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Economics Fixed Income Commentary

Global Macro Outlook - November 2020

06 November 2020
2 min read

What You Need to Know

Third-quarter global GDP data were encouraging, with China leading the way. New COVID-19 cases forced Europe to reimpose restrictions, which could lead to negative output growth there. The US economy regained about 60% of 2020’s lost activity, with much more work to be done.

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Key Forecast Trends

  • As markets continue to ponder the US Presidential election result, a surge in COVID-19 cases across Europe has led to a darkening near-term outlook. How things play out in the US—from a political and virus perspective—is still uncertain, but another period of negative European output growth now beckons.
  • Yet, there are mitigating factors. European lockdowns are unlikely to be as disruptive as they were earlier in the year and the recovery in China and the rest of Asia looks increasingly secure.
  • Moreover, it’s important to remember that COVID-19 lockdowns are the result of deliberate policy action to slow the spread of the virus and save lives. Like earlier this year, they will be accompanied by fiscal measures to support households and firms.
  • In this respect, third-quarter GDP data were encouraging. China is leading the way, with output now back above pre-crisis levels. But vigorous recoveries in the US and the euro area mean that output in both is now just 4% below pre-crisis levels.
  • That’s still an important gap. But it’s much smaller than expected a few months ago, suggesting that economies can bounce back quickly from self-imposed shutdowns, provided they're given sufficient support. That augurs well for the future.
  • What’s really taking the strain here is government debt, which is well past the point at which it's placing binding constraints on monetary policy. We continue to think central banks will keep interest rates pinned at ultralow levels for the foreseeable future.

Forecast Overview

Key Assumptions
 

  • COVID-19: resurgent virus likely to weigh on growth over the near term then fade as a cyclical factor
  • Economy: some discruption likely due to virus resurgence and/or as emergency support is gradually wound down
  • Fiscal policy: fiscal stimulus to provide sustained policy support throughout the recovery phase
  • Monetary policy: central banks to keep yield curves anchored to facilitate fiscal stimulus
  • US election: non-discruptive result

Central Forecast
 

  • Global growth: after strong post-lockdown gains, growth likely to turn patchy in 4Q/1Q
  • US/Europe: a more modest pace of expansion in the US and small contraction in Europe look likely
  • China: sustained recovery helped by ongoing policy support
  • Fed: rates to remain at zero for the foreseeable future; QE to continue
  • ECB: further increase in bond purchases likely around year end; rate cut still possible

Updside Risks
 

  • Game-changing medical innovation
  • Return of multilateralism

Downside Risks
 

  • Virus spread
  • US bond yields
  • Accidental/premature austerity

Core Views
 

  • Yield to stay near/below zero
  • Stronger euro vs. the US dollar
  • Favor hard-currency EM debt

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