Key Forecast Trends

• Our estimates suggest that the global economy contracted by 10% in the first two quarters of 2020, roughly three times as big as during the global financial crisis.
• Not surprisingly, recent data point to a better third quarter: there was always likely to be a mechanical bounce in activity as economies emerged from lockdown. But the road to a full recovery is likely to be long, with output in many countries unlikely to return to pre-crisis levels until well into 2022.
• It’s not just about disruption and dislocations caused by COVID-19. Other threats loom, including the US presidential election and a deteriorating global geopolitical environment – particularly relations between China and the West.
• The trick for investors is to balance this challenging fundamental backdrop against the promise of sustained policy stimulus and the likelihood that governments and central banks will respond forcefully to any setbacks.
• A negative view on risk assets requires a combination of economic disappointment and policy error. The latter looks unlikely now that governments have discovered the secrets of joined-at-the-hip monetary/fiscal coordination. With central banks pinning interest rates close to zero, the near-term cost of additional fiscal stimulus is low.
• We continue to think that the euro will strengthen against the dollar. With the US Federal Reserve (Fed) switching to a new, looser policy regime, this is now supported by potential dollar weakness as well as improved euro-area governance.

Outlook

• We have made no significant changes to our global forecasts this month. We expect the global economy to contract by 4.8% this year, then grow by a similar amount next year. While this looks “V-shaped”, the level of global output at the end of next year is likely to be slightly below its level at the end of 2019 and roughly 6% below a simple extrapolation of the pre-crisis trend. That shouldn’t be surprising: a shock like COVID-19 is likely to leave deep scars.
• The near-term outlook for inflation remains uncertain. Beyond the noise caused by disruptions and dislocations related to COVID-19, the cyclical story is likely to be determined by a tug-of-war between weak demand and the economy’s impaired supply capacity. While it’s difficult to be certain which of these forces will be more powerful,
• The longer-term outlook for inflation is likely to be driven by changes in the monetary regime rather than the balance of power between supply and demand. And the Fed’s recent switch towards average inflation targeting marks another step towards a more inflationary regime. We doubt that this move alone will break the back of persistently weak inflation, but the building blocks for higher inflation outcomes are gradually falling into place, including increased fiscal dominance.