A Double-Digit Rebound Has Begun, But It’s No Time To Celebrate
COVID-19 Macro Stress, Fiscal Policy and Firm Survival: A Layer Cake Model. Read the latest from S&P Global Ratings' Global Chief Economist, Paul Gruenwald here.
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While the threat from COVID-19 persists, many key economies fared better than expected in the third quarter as households stepped up spending in the U.S. and Europe, and the Chinese government ramped up infrastructure investment. The majority of advanced economies surprised on the upside, while developments in emerging markets were mixed.
But the good news only goes so far: The big bounce is largely mechanical and the next leg of the recovery will be more difficult. Indeed, momentum is already beginning to fade. Challenges are mostly fiscal include protecting those hardest hit, keeping viable firms afloat, and facilitating necessary structural changes.
Our global GDP forecast for full-year 2020 remains broadly unchanged, with a contraction of around 4%. Upward revisions for the U.S., Eurozone, and China were offset by downward revisions to India (for the second quarter in a row) and the U.K.
The balance of risks remains on the downside, reflecting insufficient support for the nexus of small- and medium-enterprises and the labor market, premature fiscal tightening, and increasing economic damage to EMs. Progress toward a vaccine provides a modest upside.
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The U.S. economy has taken a few promising steps toward recovery, with consumer spending largely resilient through the summer and the unemployment rate declining a bit more than we had forecast (though still in recession territory). We expect a 29.5% bounce in third-quarter U.S. GDP, though that will only partly offset the massive losses in the first half of the year.
While the drop in the unemployment rate to 8.4% in August from its post-1947 record high of 14.75% (in April) was a relief, that was likely the easier half of the jobs market recovery. We don't expect the unemployment rate to reach its precrisis level until mid-2024.
For full-year 2020, real GDP is likely to contract by 4% (was a 5% drop in our June forecast) and then grow a modest 3.9% in 2021 (was 5.2% in June).
As this sluggish recovery unfolds, three big risks remain: no coronavirus vaccine yet available as the country heads into flu season, a lack of new fiscal stimulus, and trade tensions with China on the rise.
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After experiencing the worst recession since WWII, the eurozone economic recovery from the lockdowns has been surprisingly fast. Since we published our last estimates in June, the more pessimistic forecasts, such as those of the OECD and to a lesser extent the ECB, have edged up closer to our view. We have also revised our expectations upward from June, and now expect GDP to fall by 7.4% this year and rebound by 6.1% in 2021. High-frequency and monthly data shows it clearly: as soon as lockdowns were lifted, consumers were quick to go out and spend. This, in turn, lead to a rebound in industrial production and construction activity (see chart 1). Current data suggests most European economies are operating at around 5% below their pre-COVID-19 levels. In July, retail sales had already surpassed those of a year earlier by 0.6%, while construction and industrial production were 4% and 8% down, respectively.
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The pandemic is not over but the worst of its economic impact has passed. New waves of infection are, in most cases, resulting in lower fatality rates. Governments are adopting more targeted strategies for flattening COVID curves, with less recourse to nationwide lockdowns. Households are spending again on services as well as goods. COVID-19 is proving hard to beat but prospects have brightened for a widely available vaccine by mid-2021 (S&P Global Ratings' baseline assumption). In the meantime, people are moving and spending more, testament to a world becoming accustomed to COVID-19. Trade growth has bottomed. The recovery is underway.
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Our macroeconomic narrative for Latin America has not changed materially since last quarter. The recovery from the worst of the pandemic is underway across the major economies in the region, and our GDP forecast adjustments this round mostly reflect unexpected performance in the second quarter.
The Brazilian economy performed better than we anticipated. Argentina, Colombia, Mexico, and Peru fared worse than we expected. Chile's was broadly in line with what we envisioned. Our new forecasts account for this, and we now see the region contracting a touch more this year, but also a bit faster next year (down 8.5% for 2020 and up 4.5% in 2021).
Most major Latin American economies will not return to prepandemic levels of GDP until 2022, and some beyond, and the permanent income losses will average about 6% of GDP--among the highest in emerging markets due to severe damage to labor and investment dynamics.
We expect the post-COVID-19 Latin American countries to face the same structural economic challenges as before the pandemic, especially regarding weak investment and low productivity. This means the region will likely converge to its traditionally low GDP growth rates as it reaches its post-pandemic "new normal."
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Strict social distancing measures shaved off 18.2 percentage points from Canadian real GDP in March and April combined.
Nearly five months into the recovery as lockdown restrictions eased in Canada, economic activity has surprised to the upside. However, the level of activity remains one-third below normal, and the recovery has been uneven.
We do not foresee the Canadian economy getting back to its pre-pandemic level before the first quarter of 2022, with a 5.6% contraction in 2020.
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The evolution of the pandemic in EMs remains mixed. COVID-19 appears to be receding in many key EMs, but is yet to be contained in others. Overall, it has proven to be highly difficult to sustainably bring the pandemic under control. Some EMs still face increasing COVID-19 cases (such as Argentina, India, Indonesia, and the Philippines), while others have had setbacks after initially controlling contagion (e.g., Poland and Turkey, and more recently Russia). The pandemic picture improved in several EMs over the last couple of months, most notably in South Africa (see Chart 1).
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