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GLOBAL ECONOMIC OUTLOOK
October 28, 2020
Mandatory and voluntary restrictions on economic activity to halt the spread of the global COVID-19 pandemic led to an unprecedented downturn in the global economy in the first half of 2020. Declines in economic activity were widespread. They were most pronounced in Latin America (Peru, Argentina), Europe (Spain, France, UK, Italy) and India, with Germany, the US, Japan and China in the middle of the range and South Korea and Taiwan standing out as having a relatively mild impact. The Conference Board estimates the level of Global GDP in 2020 to fall 4.7 percent below last year’s level according to the latest Global Economic Outlook (Table 1). This would be a far worse outcome than the contraction in global GDP during the global financial crisis (GFC) of 2008-2009 when the global economy contracted 0.9 percent in 2009 compared to 2008. At the same time, we expect a much weaker rebound than was the case in the aftermath of the GFC, primarily because of lower growth in emerging markets and developing economies (Chart 1).
Beyond 2023, The Conference Board projects global growth to return to an average annual growth rate of around 2.6 percent. This is close to but below previously released projections despite the possibility that the severe contraction induced by the global pandemic leaves a permanent scar on global growth in the long run. Factors that have for a large part driven global growth in the last two decades, including the greater supply of labor and higher investment primarily in buildings and infrastructure, are expected to weaken substantially over the next decade. This will only be partially offset by a shift towards qualitative growth sources, driven by digital transformation and productivity improvements. This means that the pandemic-induced losses are not likely to be fully recouped.
Ever since the trough in global activity in April 2020, a two-speed recovery has set in. Along with government stimulus to protect employment, incomes, and overall demand at a time when relatively stringent social distancing measures are implemented, industrial production has rebounded more strongly than services in many economies and global merchandise trade volumes have held up better than expected so far. As a result, combined with a more effective suppression of the virus, East Asian economies with large industrial sectors such as China, Taiwan and South Korea have recovered faster. Industrial production and export volumes in these economies have already exceeded pre-pandemic levels whereas those in Europe, the US, and Japan are still 5-10 percent below pre-pandemic levels.
Risks to a continued recovery are tilted to the downside. A resurgence of the virus may lead to renewed restrictions on activity. Fiscal policy packages may be unwound too quickly, sapping demand and confidence and leading to a deluge of bankruptcies which so far has mostly been averted. This would in turn cause trouble for bank balance sheets, which so far however have stayed in relatively good shape thanks in part to extremely accommodative monetary policy. Furthermore, sovereign debt crises are looming as many emerging markets and developing economies have taken on large sums of debt that may be difficult to service in the future. Other downside risks include heightened geopolitical tensions, deglobalization, domestication of supply chains and renewed trade wars. On the other hand, upside risks include more fiscal support, a faster than expected rollout of viable vaccines to broad segments of the population and finally a productivity boost from the accelerated adoption of digital technology.
REGIONAL INSIGHTS FOR WHAT’S AHEAD
In the US, following signs of improvement in Q3, we expect a lull in the pace of recovery Q4. Gains in consumer spending will be limited by high unemployment rates, but likely will accelerate again in 2021 as the labor market heals. Our base case US GDP forecast is -3.5 percent in 2020 and +3.5 percent in 2021. We also envision two different short-term scenarios, one better than our base case and the other worse. Key variables include the amount and timing of government stimulus, number of new COVID-19 cases, the labor market recovery and the degree of volatility following US presidential elections.
European economies are the worst -impacted among mature economies, with an expected contraction in 2020 of 8.8 percent for the Euro Area and -10.7 percent for the UK. Given these deep contractions economies are expected to rebound sharply by 6.2 and 8.1 percent in 2021 for the Euro Area and the UK respectively. Even in this relatively optimistic scenario, GDP levels in the Euro Area and the UK return to their pre-pandemic levels only by the end of 2021. However, such a trajectory is not certain: a new series of government restrictions on the supply side, or a loss of confidence and jobs on the demand side, could weaken the recovery. Under such a downside scenario GDP levels could still be between 5% and 10% below pre-pandemic levels by the end of next year and 2021 annual growth would be almost half of our baseline scenario.
Over the near term, China’s recovery from the downturn induced by the pandemic will extend into 2021, as a lagging demand recovery finally starts catching up with supply. Industrial production over the first eight months of 2020 has exceeded the figure for the same period last year. However, the domestic demand recovery remains incomplete as it will take longer for SMEs in the services sector and for low-income households to repair their balance-sheets. We expect China’s economy to expand 1.0 percent in 2020 and 4.7 percent in 2021, based on The Conference Board Alternative GDP estimates.
In the Gulf region, the dual shock of the COVID-19 pandemic and the subsequent collapse of global oil demand and prices is expected to result in a 5 percent contraction in the region’s GDP in 2020. This is a deeper contraction than the 3.4 percent dip forecasted for emerging markets and developing economies. However, GDP should rebound with 2.2 percent growth in 2021.The short-term outlook is similar across all six Gulf countries. It will be marked by high fiscal deficits and increasing debt levels, reform efforts, the nationalization of the workforce, and continuous support to the private sector to weather the aftermath of the pandemic. Prospects for longer-term growth is contingent on the success of diversification efforts away from oil production and exports. However, Gulf governments will continue to resort to traditional policies of streaming oil revenues back into the economy through project awards to boost consumer demand instead of greater investment in a diverse set of industries.
Chart 1: Quarterly real GDP index: COVID-19 versus global financial crisis of 2008/2009
Notes: Quarterly GDP data for China are based on official data rather than alternative GDP growth data utilized in the Global Economic Outlook and thus overstate the growth trajectory of emerging economies.
Source: Global Economic Outlook 2021 (October 2020)
The Conference Board Global Economic Outlook, 2011-2030
|Real GDP Growth Rates (Average Annual Percent Change)|
|Other Mature Economies||2.7||-3.3||4.0||1.4||2.6|
|All Mature Economies||1.9||-5.6||4.4||0.7||1.6|
|Other Developing Asian Economies||5.0||-3.1||5.5||2.9||4.6|
|Middle East & North Africa||2.8||-3.6||2.3||0.8||2.6|
|Russia, Central Asia, and Southeast Europe||2.8||-4.7||4.1||1.1||2.4|
|All Emerging Markets and Developing Economies||3.9||-3.8||5.0||2.3||3.5|
|United States (TCB adjusted)||2.4||-3.3||3.7||1.2||2.1|
Notes: Chinese data are based on alternative GDP measures, See Harry Wu, China’s Growth and Productivity Performance Debate Revisited—Accounting for China’s Sources of Growth with a New Data Set, The Conference Board, 2014. The data was updated and revised in May 2020 and the historical data series are available through The Conference Board’s Total Economy Database; United States (TCB adjusted) refers to our alternative GDP series for the US which are revised upward as they are based on alternative price deflators for ICT investment goods and services.
Source: The Conference Board Global Economic Outlook 2021 (October 2020)