Global Economic Outlook - A short in the arm for the recovery

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Global Economic Outlook

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The development of not just one, but several, promising COVID-19 vaccines that could be deployed by the end of the year is a gamechanger in our view. We reflect this in our base-case scenario and in the probabilities we ascribe to different outcomes. However, at the same time, the near-term outlook has deteriorated markedly following dramatic infection spikes in Europe and the US.

Global rebound, interrupted

The initial growth rebound has been powerful and surprisingly symmetric. Some sectors, such as retail sales, and to a lesser extent capital investment, have maintained strong momentum into 4Q. However, surging COVID cases in the US and Europe are set to weaken growth; and in the latter, to cause another outright contraction. But the rebound should again be strong, particularly as we now expect at least a minimal EU-UK trade deal.

Lowflation for years

Inflation is expected to remain low at the global level, continuing to run below the rates of even 2019. This means that global inflation will in our view remain around 3% over the coming four years, a historically very low level. In the 2000s world CPI inflation averaged 4.2%, followed by 3.5% in the 2010s.

A shot in the arm for the recovery

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This page contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale, at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of the Societe Generale group. This content has been prepared for use by institutional and professional investors and is not intended for retail investors. Investors should consider this report as only a single factor in making their investment decision.

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For world trade, this time really is different

Once again, activity stands to be particularly badly affected in the euro area and the UK given the lastest re-imposed restrictions. The scope for a rebound at the start of 2021 is limited by Brexit and we believe the pre-crisis level of GDP will not be recovered until the end of 2023.

The US is in a similar and yet dissimilar position. At the time of writing, new COVID cases were running at around five times the first peak. However, the policy response in the US has to date been lighter. Hence, while the risks are squarely skewed to the downside, we expect another solid gain in GDP in the final quarter of the year and only a gradual deceleration through 2021.

The situation in Asia-Pacific is completely different for most, all thanks to the superior containment of the virus. Even those advanced economies that were substantially depressed by the pandemic, such as Australia and South Korea, are expected to continue to expand in coming quarters and regain the pre-crisis level of GDP in the middle quarters of 2021.

Looking ahead, inflation is expected to tick up a bit in advanced economies from extremely depressed levels (0.7%).

In the US we see inflation returning to the Fed’s target in 2023, but in the euro area we see inflation remaining substantially below the ECB’s 2% target even by 2025.

Central banks - Increasingly pushing on a string

Some further easing in policy stance is likely in the near term (ECB, etc), but we expect central banks mostly to remain on hold.

In theory there is still some scope for rate cuts if central banks that have until now resisted going into negative interest rates change their minds.

Elsewhere, we expect interest rates to be maintained at their current level throughout 2021 and in most cases well beyond.

Limits faced by the quantitative easing side of monetary policy are less evident, and even if no additional asset purchase programmes are announced, the current policy settings imply rapid further growth in the balance sheets of the central banks that operate QE. We regard this as a further easing in monetary policy, meaning that in our view it is the stock of purchased assets that is the indicator of whether policy is eased, not the rate of purchases.

And there is another change from the past few years: the prospect that a US-instigated trade war which was at least partly to blame for anaemic growth in 2019 – variously estimated to have been between -0.4% and +1% even while world output grew by 2.8% – will no longer hang over global trade.

Central banks - Increasingly pushing on a string

For world trade, this time really is different

The unprecedented speed of the COVID-induced international trade contraction and the magnitude of the decline, which just about matched that of the GFC and Great Recession, has given way to what is very nearly a complete rebound in global trade. In other words, in contrast to the pronounced U-shaped cycle in 2008-10, with a very lengthy bottom, this trade cycle is clearly V-shaped with a short and sharp trough. That’s an important difference.

Firstly, the strong deflationary impulse from oil will not be repeated. In the first ten months of 2020, oil prices (Brent) were down 34% from the same period in 2019.

Secondly, lockdowns, teleworking and physical distancing drove consumers to spend a larger share of their household budgets on food and housing equipment, while non-essentials goods and services (airline tickets, clothing, etc..) were hit hard. The consumer price indexes (CPI) do not reflect these abrupt changes in spending patterns. Looking at a Covid-19 basket, it appears that inflation would have been higher than what headline CPI measures showed.

A return to a more multilateral approach to trade policy under President Biden is in our view highly likely, but the changes are likely to be gradual and incremental. There is also a good chance that a Biden administration will revive Obama’s pivot to Asia, at least in spirit.

Another area where there are high hopes that the US will re-engage with international politics is of course the Paris Agreement on climate change. The symbolic value of such a policy step for US global engagement is hard to overstate.

Policy rate changes across 22 central banks (bp)

Levels of policy rates across 22 central banks (bp)

In March alone, policy rates across our sample of 22 central banks were cut by 1,140bp, with a total of 950bp to follow in the subsequent three months. But for most advanced economies’ central banks, and many in EM economies as well, the scope for conventional policy easing, i.e. policy rate cuts, is for all practical purposes exhausted. The lull in headline interest rates changes since August strongly hints at this (see charts). Indeed, of our sample of 22 central banks, nearly two-thirds (14) now have their main policy rate at or below 0.5%, and at what they consider to be the lower bound, or very near to it. Another four are between 1.75% and 2.25%, indicating quite narrow scope for policy easing, and only four have them at 4.0-4.25%.

The collapse in global goods trade caused by the COVID epidemic was very nearly as severe as in the GFC some 12 years ago, when global trade finance disappeared and the Great Recession started. While the magnitude of the fall in trade was comparable to 2008/09, this time its speed was much faster. However, much as we anticipated, the shape of the recovery is very different from the pronounced U-shape witnessed in 2008/09. This time the recovery began after just five months of declines, whereas in 2009 it took ten months until global trade began to grow again.

Global goods trade collapses compared (volume index, local peak =100)

Global goods export recovery (volume index, Dec 2019=100)

Looking ahead, inflation is expected to tick up a bit in advanced economies from extremely depressed levels (0.7%).

In the US we see inflation returning to the Fed’s target in 2023, but in the euro area we see inflation remaining substantially below the ECB’s 2% target even by 2025.

Once again, activity stands to be particularly badly affected in the euro area and the UK given the lastest re-imposed restrictions. The scope for a rebound at the start of 2021 is in our view very limited and we believe the pre-crisis level of GDP will not recover until the end of 2023.