Our forecasts anticipate a solid rebound in global GDP growth over 2H2020 across developed economies from re-openings after strict national lockdowns, better management of COVID-19 cases and continued policy support. A cyclical upswing is evident in US indicators of manufacturing, industrial production and housing.
Vaccine developments provide upside and downside risks to our views. Our current growth forecasts assume that a vaccine is available by mid-2021 for a moderate proportion of the population across developed economies.
But, the big fall in 2020 GDP growth means that the level of GDP will remain below its pre-COVID levels until the second half of 2021, which means more spare capacity, low inflation, easy monetary policy and low bond yields for now.
The cyclical upswing in global indicators, the broadening in global growth and the falling $US is positive for sharemarkets, especially outside of the US.
Since the COVID-19 pandemic spread around the globe in March earlier this year, our view was that global GDP would have an initial “V-shaped” recovery (a big drop in growth followed by a sharp acceleration) followed by slower growth compared to its pre-COVID rates because of long-term negative impacts from the pandemic (less travel, social distancing restrictions and localised lockdowns). So far, the expectation of a “V-shaped” recovery has proven to be accurate as economic re openings have seen a rebound in consumer spending and industrial production. Record central bank stimulus and government fiscal spending has helped to supercharge the current recovery. This Econosights looks at our expectations for global growth and the risks to the outlook, including how various developments (like a vaccine) could impact our views.
Our forecasts for the global economy are set out in the table above. Most global economies have experienced a first half recession in 2020 from the impacts of COVID-19. China managed to avoid a technical recession and has engineered a big recovery in industrial production and manufacturing. Global GDP collapsed in the June quarter but will show a “V-shaped” bounce back in the September quarter. Fiscal and monetary support should see the level of global GDP get back to its pre COVID levels in the second half of 2021 (see chart below, although it will still be less than what it could have been without COVID-19 occurring). But until then, spare capacity will remain an issue which means low inflation is likely to persist until the growth pothole from COVID 19 is filled.
Our forecasts assume that another worldwide stringent lockdown on the scale that occurred in March is unlikely. Instead, governments would opt for localised mobility restrictions (if required) along with some ongoing limitations around domestic and international travel. This is evident in countries experiencing a second wave. Our forecasts assume ongoing improvements in treatment options for COVID-19 including better management of symptoms and protection of vulnerable groups (e.g. aged care homes). The larger second wave of COVID 19 cases in Europe and the US but a lower mortality rate shows that it is possible to better treat and manage the virus without a full lockdown.
We also assume that a COVID-19 vaccine becomes available for a moderate proportion of the population for developed economies by mid 2021. So far, the vaccine debate has been met with a lot of scepticism. There is concern that a fast-tracked vaccine has not met the same regulatory approvals and might be less “safe” without the history to show any long-term side-effects. The length of the immune response of a potential vaccine is also being questioned. These are valid concerns. But the current state of play in vaccine development also offers a lot of reasons for optimism. There are currently 10 vaccines in “Phase 3” of development (see table below), which is the stage that is tested on a large sample before it can receive government approval. In recent weeks, AstraZeneca/Oxford University (one of the key candidates in vaccine trials) announced that it would temporarily postpone its Phase 3 trial (as one of its participants got sick from issues not related to the vaccine). Setbacks in vaccine trials like this should be expected and not all the current players in development will be approved. But there are enough other options available that there should be a viable vaccine provider next year.
The availability of a vaccine has both upside and downside risks. If a vaccine fails to reach the population, our forecasts may need to be revised lower. However, if a vaccine is available for a larger share of the population in 2021, then this would bring some upside risks to our forecasts. Financial markets also appear to be pricing in the availability of a vaccine by 2021.
Vaccine scepticism has also surrounded the take-up of a vaccine by the population. However, surveys show that there is large proportion (over 50%) of the population that would take a vaccine (see chart below).
Other downside risks to our growth forecasts are: another wave in COVID 19 cases leading to a worsening in mobility, second round impacts from the COVID-19 crisis (like bankruptcies) and governments withdrawing fiscal support prematurely.
What will drive growth?
Before the COVID-19 pandemic erupted, the view was that global manufacturing would go through an upswing in 2020, because the US/China Phase 1 trade deal was signed which lifted confidence for exporters, automobile sales were expected to start recovering after a big collapse in the prior year and monetary policy had been eased. While the pandemic de railed the upswing in the first half of 2020, cyclical indicators like industrial production and durable goods orders have been recovering strongly, especially in the US (see chart below), after a collapse in April. The big draw-down in inventories during lockdowns will need to be rebuilt, especially as retail sales are rising sharply which will boost industrial production. Another cyclical industry experiencing an upswing is the US housing market which is benefitting from ultra-low interest rates with housing starts and building approvals well above pre COVID levels.
Global automobile sales are also on track to rise. Global car sales are down by 18.5% on a year ago (but were already falling before COVID-19 occurred) and have now recovered back to pre-COVID levels. Population aversion to public transport (as seen in low public transport usage in China where the pandemic has been quashed) should see higher car sales activity
However, after this initial bounce back in industrial activity, the longer-term outlook will be reliant on additional policy support (especially from government) given the big fall in activity in 2020.
Implications for investors
The cyclical upswing in global indicators, is positive for sharemarkets because of the lift to earnings. Cyclical rebounds and reflation tend to be positive for shares outside of the tech sector. Recent falls in tech shares (in the US but also globally) and concern about valuation could drive tech shares down a little further (but a big collapse like in the early 2000’s is unlikely as valuations aren’t as stretched compared to the dot comm boom and earnings for these companies have also lifted). But, even if non-tech shares have some near-term rebound, the high concentration of tech in the US sharemarket index could pull the rest of the index lower. The broad improvement in the global growth environment also tends to be positive for non-US shares, especially if the $US resumes its downtrend.
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