Posted by Macquarie Asset Management
April 29, 2020
The global economy slowed steadily over the course of 2019, primarily in my view due to the trade wars between the US and China, although with unemployment rates low and spare capacity used up in most of the developed world (‘DW’) supply factors were also likely biting. But by the turn of the year the trade conflict had been put on the back burner and the three interest rate cuts by the Federal Reserve, along with improving real wages and rising asset prices, had stabilised growth. The outlook for 2020 was for solid growth.
While the virus initially spread very rapidly around the world, the recent news has been more encouraging. Across mainland Europe daily infection rates are coming down and there is evidence that the same is occurring in the UK and US. The restrictions and monitoring measures that have been put in place do seem to be working and some governments are now even starting to remove restrictions. But overall we expect restrictions will be removed gradually rather than quickly, as governments around the world try to avoid a second or third wave of infections.
Daniel McCormack, Macquarie Infrastructure and Real Assets Economist
Economists now widely expect the second quarter to be the weakest quarter of growth for the DW since WWII. The US economy is likely to contract at about a -30% annualised rate1, which is a decline in activity that is three times as fast as the next weakest quarter (-10% annualised in 1Q582) and much weaker than 4Q08 (-8.4%2) when Lehman Brothers collapsed. Europe and the UK are likely to experience similar rates of decline.
High frequency data out of China suggest that economic activity started to bounce back in March after the worst of the health crisis faded. Some types of economic activity have rebounded more rapidly than others – for example coal consumption and highway traffic is back to, or even above, levels for the same time last year, while air travel is still depressed3. All this suggests we could see a bounce back in economic activity in the DW in 3Q when most of the restrictions are lifted, but it is unlikely to make up for all of the output lost in 2Q.
How the global economy evolves beyond 3Q will depend crucially on whether, and to what degree, second round or multiplier effects emerge from the current collapse in demand. Ongoing weak demand due to high levels of unemployment and bankruptcies, financial sector stress that limits credit flows, and liquidity crises in emerging markets are some of the possibilities that could keep the global economy subdued late in 2020.
But a sustained recovery could be underway by early 2021. Given the unprecedented amount of monetary and fiscal stimulus deployed, in a co-ordinated fashion across the world, a period of above trend growth is then possible before the global economy returns to more trend-like growth in 2022.