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Global GDP Forecast Stable as Coronavirus Disruption Eases

Fitch Ratings still expects global GDP to fall by 4.6% in 2020 in its latest Global Economic Outlook (GEO), released today. The stabilisation in the forecast follows clearer evidence in recent weeks of sequential improvements in economic activity.

“Signs of sequential improvements in activity have become clearer over the past month, lending confidence to the view that April marked the trough of the coronavirus-related recession. Nevertheless, the risk of a resurgence of the virus and renewed nationwide lockdowns – which could severely interrupt the expected economic recovery path – remains high,” said Brian Coulton, Chief Economist, Fitch Ratings.

Firmer signs of economic recovery have emerged since our previous GEO, in the form of sharp month-on-month increases in retail sales in the US, UK and Spain in May, a rise in US employment last month and improving PMI balances in May and June. Daily mobility data confirm a significant ongoing recovery in visits to retail and recreation venues as lockdown measures have eased. Construction activity is also reviving relatively quickly after having fallen particularly sharply amid lockdowns.

China’s recovery also continued at a solid pace in May and we have raised our 2020 GDP forecast to 1.2% from 0.7% in the previous GEO, the first upwards forecast revision for a long time. We have also upgraded forecasts for Australia and Korea, respectively to -2.7% from -5.0% and to -0.9% from -1.2%. We now expect Germany’s economy to shrink by 6.3% in 2020 compared to an earlier forecast of -6.7%, owing to additional fiscal policy easing. The eurozone forecast is, correspondingly, now -8% compared to -8.2% in the previous GEO.

We have affirmed the US 2020 GDP forecast at -5.6% following recent improvements in the data but we still expect the economy to decline by 9.9% (34% annualised) in 2Q20 and the recent increase in daily new virus cases increases downside risks.

We have lowered our forecasts for Brazil, the UK, Mexico, Russia, Turkey, South Africa and Indonesia. The virus outbreak continues to intensify in Brazil and we now expect GDP to decline by 7% in 2020 (previous forecast -6%) despite aggressive policy easing. We have cut Mexico’s forecast to -9.1% (from -7.4%) following very weak incoming industrial production data and the extension of restrictions and against a backdrop of a modest policy easing response. We now expect the UK economy to fall by 9% this year (-7.8% previously) with a longer-than-anticipated lockdown and incoming data now pointing to a 15% decline in GDP in 2Q20.

Policy easing has been stepped up even further since the previous GEO and has been huge by historical standards. The Fitch 20 countries in aggregate have announced direct fiscal easing measures of more than 7% of GDP, twice as much easing as enacted by the advanced countries in the aftermath of the global financial crisis.

“The recent surge in credit to the non-financial corporate sector in the US and Europe is testimony to the impact that fiscal support and massive central bank liquidity injections have had in preventing a tightening in financial conditions,” said Coulton.

Policy interventions have also cushioned the economic shock in Europe through preventing a sharp rise in unemployment to date. No less than 45 million workers are now enlisted in job-subsidy schemes in the UK, Germany, France, Italy and Spain, equivalent to 28% of the combined workforce. Unemployment rates in Europe are nevertheless expected to rise significantly over the coming months although the pace will depend crucially on how quickly subsidy schemes are unwound.

“Elevated job uncertainty, along with ongoing social distancing behaviour is likely to weigh heavily on household spending over the next 18 months, while firms are likely to cut back sharply on investment plans after such a huge revenue shock. This means that the climb back to pre-virus GDP levels will, despite massive stimulus, be much slower than the recent rapid descent,” added Coulton.

Fitch expects global GDP to rise by 4.9% in 2021, a rebound that is partly technical as the restrictions on activity imposed in 2020 are eased. World growth is expected to continue at an above-trend rate of 3.4% in 2022 as the impact of policy support persists and the output gap closes, although we anticipate some loss of potential GDP in the aftermath of the crisis. We forecast that US GDP will regain 4Q19 levels in 2Q22 and the eurozone in 4Q22, a relatively slow and tentative return, albeit more rapid than that after the global financial crisis. A downside scenario in which renewed nationwide lockdowns become necessary could see this return delayed until the middle of the decade.
Source: Fitch Ratings

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