields for the near term, but we think the Bank will eventually need to make even more bond purchases to avert an Italian debt crisis. With inflation even lower than pre-virus (see Chart 7), looser policy will be needed in the long term too, perhaps involving a kind of monetary financing. Looking ahead to next year, the ECB is likely to end up holding a large share of Italian government bonds.
  • Assuming that the lockdown is lifted gradually in the second half of the year, there should be a rapid rebound in economic activity. But we think GDP will still be 5% below pre-crisis levels at end-2022. (See Chart 8.) A slump of this magnitude will leave a trail of destruction in the corporate and banking sectors as well as a legacy of high unemployment.

Euro-zone Charts

Chart 1: Composite PMI & GDP

Chart 2: Manufacturing and Services PMIs

Chart 3: Flight Departures in Largest Airports in Major Euro-zone Economies

Chart 4: Employment & Firms’ Hiring Intentions

Chart 5: Government Debt (2020, % of GDP)

Chart 6: ECB Balance Sheet (€trn)

Chart 7: HICP Inflation (%)

Chart 8: Euro-zone GDP (Q4 2019 = 100)

 

Sources: Refinitiv, Markit, Capital Economics


Japan

Output falls set to eclipse those during global financial crisis

  • The lockdown in Japan is less stringent than those in other major DMs, but that will not stop a plunge in economic activity. And with inflation going deeper into negative territory than elsewhere, the Bank of Japan may yet respond with a rate cut, or even a helicopter drop. But fiscal policy will do the heavy lifting.
  • Japan’s number of confirmed virus cases is a fraction of that in other large economies. (See Chart 25.) But the number of new cases has accelerated in recent weeks. (See Chart 26.) and the country is now in a state of emergency.
  • That gives local governments the power to request businesses to close and to urge citizens to work from home. The experience from Tokyo suggests that these requests will largely be heeded. (See Chart 27.) Spending on retail, transport and accommodation was slumping even before the formal declaration of a state of emergency, but we now expect a 15% q/q plunge in consumption in Q2. The containment measures will also undermine investment by preventing construction activity.
  • Exports are already plunging. While China’s economy is now on the mend, most other trading partners are in the midst of a severe downturn. We expect export volumes to fall by around 30% in Q2, which would eclipse the fall during the financial crisis. (See Chart 28.)
  • Containment measures and prolonged economic weakness will push the unemployment rate from 2.4% to above 4%. (See Chart 29.) And inflation will fall sharply this year. Admittedly, we expect output to rebound quickly in the second half of the year and a recovery in oil prices will lift headline inflation next year. But higher unemployment will result in falling wages so core inflation should remain negative. (See Chart 30.)
  • In contrast to the US, interbank spreads in Japan haven’t widened. (See Chart 31.) That may seem surprising given the precarious situation of many regional banks, but it reflects the fact that regional lenders only have a small presence in wholesale funding markets. We consider a financial crisis unlikely.
  • The Bank of Japan has only taken small steps to combat the coronavirus. It has provided additional loans to banks and stepped up its ETF purchases. We’ve pencilled in a cut in the policy rate to -0.2%. And the Bank of Japan might be the first in the world to try a helicopter drop if the economy weakens much further.
  • But the onus is really on fiscal policy. The government has announced a fiscal stimulus package worth 20% of GDP, but fresh fiscal measures are closer to 5% of GDP. We expect the budget deficit to widen to 8% of GDP this year. (See Chart 32.) This will leave debt sky high, but probably still sustainable.

Table 5: Japan

% y/y unless otherwise specified

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

           

Private cons’ptn

0.6

0.2

-8.1

5.8

1.9

Total fixed investm’t

0.8

0.9

-10.3

4.9

3.1

Public demand

1.2

2.1

2.5

1.8

0.9

Domestic demand

0.7

0.9

-5.6

4.1

1.7

   

 

     

Exports

2.8

-1.8

-20.6

14.4

6.9

Imports

2.4

-0.7

-12.8

8.6

5.4

   

 

     

GDP

0.7

0.7

-7.0

5.0

2.0

           

Consumer prices

0.3

0.5

-1.1

0.0

0.3

Cons. pri. excl. tax

0.1

0.4

-1.3

0.0

0.3

           

Unempl. (%)1

3.8

2.4

3.2

4.2

4.0

Policy rate (%)

0.1

-0.1

-0.2

-0.2

-0.2

10-yr JGB yield (%)

0.6

0.0

0.0

0.0

0.0

Gen’l gov’t bal.2

-6.4

-2.8

-8.0

-7.5

-7.0

Current account2

2.6

3.6

3.6

4.0

4.2

 
Sources: Refinitiv, Capital Economics. 1) Yearly Average, 2) % of GDP.

Japan Charts

Chart 25: Number of Coronavirus Cases

Chart 26: Number of New Coronavirus Cases

Chart 27: Toei Subway Passenger Volumes (Four Tokyo Underground Lines, Weekday Mornings)

Chart 28: Overseas GDP & Export Volumes

Chart 29: Unemployment Rate (%)

Chart 30: Consumer Prices (Excl. tax, % y/y)

Chart 31: 3M-Libor to 3M-OIS Spread (bp)

Chart 32: General Government Budget Balance
(% of GDP)

 

Sources: CEIC, Markit, Refinitiv, Bureau of Statistics, Capital Economics


United Kingdom

Effects of the huge hit to the economy will linger

  • We think that the recovery from the coronavirus will be slower than most expect. And lingering uncertainty over Brexit will be an extra drag relative to other advanced economies.
  • We’re assuming that the lockdown, which started on 23rd March, lasts until at least May and triggers an unprecedented peak-to-trough fall in GDP of 25%. (See Chart 33.) When the restrictions are eased GDP will recover more quickly than after previous recessions, in part thanks to the huge support put in place by policymakers to limit the lasting damage. But it will still take years for GDP to get back to its previous level. (See Charts 34 & 35.)
  • The government’s discretionary fiscal response worth 4.5% of GDP, on top of automatic stabilisers, may push the budget deficit up from 2% of GDP to 15% in 2020/21, and debt may climb from 80% of GDP to over 105%. (See Chart 36.) Meanwhile, the Bank of England’s cut in interest rates from 0.75% to a record low of 0.10%, £200bn increase in quantitative easing (see Chart 37), and schemes to provide liquidity and loans to banks and businesses has reduced the strain in financial markets.
  • Despite the unprecedented policy response, we expect the unemployment rate to rise from 4% to almost 9%, higher than the peak after the Great Financial Crisis. (See Chart 38.) And a similar number of businesses will go bankrupt. Both households and businesses may also decide to maintain higher savings in the future.
  • Such a lingering fall in the ability and desire to spend explains why by the end of 2022 GDP may still be about 5% lower than if the virus never existed. (See Chart 39.)
  • There’s a risk that the policy stimulus will boost inflation once the economy returns to full health. But the plunges in energy prices and demand will drag down inflation in the near term. We think it will fall to 0.5% in the middle of this year and stay below 2% for the next few years. (See Chart 40.) That explains why we expect the Bank of England to keep interest rates at 0.10% for the next three years.
  • Brexit may come back onto the agenda later this year. Our forecasts are based on the transition period being extended by a year to the end of 2021, by which time a deal is done. Overall, we expect a 12% fall in GDP in 2020 to only partially be offset by a 10% rise in 2021, leaving GDP struggling to get back to its pre-crisis level.

Table 6: United Kingdom*

% y/y unless otherwise specified

 

Ave.

 

Forecasts

 

10-18

2019

2020

2021

2022

   

 

     

Private cons’ptn

2.1

1.1

-21.0

12.0

4.6

Gov’t cons’ptn

0.8

3.5

19.5

5.0

2.0

Total fixed investm’t

2.6

0.6

-24.0

14.5

5.3

Stockbuilding1

0.1

0.2

0.0

0.1

0.0

Dom’stic demand

2.1

1.6

-14.0

10.7

4.0

   

 

     

Exports

3.3

4.8

-6.0

9.0

2.3

Imports

3.8

4.6

-13.0

11.5

3.7

   

 

     

GDP

1.9

1.4

-12.0

10.0

3.7

   

 

     

Consumer prices2

2.3

1.8

1.0

1.0

1.6

RPIX2,3

3.2

2.6

1.6

1.5

2.5

   

 

     
   

 

     

Real disp income

1.8

1.3

-5.0

1.4

1.6

H’hold sav. ratio4

8.5

5.7

21.5

12.9

10.5

Employment

1.2

1.1

-2.9

1.6

1.0

Unemp. rate2

6.3

3.8

7.0

5.7

5.3

   

 

     

Interest rate5

0.48

0.75

0.10

0.10

0.10

PSNB1

5.1

2.1

15.5

9.0

6.0

Current account1

-3.9

-3.8

-1.7

-2.6

-3.0

 

Sources: Refinitiv, Capital Economics.
*Assumes the lockdown lasts from March until June and the Brexit transition period is extended until December 2021.

1) As a % of GDP, 2) Year average, 3) Retail Price Index excluding mortgage interest payments, 4) As a % of disposable income, 5) Bank of England Bank Rate at end period.

United Kingdom Charts

Chart 33: GDP (% y/y)

Chart 34: GDP (% q/q)

Chart 35: Level of GDP (Pre-Recession Peak = 100)

Chart 36: Public Borrowing Requirement (% of GDP)

Chart 37: Chart 37: BoE Asset Purchase Facility

Chart 38: ILO Unemployment Rate (%)

Chart 39: Level of GDP (Q4 2019 = 100)

Chart 40: CPI Inflation (%)

 

Sources: Refinitiv, Capital Economics


Canada

Virus disruption will cause some long-lasting damage

  • The economy is heading for a record drop in GDP in the second quarter. With firms and households suffering permanent hits to their income, this slump will be only partially reversed as the restrictions on activity are lifted. We expect an 8.0% drop in GDP this year.
  • Almost 45% of consumption is at high risk due to the restrictions on activity. (See Chart 41.) The slump in business confidence points to a huge decline in investment as well. (See Chart 42.) We forecast a 45% annualised contraction in GDP in the second quarter, after a 10.5% decline in the first. We are assuming a total drop in employment of 4 million, or almost 20%. As many of these people will not officially count as unemployed, we are forecasting a smaller rise in unemployment, but still think the unemployment rate will average almost 17% in the second quarter. (See Chart 43.)
  • The Bank of Canada has so far cut its policy rate from 1.75% to 0.25%, launched a suite of credit-easing programs and announced its Large-Scale Asset Purchases (LSAP) program. The Bank’s asset holdings have already risen by $150bn (see Chart 44) and we expect a further increase of $200 bn. The government’s fiscal package amounts to over 11% of 2019 GDP. For now, only the direct spending measures should add to the budget deficit this year. With automatic stabilisers also kicking in, we expect the deficit to hit 11% of GDP. (See Chart 45.)
  • Nevertheless, there will still be lasting damage from months of reduced income. Some customer-facing firms, such as restaurants, have already permanently closed. Even firms that re-open are likely to hire fewer staff than before if social distancing remains in place. We see the unemployment rate falling from June but expect it to remain above February’s 5.6% for the next few years. (See Chart 2 again.)
  • The slump in oil prices this year means that headline inflation is set to briefly dip below zero. We expect the CPI-trim measure of core inflation to drop to 1.2% later this year (see Chart 46), although an average of the three core measures should be nearer 1.5%. Lower oil prices also mean that the near-term outlook for the energy sector is bleak. Firms have said that they will cut capital spending by an average of 25% this year. Prospects should start brightening from late 2021, as the first of three new pipelines comes online. (See Chart 47.)
  • Overall, due to the lasting damage of the disruption, we think that GDP will remain below its late-2019 level until early 2022. We do not see GDP returning to its pre-2020 trend path within the next few years. (See Chart 48.)

Table 7: Canada

% y/y unless otherwise specified

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

   

 

     

Private cons’ptn

2.3

1.7

-10.7

12.3

2.3

Total fixed investm’t

0.9

2.4

-10.0

0.9

5.1

Gov’t cons’ptn

1.5

1.5

3.8

3.4

0.7

Stockbuilding1

0.0

0.2

-0.3

-0.2

0.1

Dom’stic demand

1.8

1.8

-7.1

7.9

2.5

   

 

 

 

 

Exports

2.0

0.2

-6.8

5.7

4.6

Imports

2.3

0.4

-4.7

3.9

3.2

   

 

 

 

 

GDP

1.7

1.5

-8.0

8.0

3.0

   

 

 

 

 

Consumer prices2

1.6

1.9

0.6

2.1

1.9

   

 

 

 

 

Real disp income

1.5

3.5

-5.0

6.0

2.5

H’hold sav. Ratio3

3.8

2.7

6.0

3.0

3.0

Employment

0.9

2.1

-7.1

6.9

1.5

Unemployment2

7.1

5.7

10.7

7.2

6.5

   

 

 

 

 

Interest rate4

1.75

1.75

1.75

0.25

0.25

Federal gov’t bal.1

-1.0

-1.0

-11.0

-6.0

-3.0

Current account1

-3.0

-2.0

-2.9

-2.6

-2.2

 

Sources: Refinitiv, CE. 1) As a % of GDP, 2) Year average, 3) As a % of disposable income, 4) Bank of Canada overnight target rate at end of period.

Canada Charts

Chart 41: 2019 Consumption ($bn)

Chart 42: CFIB Business Barometer & Investment

Chart 43: Unemployment Rate (%)

Chart 44: Bank of Canada Assets ($bn)

Chart 45: Federal Budget Balance (% of GDP)

Chart 46: Inflation (%)

Chart 47: Pipeline Capacity (mn barrels per day)

Chart 48: GDP ($bn, 2015 chained price)

 

Sources: Refinitiv, Bloomberg, Capital Economics


Australia & New Zealand

Coronavirus restrictions to result in double-digit falls in GDP

  • Restrictions to limit the spread of the virus will see GDP fall at a double-digit rate in Australia and New Zealand in Q2. While activity will bounce back over the coming months, the rise in unemployment is a particular concern in Australia given high household debt.
  • The number of new coronavirus cases has fallen sharply in Australia since the end of March. New cases have also slowed dramatically in New Zealand. (See Chart 49.)
  • New Zealand imposed a draconian lockdown from 25th March which forced all non-essential businesses to close. Restrictions in Australia were less severe as the government still allowed most people to go to work. The slump in Australia’s business confidence points to GDP falling at an unprecedented rate. (See Chart 50.)
  • The recent drop in the number of new coronavirus cases suggests that both countries will gradually relax restrictions over the coming weeks. As such, we have lifted our GDP forecasts. We’ve now pencilled in a 20% q/q drop (30% previously) in output in New Zealand and a 12% q/q drop (15% previously) in Australia in Q2. (See Chart 51.)
  • Central banks in both countries have cut rates to 0.25%. The RBNZ has previously indicated its preference for negative rates but noted in March that it isn’t operationally ready to implement them. We think that will change and have pencilled in a reduction to -0.75% by year-end. (See Chart 52.)
  • Both central banks have started to buy government bonds, though the main aim of the RBA’s purchases is to improve market liquidity. As government bond markets have become less dysfunctional, those purchases will be scaled back. By contrast, the RBNZ has launched a traditional quantitative easing programme and has pledged to buy around 30% of the outstanding stock over the coming year.
  • With tensions in interbank markets flaring up last month, both central banks have provided ample liquidity. Those measures have restored calm in interbank markets. (See Chart 53.)
  • The fiscal response has been more forceful in Australia than in New Zealand. (See Chart 54.) Both countries have launched a wage subsidy scheme for firms whose revenues fall by more than 30%. But companies whose revenues drop by less than that will fall through the cracks. We still expect the unemployment rate to jump to 15% in New Zealand and to 12% in Australia. (See Chart 55.) This is especially worrying as Australia’s households entered the crisis with record-high debt loads.
  • Both the Australian dollar and the New Zealand dollar have already made up some of the sharp weakening that happened when stock markets plunged last month. And we think both currencies will strengthen a little further as risk appetite improves. (See Chart 56.)

Table 8: Australia & New Zealand

% y/y unless otherwise specified

 

Ave.

   

Forecasts

 

09-18

2019

2020

2021

2022

Australia

         

GDP

2.6

1.8

-8.0

7.8

4.0

Unemployment1

5.5

5.2

9.4

10.4

10.1

Consumer prices2

2.1

1.6

1.0

1.4

1.3

RBA cash rate3

2.8

0.75

0.25

0.25

0.25

Gen’l gov’t bal4

-2.2

-6.9

-8.2

-4.8

-4.3

Current account4

-3.5

0.5

2.1

0.6

0.3

New Zealand

         

GDP

2.5

2.3

-11.4

10.0

3.0

Unemployment1

5.5

4.1

10.8

11.2

10.6

Consumer prices2

1.6

1.6

1.5

1.4

1.5

RBNZ cash rate3

2.5

1.00

-0.75

-0.75

-0.75

Gen’l gov’t bal4

-1.7

-1.2

-8.9

-10.2

-8.0

Current account4

-2.9

-3.0

-3.0

-3.7

-3.7

 

Sources: Refinitiv, Capital Economics.
1) Unemployment rate, 2) Year average, 3) End-year, 4) As a % of GDP.

Australia & New Zealand Charts

Chart 49: New Coronavirus Cases

Chart 50: Aus. Business Confidence & GDP Growth

Chart 51: GDP (% y/y)

Chart 52: Policy Rates (%)

Chart 53: 3-Month Interbank Spreads to OIS (bp)

Chart 54: Fiscal Measures (% of GDP)

Chart 55: Unemployment Rates (%)

Chart 56: Exchange Rates

 

Sources: CEIC, The Guardian, Refinitiv, Treasuries, Capital Economists


The Nordics & Switzerland

Comparatively well placed to weather the carnage

  • Decisive actions from policymakers mean that Switzerland and Denmark are likely to emerge most quickly from the lockdown-driven downturns, while lower oil prices cloud the outlook for Norway. Meanwhile, although Sweden has taken a different path with its policy response, it will not be immune to a COVID-driven crunch.
  • While the Swiss and Nordic economies are set for precipitous declines in output this year, low levels of government debt mean that they are comparatively well placed to withstand the acute stresses being placed on the public finances – particularly compared to the euro-zone. (See Chart 57.) Norway will tap its huge oil fund, which will prevent an even deeper downturn, and the wide-scale usage of short-time work in Switzerland, and the efficient provision of loans to businesses (see Chart 58), will help support the recovery there too.
  • Sweden has ploughed its own, less-draconian furrow, and the authorities elsewhere are beginning the gradual process of easing virus-related restrictions. That said, output everywhere will take years to return to its pre-crisis peak (see Chart 59), and the level of GDP at end-2022 will be between 4-8% below where it would have been in the absence of the virus. The prospect of lower-for-longer oil prices means that the Norwegian economy will be the laggard in the Nordics.
  • While central banks have been in firefighting mode so far, we suspect that they will leave no stone unturned as the focus shifts to supporting recoveries. We expect that the SNB and Riksbank will cut their policy rates again before the end of the year. Moreover, having already slashed its key deposit rate by 125bp, we now think that the Norges Bank will join the sub-zero club before long. (See Chart 60.)
  • Accordingly, we forecast that the yields of 10-year government bonds in Switzerland and Sweden will remain below zero over the next couple of years. And we think that the 10-year rate in Norway will drop a bit further, to 0.50% by the end of 2020, before bouncing back next year as prospects for the Norwegian economy gradually improve. (See Chart 61.)
  • Provided that the epidemic is brought under control, we think that equities will continue to recover during the rest of this year. That said, stock markets are unlikely to return to where they were before the epidemic outbreak until at least 2022. (See Chart 62.)
  • Similarly, if the virus is controlled and market sentiment improves further, the Swedish krona and Norwegian krone would both benefit. (See Chart 63.) Meanwhile, upward pressure on the Swiss franc would probably ease, which would give the SNB some breathing space and allow it to wind down its interventions in the FX market. (See Chart 64.)

Table 9: The Nordics & Switzerland

 

World

GDP (% y/y)

Inflation2 (%)

 

Share1

2019

2020f

2021f

2022f

2019

2020f

2021f

2022f

Sweden

0.41

1.3

-7.5

6.5

2.5

1.7

0.0

1.2

1.0

Switzerland

0.40

0.9

-10.0

9.0

2.0

0.4

-1.2

0.8

0.5

Norway3

0.29

2.4

-9.0

5.0

3.5

2.3

0.0

1.8

1.7

Denmark

0.22

2.4

-7.0

7.0

2.5

0.7

0.0

0.5

1.0

 

Sources: Refinitiv, Capital Economics. 1) Share of world GDP in 2018 PPP terms, 2) Year average, EU harmonised consumer prices, 3) Mainland GDP.

Nordics & Switzerland Charts

Chart 57: General Gov’t Gross Debt (% of GDP)

Chart 58: Virus-related Loans Extended to Businesses (Thousands)

Chart 59: Real GDP (Q4 2019 = 100)

Chart 60: Central Bank Policy Interest Rates (%)

Chart 61: 10-Year Government Bond Yields (%)

Chart 62: Equities Markets (1st Jan. 2013 = 100)

Chart 63: Exchange Rates Vs. Euro
(1st Jan. 2020 = 100)

Chart 64: Swiss Francs per Euro & Weekly Sight Deposits Change

 

Sources: Refinitiv, Capital Economics


China

Recovery now underway

  • After the deepest downturn since the Cultural Revolution in Q1, China’s economy will return to growth this quarter. But with labour market strains holding back domestic demand and external headwinds intensifying, output is still set to contract this year and remain below the pre-virus path well into 2021.
  • The official figures show that China’s economy contracted 6.8% y/y in the first quarter. Unsurprisingly, restaurants, retail and wholesale activities were worst-affected. The slow return of migrant workers to cities also held back construction. (See Chart 65.) But even these figures may understate the scale of the Q1 contraction. (See Chart 66.)
  • With most social distancing restrictions now lifted, the economy is past the worst. (See Chart 67.) The daily activity indicators that we track have improved in recent weeks. Output should return to growth this quarter. That said, a rapid recovery to the pre-virus path is unlikely.
  • For a start, even in the absence of restrictions, lingering concerns about the virus are keeping many consumers and workers home. Passenger traffic remains well below normal levels. (See Chart 68.) And around a fifth of the migrants that left the cities ahead of Lunar New Year have yet to return. Meanwhile, the shutdowns will leave a legacy of job losses and firm closures that will take time to reverse.
  • Public records suggest that at least half a million firms were dissolved in Q1 and more are likely to close shop before long. Many SMEs only have enough cash to last a few months amidst the current weakness in sales.
  • The unemployment rate jumped in February (see Chart 69) and will probably remain elevated in the coming months. The quarter of the urban workforce that are self-employed or part of family-run businesses will also remain cautious given the recent hit to their incomes.
  • Another near-term headwind is the COVID-19 disruption outside of China, which we think will lead to the sharpest global contraction since WWII this quarter. This looks set to pull down exports, which drive 15% of China’s GDP, by as much as 50%. (See Chart 70.)
  • The global weakness will slow China’s recovery. We expect China’s economy to shrink 5% this year. The official GDP figures may not reflect this in full, but there is still a good chance they show the first annual contraction since 1976.
  • That said, China will outperform most other major economies. Its shutdowns, while severe, were shorter than now seems likely elsewhere. And while a renewed outbreak is still a risk, China’s containment efforts look to have been effective.
  • Meanwhile, although policy support has been low-key relative to China’s post-GFC stimulus, state control of the much of the financial system has minimized defaults and kept credit growth stable even amidst the slump in demand. (See Chart 71.) This has averted layoffs on the scale now being seen elsewhere.
  • While we think the economy won’t return to its pre-virus trend until well into 2021 (see Chart 72), that would be much earlier than is likely in other countries.

China Charts

Chart 65: Q1 GDP by Sector (% y/y)

Chart 66: Services Activity (% y/y)

Chart 67: GDP

Chart 68: Passenger Traffic (% of 2019 level, 7d ave.)

Chart 69: Surveyed Unemployment Rate (%)

Chart 70: Exports & Trade Partner GDP (% y/y)

Chart 71: Broad Credit Outstanding (% y/y)

Chart 72: GDP (Q4 2019 = 100)

 

Sources: CEIC, Baidu, Capital Economics


India

Slowest growth in four decades

  • The rapid spread of the coronavirus in India, and the aggressive measures to contain it, will have severe economic repercussions. We are forecasting growth of just 1% this year, the weakest pace of annual growth since 1979. (See Chart 73.) And since India is ill-equipped to cope, the risks are firmly on the downside.
  • The number of recorded cases of coronavirus in India is on a sharp upward trajectory (see Chart 74) and the true number of infections is likely to be higher still, given India’s limited testing capacity. (See Chart 75.) In response, the government has enacted several containment measures, most notably a nationwide shutdown requiring most people to stay in their homes.
  • But these measures are likely to be less effective in India than in richer economies. Social distancing isn’t an option for many – for example, only 16% of households have running water in their homes. (See Chart 76.) And policing activity in the enormous informal sector (see Chart 77) is virtually impossible.
  • Our base case is that the shutdown will continue in some form for three months. This will have enormous economic repercussions. Large parts of the manufacturing, construction, transport, retail, leisure and recreation sectors have ground to a halt. Other sectors will slow significantly too.
  • With businesses taking a pummelling and many households in India having thin savings buffers, the onus has fallen on monetary and fiscal policy to support the economy. The RBI has stepped up with hefty rate cuts and large-scale liquidity injections to help ensure financial stability. And it has left the door open for further easing.
  • By contrast, the finance ministry’s response has been timid so far. The total stimulus announced in response to the virus outbreak amounts to just 0.7% of GDP – far lower than in many other countries. (See Chart 78.) If the Finance Ministry is able to match the scale of the RBI’s response, it could help prevent the drastic economic slowdown from spiralling into an outright contraction in annual output this year.
  • That said, the risks are still firmly on the downside and the virus could prove to have more insidious and long-lasting effects.
  • For one example, the panic in global markets caused by the virus has meant that foreign portfolio flows out of India’s markets have surged to almost treble the peak during the “Taper Tantrum” in 2013, which pushed India to the brink of a balance of payments crisis. (See Chart 79.)
  • Admittedly, higher foreign exchange reserves and a smaller current account deficit (see Chart 80) that is comfortably financed by relatively stable inflows of FDI mean that the external position looks far more secure now. But an extended period of risk aversion could force the RBI to deploy its FX reserves, while the sudden halt in global economic activity could threaten even FDI inflows. This would intensify concerns over the external position and potentially prolong the domestic slowdown.

Table 11: India

% y/y unless otherwise specified

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

7.1

5.3

1.0

9.0

6.5

           

Consumer prices1

7.6

3.7

4.5

5.0

5.0

           

RBI Repo Rate2

6.80

5.15

4.00

4.50

5.50

Gen’l gov’t bal3,4

-7.6

-6.6

-6.8

-12.0

-8.0

Current account4

-2.4

-0.9

-0.2

-1.5

-2.0

 

Sources: Refinitiv, Capital Economics. 1) Year average, 2) End-year, 3) Fiscal Years, 4) % of GDP.

India Charts

Chart 73: GDP (% y/y)

Chart 74: Number of Confirmed Coronavirus Cases
in India (Latest = 15th Apr.)

Chart 75: Number of Coronavirus Tests
(Per Million People, Latest)

Chart 76: Households with Running Water
(% of Total, Latest)

Chart 77: Non-Agri Employment in Informal Sector
(% of Total, 2018)

Chart 78: Announced Fiscal Stimulus in Response to Coronavirus (% of GDP)

Chart 79: Daily Net Foreign Portfolio Inflows
(INRbn, Rolling 1m. Sum, Latest = 15th Apr.)

Chart 80: Current Account Balance
(4Q Sum, % of GDP)

 

Sources: World Bank, WHO, OurWorldInData, ILO, CEIC, CE


Other Emerging Asia

Full recovery from crisis unlikely even by end-2022

  • Asia is in the midst of a devasting recession. (See Chart 81.) Even if the virus is contained, recoveries will be very gradual, not least due to many economies’ exposure to tourism.
  • Domestic demand is being hammered as restrictions on the movement of people are extended and expanded to prevent the spread of the coronavirus. Large parts of South and South East Asia are now under lockdown. Google data on the movement of people (see Chart 82) indicate that service-sector activity in much of the region is grinding to a halt. Even in Taiwan and Korea, which have done a better job of containing the virus, retail and leisure sectors are still being hit hard.
  • External demand is collapsing too. We are forecasting a deep global recession, with world GDP set to fall by 3.5% this year, which would be a sharper fall than during the global financial crisis. (See Chart 83.) The region’s most trade-dependent economies (see Chart 84), are set to be hit hardest. Meanwhile, tourism across the world has ground to a halt and is likely to be the last sector of the global economy to recover. Cambodia, Thailand and Malaysia are very vulnerable. (See Chart 85.)
  • Economic recoveries are unlikely to take hold until there are clear signs that the virus has been contained. This is unlikely to happen in most countries until the third quarter. However, while an initial increase in activity can happen rapidly once lockdown measures are eased, this will soon run into constraints resulting from subdued demand.
  • Services will lag manufacturing. Lockdown measures may have to be tightened again if infections reappear. Further ahead, higher debt levels as a result of crisis mean a prolonged period of austerity is likely once economies are back on their feet. Sectors like tourism will struggle to fully recover.
  • Interest rates have been cut nearly everywhere, with further loosening likely over the coming weeks. (See Chart 86.) But with firms reluctant to invest and consumers unwilling or unable to spend, they will not be as effective as normal at stimulating demand. Central banks can still employ unconventional measures to lower bank financing costs and ensure that companies can continue to access credit. We expect more of such measures to be unveiled in the months ahead.
  • The job of supporting domestic demand will fall mostly on fiscal policy. The most generous fiscal stimulus packages so far have been in Singapore, Malaysia and Thailand. Relatively low debt levels mean most could loosen policy even more aggressively. (See Chart 87.)
  • Looking across the region, our assessment is that Thailand and Hong Kong will be the worst-affected countries this year. (See Chart 88.) Many will still be 2-5% smaller at the end of 2022 than if the crisis had not happened.

Table 12: Selected Other Emerging Asia

 

World Share 1)

GDP

Inflation

    2019 2020 2021 2022 2019 2020 2021 2022

Emerging Asia 2)

10.8

3.8

-3.0

8.0

5.0

3.0

2.2

2.3

2.8

Indonesia 3)

2.6

4.7

-1.0

7.0

6.0

2.8

2.0

2.5

4.0

Philippines

0.7

5.9

-4.0

12.0

8.0

2.5

1.7

2.0

3.0

South Korea

1.6

2.0

-3.0

6.0

3.5

0.4

-0.5

0.5

1.0

Thailand

1.0

2.4

-9.0

10.0

5.5

0.7

-1.0

-0.5

0.5

Sources: Refinitiv, Capital Economics. 1) Share of World GDP in 2018 PPP terms. 2) Excluding China and India 3) refers to Indonesia Activity Proxy.

Other Emerging Asia Charts

Chart 81: Emerging Asia GDP (% y/y)

Chart 82: Change in Number of People at Work (relative to 3rd Jan. to 6th Feb. baseline)

Chart 83: Global GDP and Asian* Exports (% y/y)

Chart 84: Exports of Goods and Services (% GDP)

Chart 85: Tourism Spending (% of GDP)

Chart 86: Change in Policy Rate (bps)

Chart 87: Government Debt (% of GDP)

Chart 88: 2020 GDP (% y/y)

 

Sources: Refinitiv, CEIC, ADB, Google, CE


Emerging Europe

Deepest contraction since the end of communism

  • Emerging Europe will experience its largest peak-to-trough decline in GDP this year since the fall of the Soviet Union. The aggressive policy response in Central Europe and authorities’ ability to curb the virus’ spread mean that economic recoveries there are likely to be much stronger than in Russia and Turkey.
  • The response to the coronavirus has differed across the region. The Polish and Czech governments have slowed the spread of the virus while the authorities in Russia and Turkey were slow to implement restrictions and are struggling to contain outbreaks. (See Chart 89.)
  • The effects of containment measures have had a dramatic effect on activity. (See Chart 90.) The effects are likely to be felt acutely in Turkey and Southern Europe, where a large share of consumption is vulnerable to social distancing and tourism sectors are large. (See Chart 91.)
  • While Russia’s economy looks less exposed to the effects of social distancing, the economy will be hit by a collapse in oil prices. This will cause oil revenues to plunge and result in twin budget and current account deficits. That said, low oil prices will benefit those countries with high inflation (Turkey and Central Europe) and external vulnerabilities (Turkey and Ukraine).
  • The policy response across Central Europe has been the most aggressive with interest rate cuts and large fiscal support packages. We expect interest rates to settle at near-zero in Poland and the Czech Republic and central banks in both countries are likely to implement QE.
  • The policy response has been more tepid in Turkey and Russia. Fiscal packages amount to between 2-3% of GDP. (See Chart 92.) More will need to be done, but the scope for monetary easing in Turkey is limited and the slow policy response in Russia will probably hold back the eventual recovery.
  • Budget deficits will widen sharply as a result of large fiscal packages and reduced tax revenues, although this shouldn’t trigger sustainability concerns. (See Chart 93.)
  • What’s more, banking systems are better placed to weather a downturn than in 2008. The exceptions are Russia and Turkey. (See Chart 94.) In Russia, NPL ratios are high, and banks have less capital to absorb losses on their loan books. In Turkey, there is a growing risk that banks default on their large external debts.
  • We expect regional GDP to fall by around 7% this year, which would mark the biggest contraction since the early 1990s. (See Chart 95.) Poland and the Czech Republic are likely to experience the strongest recoveries while the Russian and Turkish economies are likely to take longer to recover. (See Chart 96.)

Table 8: Emerging Europe Key Forecasts1

 

World Share2

GDP

Inflation

 

2019

2020

2021

2022

2019

2020

2021

2022

Emerging Europe

7.3

2.1

-6.7

5.5

2.5

6.5

5.0

6.0

5.4

Russia

3.1

1.3

-6.0

4.5

1.5

4.5

3.5

3.8

3.5

Turkey

1.7

0.9

-8.3

8.0

3.0

15.2

10.5

14.0

12.5

Poland

0.9

4.1

-5.3

5.0

3.5

2.3

3.0

3.5

2.8

Czech Republic

0.3

2.4

-6.0

5.5

2.3

2.8

3.5

2.5

2.3

Hungary

0.2

4.9

-6.8

5.0

3.5

3.4

4.0

4.0

3.5

Sources: Refinitiv, Capital Economics. 1) % y/y. 2) Share of World GDP in 2019 PPP terms.

Overview Charts

Chart 89: Daily New Coronavirus Infections
(3-Day Average, T = Day of 100th Case)

Chart 90: Emerging Europe* Cinema Ticket Sales ($mn)

Chart 91: Consumption Most Vulnerable to Social Distancing & Direct Cont. of Travel & Tourism

Chart 92: Selected Fiscal Support Packages (Includes Direct & Indirect Measures, % of GDP)

Chart 93: Government Budget Balance (% of GDP)

Chart 94: Banking Sector Heat Map

Chart 95: Emerging Europe GDP (% y/y)

Chart 96: Real GDP at End-2022 Compared to CE Forecast if Coronavirus Crisis Had Not Occurred (%)

 

Sources: Refinitiv, CEIC, Bloomberg, IMF, World Bank, IMDB, WTTC, Capital Economics


Latin America

Brazil and Mexico to come out worst

  • The downturn in Latin America this year will be one of the deepest ever. And the limited scale of policy responses in Brazil and Mexico means that their recessions are likely to be steeper and recoveries weaker than in Chile and Peru or, indeed, many other EMs.
  • There are early signs that the infection curve is starting to flatten in Argentina, Chile and Colombia. (See Chart 97.) However, the number of cases continues to rise sharply in Brazil and Mexico though.
  • Across the region, social distancing has had a dramatic effect since the second half of March. Low profile indicators suggest that travel and recreation have ground to a halt. (See Chart 98.) Mexico’s economy is most exposed to these effects – its tourism sector is large (see Chart 99) and consumption of goods and services most vulnerable to social distancing (e.g. restaurants, recreation, public transport) is high too. (See Chart 100.)
  • The hit to the region’s economies is being compounded by capital outflows and falls in commodity prices (notably oil). The effects of the latter will be most severe in Ecuador and Venezuela. But most of the region will suffer from lower commodity revenues.
  • Central banks have cut interest rates and, with inflation likely to ease, we expect further monetary easing across most of the region. (See Chart 101.) In Chile, where the policy rate is at the effective lower bound, we think that the central bank will undertake a QE programme to reduce long-term interest rates.
  • The fiscal response has been mixed. (See Chart 102.) Chile and Peru have unveiled large packages worth 6-8% of GDP. Those in Brazil and Mexico have gradually increased, but remain small. More will probably be done in the latter two to help firms and households. But the late response means the economic damage will be larger.
  • Budget deficits will widen sharply as a result of emergency fiscal packages and reduced revenues. This shouldn’t create problems in most places. Debt can be issued domestically and in local currency. But those starting with high debt ratios (Brazil, Mexico) are likely to turn to austerity and financial repression by 2021 to stop debt ratios rising sharply.
  • Mexico’s government may also stop providing funds for Pemex – resulting in a default on its external debts – to free up funds for healthcare. For Argentina, the costs of the coronavirus raise the risk of a disorderly default on public debt.
  • Overall, we think that regional GDP will shrink by around 6% this year, the worst downturn in modern history. (See Chart 103.) At a country level, our 2020 forecasts are generally more pessimistic than those of the IMF. (See Chart 104.)

Table 7: Latin America Key Forecasts1

 

World Share2

GDP

Inflation3

 

2019

2020

2021

2022

2019

2020

2021

2022

Latin America

6.5

0.7

-6.0

3.7

2.0

3.4

3.0

3.2

3.4

Brazil

2.4

1.1

-5.5

2.5

2.0

3.7

3.5

3.3

3.5

Mexico

1.8

-0.1

-8.0

5.0

2.0

3.6

3.0

3.5

3.5

Argentina

0.6

-2.2

-5.0

2.5

1.0

53.5

45.0

35.0

30.0

Colombia

0.6

3.3

-5.0

4.0

2.0

3.5

3.5

3.8

3.5

Chile

0.4

1.1

-5.0

6.0

3.0

2.3

3.1

2.3

3.0

Sources: Refinitiv, Capital Economics. 1) % y/y. 2) Share of World GDP in 2019 PPP terms. 3) Argentina excluded from regional inflation aggregate.

Latin America Charts

Chart 97: Number of Confirmed
Coronavirus Cases (Log Scale)

Chart 98: Citymapper Mobility Index (% of Normal Use)

Chart 99: Tourism (Direct Contribution,
% of GDP, Latest)

Chart 100: Consumption of Goods & Services Most Vulnerable to Social Distancing (% of GDP)

Chart 101: Change in Policy Interest Rates (bp)

Chart 102: Direct Fiscal Support (% of GDP, Latest)

Chart 103: Latin America Annual GDP Growth (%)

Chart 104: 2020 GDP Growth Forecasts (%)

 

Sources: Citymapper, Refinitiv, Bloomberg, World Bank, IMF, CE


Middle East & North Africa

Steepest downturn since the 1980s, recoveries to be slow

  • Efforts to contain the coronavirus outbreak and the fallout from the plunge in oil prices will cause the MENA economies to contract this year at their fastest pace since the 1980s.
  • The virus has spread rapidly, and governments have responded with draconian measures to get on top of the outbreak. (See Chart 105.) This has led to severe economic disruption and will continue to do so over the coming weeks.
  • Sectors most vulnerable to social distancing will be hit hard and these are largest in the North African economies as well as Lebanon, Jordan and Dubai. (See Chart 106.) Dubai is heavily exposed to the global downturn which, coming alongside the possible delay to the World Expo, raises concerns about the Emirate’s large debts.
  • For the Gulf, the impact will be compounded by developments in the oil market. Steep output cuts mean that hydrocarbon sectors will be a major drag on GDP. (See Chart 107.)
  • Meanwhile, the plunge in oil prices will push budget and current account positions across all six Gulf countries into deficit. (See Chart 108.) Large FX savings (see Chart 109) and financial support for Bahrain and Oman mean that dollar pegs should stay intact. Instead, policymakers will rely on a fresh round of fiscal austerity to make the adjustment to low oil prices.
  • Elsewhere, fragile external positions will limit the scope for policy support. Lebanon was already in a crisis, with the government in default and moving towards an official devaluation of the pound. The coronavirus outbreak is making a bad situation even worse.
  • Low oil prices will aggravate long-standing problems in Algeria’s economy. Tunisia and Jordan can lean on the IMF, but fiscal policy will be kept tight and, in Tunisia, the dinar will weaken. Morocco’s external position is in better shape and the decision to draw down an IMF credit line will help it to weather the storm.
  • In Egypt, the central bank has intervened to prop up the pound. Policymakers hinted this is a temporary measure and our central view is that the currency will gradually weaken. (See Chart 110.) With inflation under control, this would pave the way for further interest rates to support the economy. (See Chart 111.)
  • That said, there is a risk that the authorities hold on to the pound for too long, leading to a build-up of imbalances and a need for interest rates to stay high. All of this will add to the economic headwinds. Meanwhile, the government’s large debt burden limits the scope for fiscal stimulus.
  • All told, we expect the region’s economy to contract by 4.8% this year, which would mark the worst performance since the early 1980s. (See Chart 112.) Recoveries are likely to get underway in 2022, but limited policy support means that they are likely to be slow going.

Table 9: Middle East & North Africa Key Forecasts1

 

World Share2

GDP

Inflation

 

2019

2020

2021

2022

2019

2020

2021

2022

Middle East & North Africa

4.5

1.7

-5.2

4.6

3.3

1.8

2.0

3.7

4.0

Saudi Arabia

1.3

0.3

-5.0

2.8

1.3

-1.2

0.5

1.5

2.5

Egypt

1.0

5.6

-2.3

6.3

4.8

8.6

5.3

6.5

6.0

UAE

0.5

1.5

-10.0

10.0

5.8

-1.9

-2.2

2.5

3.0

Morocco

0.2

2.2

-6.5

6.0

3.0

0.7

0.3

1.5

2.0

Sources: Refinitiv, Capital Economics. 1) % y/y. 2) Share of World GDP in 2019 PPP terms.

Middle East & North Africa Charts

Chart 105: MENA Confirmed Coronavirus Cases & Policy Stringency Index

Chart 106: Sectors at Risk of Social Distancing* (% of GDP)

Chart 107: Hydrocarbon Sector Contribution to 2020 GDP Growth (%-pts)

Chart 108: Oil Price Needed to Balance Budget and Current Account ($pb)

Chart 109: Sovereign Wealth Fund Assets and FX Reserves

Chart 110: Egyptian Pound (vs. $, Inverted)

Chart 111: Egypt Consumer Prices & Interest Rates

Chart 112: Middle East & North Africa GDP (% y/y)

 

Sources: CEIC, Refinitiv, Capital Economics


Sub-Saharan Africa

Steep regional recession, default risks building

  • Sub-Saharan Africa is set for one of its worst downturns in decades this year, with the region’s largest economies all likely to fall into deep recessions. The fiscal cost of the crisis will push many countries towards debt defaults.
  • The number of cases of the coronavirus in the region has continued to rise. (See Chart 113.) With testing limited, the official figures may well underestimate the true extent of the virus’ spread. More and more countries have introduced strict containment measures.
  • But containing the coronavirus could prove much harder in Africa than elsewhere. Lockdowns will be difficult to enforce when people need to visit communal areas out of necessity, e.g. for running water. (See Chart 114.) And weak social welfare nets could force people to restart work.
  • In general, the impact on GDP caused by social distancing is likely to be smaller in Africa than elsewhere. Agriculture is a larger part of these economies and is unlikely to be affected as severely. What’s more, low income levels mean there is little discretionary spending to be cut back. But if governments fail to contain the virus, the damaging effects of social distancing would be much longer lasting.
  • In higher income economies such as Mauritius, South Africa, and Botswana (see Chart 115), discretionary spending is larger and the costs of social distancing will be more severe. Mauritius and Botswana will suffer due to the importance of tourism. (See Chart 116.)
  • Meanwhile, the collapse in commodity prices will hit Zambia (copper) and Angola and Nigeria (both oil) hardest. (See Chart 117.) Balance of payments strains are compounded by capital outflows. African economies are among the most dependent on foreign capital inflows – and have the largest external vulnerabilities – of any EMs. (See Chart 118.)
  • For many, these external vulnerabilities are a result of large public sector external debts. Zambia already is already seeking to restructure its debts. Many others have gone (or will go) to the IMF. The Fund may ask for debt restructuring in countries where public debt looks unsustainable (which means the process should be orderly). That’s most likely to include Angola (see Chart 119), but the Fund has also warned of debt distress in Ghana and Ethiopia.
  • South Africa is the one economy in the region with large domestic financial markets and that can finance larger budget deficits more easily. But this would worsen the slow burning local currency debt problem.
  • Weak public finances and strains in the balance of payments will limit the scale of the policy response across the region. Regional GDP is likely to contract this year (see Chart 120) for the first time since the early 1990s.

Table 16: Selected Sub-Saharan Africa

 

World

GDP

Inflation2

Share1

2019

2020

2021

2022

2019

2020

2021

2022

Sub-Saharan Africa

2.5

3.0

-2.6

3.9

3.5

8.4

9.7

9.1

8.2

Nigeria

0.9

2.2

-3.0

2.5

2.0

11.4

13.0

12.5

12.0

South Africa

0.6

0.2

-6.5

3.5

1.8

4.1

3.8

4.3

3.8

Angola

0.1

-0.3

-6.0

3.0

2.0

17.3

25.0

20.0

17.5

Kenya

0.1

5.6

1.5

5.5

6.5

5.2

6.0

5.5

5.0

Sources: Refinitiv, IMF, NBS, Stats SA, INE, KNBS, National Sources, Capital Economics. 1) Share of World GDP in 2019 PPP terms. 2) Annual average

Sub-Saharan Africa Charts

Chart 113: Coronavirus Cases (Log Scale, T = Day of First Confirmed Case)

Chart 114: Households with Running Water (%, Latest)

Chart 115: GDP per Capita (US$, 2019)

Chart 116: Tourism (Direct Contribution, % of GDP)

Chart 117: Change in Net Exports Due to Changes in Commodity Prices (% of GDP, 2020 vs. 2019)

Chart 118: Gross External Financing Requirement (% of FX Reserves, Latest)

Chart 119: Government Debt (% of GDP, 2019)

Chart 120: Sub-Saharan Africa GDP Growth (%)

 

Sources: Refinitiv, WTTC, DHS, IMF, Capital Economics


Commodities

Some light at the end of the tunnel

  • We forecast that most commodities prices will start to recover later this year, but we do not expect prices to return to their pre-virus levels until 2022, at the earliest. Stocks are high and will take some time to draw down, particularly if – as we think likely – consumer confidence is slow to recover.
  • The prices of nearly all commodities have fallen since the start of the year (see Chart 121) as virus-containment measures have led to a collapse in demand. A stronger US dollar has also weighed on prices. (See Chart 122.)
  • Commodity prices had been tracking moves in risky assets, including equities, for much of this year, but this relationship broke down recently. (See Chart 123.) We think prices will remain in the doldrums until there are clear signs that physical demand is starting to pick up. Indeed, industrial metals prices have outperformed energy prices recently on the back of a revival of activity in China. (See Chart 124.)
  • The downturn in global growth in 2020 will lead to lower demand for all commodities. But we think oil demand will be particularly hard hit given that many of the virus containment measures target oil-intensive travel. We expect oil demand to fall by more than the drop implied by our GDP forecasts. (See Chart 125.) What’s more, while the recovery in economic activity expected in 2021 will give a lift to oil demand, we do not anticipate a surge. The virus measures are likely to have a lingering negative impact on consumer behaviour.
  • Given moribund demand, developments on the supply side for oil will be a key driver of prices. OPEC and its allies have announced deep cuts to output. By our reckoning, the market will remain oversupplied until Q4. That said, US supply looks set to fall sharply given low prevailing prices. (See Chart 126.) By the end of 2020, we expect the oil price (Brent) to be factoring in stronger demand in 2021 and to have picked up to around $45per barrel.
  • Industrial metals prices should also rise in the second half of the year if we are right and activity picks up. Stimulus spending on infrastructure in China, in particular, bodes well for demand. But like oil, prices will remain below pre-virus levels.
  • By contrast, the virus containment measures have not been entirely negative for agricultural commodity prices. Prices have undeniably been affected by the general sell-off in riskier assets. (See Chart 127.) And agriculturals used in industry or as biofuels have seen prices plummet. But initially, a spate of stockpiling boosted the prices of staples, such as wheat and rice. And more recently, labour shortages resulting from lockdowns have raised concerns about future supply. The big picture though is that stocks of most grains remain high (see Chart 128) and prices should ease back by end-year. But the more industrial agriculturals could see prices rebound strongly later in the year.

Table 17: Commodity Prices (Year-end)

     

Forecasts

 

2018

2019

2020

2021

2022

 

         

S&P GSCI Index

374

436

437

520

555

Bloomberg Index

321

355

358

395

415

Energy

         

Brent ($ per barrel)

54

66

45

55

60

US Natural Gas(1)

2.9

2.2

2.5

3.0

3.5

Coal(2)

102

67

60

55

52

           

Metals ($ per tonne)

   

Copper

5,949

6,149

5,500

6,500

6625

Aluminium

1,863

1,781

1,600

1,650

1700

Iron Ore

72

92

70

65

60

Gold ($ per oz)

1,283

1,517

1,600

1,600

1,550

           

Agriculturals (US cents per bushel)

   

Corn

375

388

360

400

415

Soybeans

883

943

900

930

950

Wheat

503

559

475

450

470

 

Sources: Refinitiv, Bloomberg, Capital Economics. 1) Henry Hub, $ per mBtu, 2) Newcastle, $ per tonne/

Commodities Charts

Chart 121: S&P GSCI Commodity Prices
(1st Jan. 2020 = 100)

Chart 122: US Dollar & Commodity Prices

Chart 123: US Equity & Commodity Prices

Chart 124: China Manuf. PMI & Industrial Metals Prices

Chart 125: Global Economic Growth & Oil Consumption

Chart 126: US Drilling Rigs & Oil Price

Chart 127: Futures Position in Agriculturals
& Price Index

Chart 128: Global Wheat Stocks

 

Sources: Refinitiv, IEA, BP, USDA, Capital Economics