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Economics Fixed Income Commentary

Global Macro Outlook - July 2020

16 July 2020
2 min read

What You Need to Know

Our experienced global team of economists offers its latest perspective on the world economy. Included are regional and country forecasts for growth, inflation and interest rates, updates on central bank and fiscal policies, and the upside and downside risks that could change the trajectory.

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Key Forecast Trends

  • Activity has bounced as governments relax restrictions on economic and social activity. There's even increased talk of a "V-shaped" recovery.
  • We think this is misplaced. Given the unprecedented restrictions placed on activity, growth was always going to rebound strongly as countries emerged from lockdown.
  • But the level of output is still well below "normal" and closing the gap won't be easy, particularly as restrictions on some forms of business activity are here to stay.
  • Renewed virus outbreaks look inevitable. And while few countries are unlikely to shut down their economies again, even local lockdowns are likely to be disruptive.
  • The overall shape of recovery is therefore likely to be slow and uneven rather than "V-shaped." Key challenges lie ahead, including the US election and rising tension between China and the West.
  • The case for additional fiscal stimulus remains compelling. The good news is that most governments are likely to deliver—even in Europe, austerity is over.
  • Direct monetary stimulus has reached the end of the road. But central banks still have a key role to play by suppressing interest rates and facilitating fiscal expansion.
  • It's a short step, though, from "joined-at-the-hip" monetary/fiscal policy to outright fiscal dominance—central bank "burden sharing" in Indonesia being a good example of this. History suggests this has rarely ended well.

Outlook

  • We have lowered our 2020 global growth forecast further to –4.6% from –0.7%. Risks to this forecast look more evenly balanced than a month ago when they were heavily skewed to the downside.
  • The US and euro-area economies are expected to contract by 5.5% and 10.0%, respectively, this year, while China is expected to expand by 1.1%. The big difference between the forecasts is largely explained by the relative severity of the economic lockdowns needed to contain the spread of the virus—but also by fiscal stimulus.
  • We see global growth rebounding to 5.1 % in 2021. This will depend crucially on the effectiveness of policies to dampen the economic impact of the lockdowns and the extent to which the virus can be contained as those lockdowns are lifted.
  • Central banks have moved quickly to relaunch quantitative easing (QE) programs to allow governments to support their economies without putting upward pressure on bond yields. We expect yields to remain close to current record lows.

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