No part of our planet has been spared the ravages of the COVID-19 pandemic. Pundits have struggled to keep pace with its swift and devastating march, and it has made economic forecasts quite jealous of the mayfly’s 24-hour lifespan: Predictions of near-term growth have been mostly obsolete long before the ink on the publications is dry. Certain key prognosticators actually gave up, preferring to wait out the wackiness. Instead of abandoning our efforts, EDC Economics went into perpetual forecasting mode in an effort to stay on top of rapid developments. What does our latest Global Economic Outlook say?
Digesting economic developments has basically been a three-fold task: Anticipating and reacting to the cordless bungee-plunge in critical indicators; incorporating the near-daily deluge of dramatic policy announcements; and tracking real-time data on the coronavirus itself. Information on all three fronts has moved wildly in the few weeks of the pandemic’s reign, wreaking havoc with the economic forecasting calendar. Things seem to be stabilizing, but we remain on high alert.
COVID-19’s economic mayhem has given rise to a wide variety of recovery paths, usually characterized by a letter of the alphabet. First it was the “V”—a short, sharp decline and an equally short and sharp recovery. This one’s less popular now. Others, including the Fed, favour a “U”—a sharp drop, followed by a pause of varied duration, and then a sharp recovery. Fewer see the dreaded “L”—a sharp drop followed by a lacklustre partial recovery—as an outcome today. Our summer Global Economic Outlook favours a checkmark shape: a sharp drop followed by a sharp, although partial rebound, followed by a weaker return to pre-COVID-19 levels as smaller, second-wave outbreaks impede the recovery. This view still sees world output back to prior levels by the end of 2021. High-frequency data are sending encouraging signals that the rebound has begun.
Our forecast calls for the world economy to shrink by 4.3% this year, a number that was unthinkable just weeks ago. Developed economies are harder-hit, collectively shrinking by 5.4%. By all appearances, emerging economies get off with a lighter 3.6% decline. However, against what they expected to grow by, it’s also quite a nasty shock for them. Next year couldn’t be more different. Revival that begins in the second half of 2020 boosts global growth to 6.9%, fed by a 7.2% gain in emerging markets and a 6.1% increase in the developed world. Canada, France and the United Kingdom sustain sharper drops this year, with the latter two rebounding in 2021 just ahead of average. The United States gets off more lightly, down 5.0% this year and back up by 6.9% in 2021.
Monetary policy will be highly stimulative through this period, with interest rates on hold at close to the zero lower bound until 2022. Fiscal measures will be gradually withdrawn as the recovery takes hold, but the delay in meting out funds together with a reticence to spend them will cause public spending measures to kick in precisely as recovery takes hold.
Commodity prices will make a slow march back to pre-COVID-19 levels over the medium-term horizon. Oil prices will see no rushed rebound, as any price gains will bring sidelined shale and other non-conventional supplies back into circulation. As such, official supply restrictions will not initially lift West Texas Intermediate (WTI) prices much above US$35 per barrel. Metals also face ample supply conditions, and as such near-term price gains will be muted.
Canada’s outlook will be one of the weakest among OECD nations, for a number of reasons. Unlike the rest, Canada’s consumer and housing markets entered the downturn in a fundamentally weak position. Moreover, our dependence on trade and sectors, like autos, aerospace and oil and gas, further weaken our near-future prospects. Interest rate increases will lag behind the Fed moves by about six months, and the Canadian dollar will average US $0.73 this year and US $0.75 in 2021.
The bottom line?
Globally we’ve been drowning in red ink for weeks now, and forecasts for world activity are still being revised down. At the same time, the first encouraging signs of rebound are following return-to-work programs in first-wave countries, like China and South Korea. Glimmers of hope are also evident in the latest labour force data for Canada and the U.S. We expect further good news as we move through mid-year. Much will depend on the continued success of COVID-19 containment—on that front, so far so good. We’ll all be happy to put this episode behind us.
