Reopening the world economy

3 July 2020

By Tim Pemberton

Governments are slowly unlocking their economies – even though coronavirus infections are still rising globally. Consumer spending on goods has rebounded, reflecting an unleashing of pent-up demand. But Asia, Europe and the US have shown that returning production towards pre-pandemic levels is easier than restoring demand for consumer-facing services, particularly in countries where virus infections are high.

However, after steadily lowering our economic growth forecasts this year, our global projection for 2020 has now stabilised. We expect a record contraction in global GDP of 4.8 per cent unless a widespread second COVID-19 wave brings back draconian lockdowns.

We still see mainland China’s economy growing this year – by 1.7 per cent, with a 7.5 per cent jump in 2021 – as Beijing focuses spending on financial relief for small businesses and households, plus urban infrastructure investment and technology projects.

But consumers worldwide may remain cautious and economies could be permanently damaged. Even by the end of 2021, we still expect much economic activity to be below 2019 levels, with unemployment and debt far higher.

After the initial bounce in consumer spending, the pace of improvement could slow, keeping investment spending weak, especially if fears of a second wave persist.

Home-working, social distancing and cashless shopping may mean the pandemic encourages investment in technology, automation and payment systems. But more generally we think cash-depleted companies will remain reluctant to invest, implying less innovation, lower productivity and, given high unemployment, subdued wage growth.

The volume of international goods trade is estimated to have fallen a record 18.5 per cent year-on-year in the April-June quarter and is unlikely to rebound quickly given the investment outlook.

Central banks responded to the crisis quickly with interest-rate cuts and liquidity measures while emerging economies have increasingly joined the advanced world in asset-purchase programmes. The G10 says policy rates will remain low until at least the end of 2022 and, while we remain unconvinced of the benefits of negative interest rates, we could see more.

But despite such monetary measures, fiscal policy will likely play the primary role in ensuring that any recovery is sustained. However, we believe it will need to evolve from the initial economy-wide government support: it must be targeted on lower-income households with newly unemployed workers taught new skills as old jobs go.

But getting it right will be tough over the medium to long term. Extending the support for too long delays changes in the labour market, which could damage productivity and growth. But withdrawing the labour market stimulus too soon may jeopardise any nascent recovery, causing more corporate defaults.

In a world of many uncertainties, one certain outcome is that debt ratios will be higher – for households, companies and particularly for governments. Without a strong and sustained bounce-back in growth that raises tax revenues, we face austerity, default, inflation or taxation.

Emerging countries may see some mixture of all those outcomes over the next year or two, but in the advanced economies central banks look likely to continue backstopping governments by ramping up asset purchases and keeping yields down as more fiscal support is delivered and economies recover. Low interest rates help, but eventually higher taxes probably lie ahead.

Key HSBC GDP forecasts

% Year 2019 2020f 2021f
World 2.6 -4.8 5.1
Developed 1.7 -6.7 4.6
Emerging 3.9 -2.1 5.7
US 2.3 -6.4 3.6
Mainland China 6.1 1.7 7.5
Japan 0.7 -4.1 2.2
India* 4.9 -7.2 6.6
Eurozone 1.2 -8.1 6.5
UK 1.4 -7.8 6.2
Russia 1.3 -6.1 2.1
Brazil 1.1 -7.3 4.5

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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Janet Henry

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