The end of the beginning
After an unprecedented collapse in global GDP in the second quarter, there has been a significant bounce in the third. But that was just the beginning of what appears set to be a long uphill struggle.
The progress seen so far may yet prove to have been the easiest part of the recovery. It has so far been uneven and in many countries there are signs that the pace with which activity is trying to claw back its way to pre-pandemic levels is starting to slow. Confidence, particularly among consumers, is faltering, as they become increasingly concerned about the future outlook for jobs. So savings rates appear likely to stay high amid the uncertainty.
Most risks are clearly to the downside. There are plenty of geopolitical tensions, but most downside risks relate to the possibility of some kind of second wave of the pandemic.
Even before the renewed lockdowns in various regions and countries, higher unemployment and higher debt appeared inevitable but there are also implications for income inequality, financial stability and long-term growth potential.
Globally, job losses have been concentrated in lower-skilled, lower-paying work. The mix is now broadening from blue-collar to white-collar jobs but younger workers still seem set to bear the brunt.
As the young and other lower earners typically spend a larger share of their incomes, this will affect near-term consumer demand. But income inequality also creates disparities in life expectancy, education, skills levels and labour mobility so could hit future productivity.
Corporate debt is potentially a bigger default risk than consumer borrowing. Government support measures have so far subdued insolvencies, but the longer it takes to contain the pandemic and fully re-open economies, the more industries that will eventually need to be restructured.
Higher structural unemployment, corporate closures and lower investment are likely to lower productivity and potential growth, reducing government revenues and thus finance for public services. Although current funding costs are extremely low, debt levels unprecedented in peacetime could constrain further stimulus, particularly in parts of the emerging world.
Corporate debt is potentially a bigger default risk than consumer borrowing
With interest rates at record lows, the monetary policy challenges are intensifying. Central banks appear set to continue to make purchases of government bonds and other assets, some will deliver more negative interest rates, and the US Federal Reserve is willing to overshoot its inflation target but fiscal policy will be key to supporting the recovery. No rise in US rates is likely before the end of 2023 at the earliest.
For GDP, we have lessened the scale of contraction we are forecasting for 2020 from -4.8 per cent to -4.1 per cent, thanks to upward revisions to the US, eurozone, China, Russia and Brazil while many other revisions are downwards. But our forecast of the rebound in 2021 GDP is also smaller, cut from 5.1 per cent to 4.7 per cent.
We have also published our initial projections for 2022, when the economic scarring from the pandemic should become apparent. For global GDP growth we forecast 3.1 per cent, with emerging economies growing by 4.1 per cent and the advanced economies by 2.3 per cent.
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