key: cord-0048431-oqs56syx
authors: nan
title: World Economic Prospects Monthly
date: 2020-07-15
journal: nan
DOI: 10.1111/1468-0319.12494
sha: 4733e8e82b14eb80a5513341c0e1d1b51c0ad905
doc_id: 48431
cord_uid: oqs56syx

Overview: Global activity starts to bounce back ▀ After a dire start to Q2 in April, the global economy has since staged a robust rebound as lockdown restrictions in many regions have eased. But despite a strong initial bounce, high unemployment and surging corporate debt will limit the scale of the revival in H2 and beyond. And the renewed rise in Covid‐19 cases in parts of the world shows that considerable downside risks remain. ▀ After persistently surprising sharply to the downside, global economic data have exceeded expectations over the past month or so. Retail sales staged a particularly sharp rebound in Europe and North America in May. ▀ The sharp post‐lockdown consumer spending bounce in response to the release of pent‐up demand, along with some evidence of a revival in industrial production and global trade, is clearly encouraging. In response we have raised our mid‐year GDP forecasts for a number of economies, including the US and China, pushing up our 2020 world GDP growth forecast by about 0.5pp to −4.5%. ▀ Nonetheless, the risk of a second Covid‐19 wave, the swathe of negative headlines about job redundancies and the scaling‐back of some government support measures before long in some countries suggest that the sharp rebound in activity seen so far may not persist for too long. ▀ As a result, the upward revision to our forecast for global activity in the shorter‐term is offset by a more cautious assessment of growth prospects next year. We now expect the level of global GDP at end‐2021 to be a touch lower than anticipated a month ago. Overall, we have cut our world GDP growth forecast for 2021 from 6.5% to 5.8%. ▀ Our baseline forecast assumes that a global second wave of Covid‐19 is avoided. But in this respect, the recent resurgence in cases in some countries (and in some US states in particular) is a clear worry. Risks to our baseline forecast remain firmly tilted to the downside.

 Nonetheless, the risk of a second Covid-19 wave, the swathe of negative headlines about job redundancies and the scaling-back of some government support measures before long in some countries suggest that the sharp rebound in activity seen so far may not persist for too long.

 As a result, the upward revision to our forecast for global activity in the shorter-term is offset by a more cautious assessment of growth prospects next year. We now expect the level of global GDP at end-2021 to be a touch lower than anticipated a month ago. Overall, we have cut our world GDP growth forecast for 2021 from 6.5% to 5.8%.  Our baseline forecast assumes that a global second wave of Covid-19 is avoided. But in this respect, the recent resurgence in cases in some countries (and in some US states in particular) is a clear worry. Risks to our baseline forecast remain firmly tilted to the downside.

Global activity has begun to rebound, leading us to raise our world GDP growth forecast for 2020 to -4.5%

Retail sales in May rose sharply in most advanced economies. While this resulted in annual growth returning to positive territory in some countries, sales in advanced economies as a whole were well below levels at the start of the year.

Retail sales surged in May, adding to evidence that April marked the trough for global activity  The minutes from the June 9-10 FOMC meeting underscored the Fed's caution on the outlook and its dovish stance. The policy rate will likely remain pegged near zero over the next couple of years, open-ended QE continues, and the Fed stands ready to lend via its emergency facilities. Outcome or data-based forward guidance and yield curve control are being studied but are unlikely to be implemented before the fall. 

Economic conditions are evolving at such a swift pace that the final Q1 GDP report felt exceptionally stale. The 5.0% annualized contractionthe sharpest decline since 2008confirms the onset of the Global Coronavirus Recession, with consumer spending and business investment falling 6.8% and 6.4% respectively. We estimate that real GDP plunged 30% in Q2, driven by a collapse in consumer outlays, severely constrained business activity and stalled trade flows. The peak-to-trough decline in GDP should be around 10% -2.5 times as bad as the financial crisis.

Consumer spending sprang back to life in May as retail sales surged a record 17.7% and overall spending registered a record 8.1% advance as the nation reopened. However, behind the punchy headlines, both metrics remain well below pre-crisis peaks. Despite a modest rebound in compensation, the fading boost from fiscal aidmostly onetime checks to familiesled to a steep 4.2% drop in personal income in May. The expiring federal top-up to UI benefits (an additional $600) represents a significant downside risk to spending at the end of July.

Supporting the consumer recovery, the labor market rose strongly in June, with employment up a record 4.8 million and the unemployment rate falling 2.2ppt to 11.1%. Yet, we caution that the labor market still faces a net loss of 14.7 million jobs, while the data on the gross flows of jobless claims show a labor market still bleeding jobs.

On the business front, durable goods orders rose a strong 15.8% in May, though under the surface the key indicators of business investment were weaker. Core capital goods shipments rose a much more modest 1.8% and remained about 6% below their February peak. Industrial production also rose an uninspiring 1.4%, keeping it more than 15% below its pre-crisis peak.

Our new Recovery Tracker finds that demand has been rising strongly through to mid-June and financial markets have made up most of their losses. Yet, the economy is still at risk from the worsening health situationthe area of our Tracker showing the greatest weaknessas new daily cases have hit records of over 50,000 in recent days.

The Federal Reserve has engineered an ultra-loose policy, including new emergency lending facilities, with the aim of making progress toward reaching its dual mandates of full employment and a 2% inflation target. Yet while providing stimulus worth more than 2ppt of GDP growth to the economy, its actions have lifted asset prices more than the real economy. Meanwhile, the Fed's emergency lending facilities have only lent $95bn thus far out of a potential $4.5 trillion. Given the slow uptake, an improving credit landscape and remaining hurdles for some of the facilities, we have cut our projections for total lending from $2.5tn to $1.1tn.

The Fed will maintain its very dovish forward guidance that the policy rate will remain at the effective lower bound until "it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals". We believe that will mean at least until the end of 2022. The Fed may adopt a more specific date-or data-contingent forward guidance in the fall.

Core risks could turn the GCR into a protracted shock:

• Fresh wave of cases: our scenario analysis shows that if the current surge of cases does not come under control, a renewed lockdown could lead to a severe contraction in activityleaving the economy 7% smaller by 2023.

• Indebted corporate sector: highly indebted firms will undertake cost-cuts to avoid default by reducing payrolls and capital spending. Further stress could mean renewed financial market strain and increased economic pain.

• Labor market shock: short-run uncertainty about the virus and the possibility of long-run hysteresis mean that labor market risks are tilted to the downside.

Despite the bleak situation currently, the economy should attain growth averaging around 1.8% per year in 2024-30, marginally above its potential.

• Flexible labor force: the US will maintain the flexibility of its labor force, giving it an advantage over its peers.

• Steady productivity: we look for productivity growth to sustain a steady, but modest, pace in the long term.

• Population challenges: lower population growth projections have led us to cut our forecast for long-run output growth to 1.7%.  The economy is now clearly on a recovery path, after its plunge in Q1. Industrial value added growth improved further in May and the momentum of investment and household consumption increased substantially. Meanwhile, the acceleration in credit growth in recent months reflects monetary easing at work. The faster-than-expected domestic recovery, together with the resilience of China's exports as shown in the May trade data, has led us to raise our GDP growth forecast for 2020 to 2%, up from 0.8% previously.

 Industrial value added rose 4.4% y/y in May while fixed asset investment increased 3.9% y/y. Nominal retail sales contracted at a much slower pace than in April, down 2.8% y/y compared to -7.5%, suggesting a substantial improvement in consumption momentum. Goods exports proved surprisingly resilient in May, falling only 3.3% y/y in US$ terms. But this relative strength is unlikely to last amid falling new export orders.

 We expect China's economic recovery to continue over the rest of the year, aided by the policy easing. Indeed, the June PMI readings suggest that domestic economic momentum is picking up, though employment and export demand will remain weak.

 In line with the measures to ease monetary policy in recent months, credit growth has picked up significantly so far this year. Total social financing (TSF) grew 12.5% y/y in May, up from 12% in April and 10.7% in February.

 The CNY/US$ rate has remained relatively stable in recent months, as policymakers prioritized such stability amid unwelcome deprecation pressure, international financial turmoil, and China's commitment to prevent currency weakness in the phase one deal with the US. We expect these considerations to remain key in the coming months. We expect the domestic recovery to continue, aided by policy support Stronger-than-expected data for May prompt us to raise our growth forecast for 2020

Forecast overview

Following the GDP contraction of 6.8% y/y in Q1 at the peak of the country's coronavirus outbreak, May's data suggest China's economy is on the path to recovery. Industrial value added grew 4.4% y/y after picking up by 3.9% y/y in April, while fixed asset investment increased 3.9% y/y from 0.8% previously, driven by rising infrastructure and real estate investment. Household consumption remains the weakest link, but its momentum also improved substantially in May. Meanwhile, despite a very deep recession in much of the rest of the world, goods exports in US$ terms fell by just 3.3% y/y in May, with shipments of textiles and electronics seeing strong, double-digit growth.

We expect the economy to continue to recover from Q2 onwards as it is no longer being held back by supply-side disruptions and constraints. The improvement in consumption momentum is likely to continue, albeit gradually and from a weak starting point, while we see investment outperforming. We think the government's mandate for meaningful macro policy easing will support the ongoing domestic recovery. Meanwhile, despite the recent resilience, we expect exports to remain under substantial pressure in the coming months before global demand recovers. We now forecast GDP to grow 2% in 2020 as a whole, with an expansion of 5.8% y/y in H2. The key downside risk is a large, second-wave Covid-19 outbreak hitting still fragile consumer sentiment and hindering economic activity. Factors affecting our short-term outlook are:

• External demand to fall sharply: despite recent resilience, we think that exports will struggle in the coming months before global demand recovers later this year. New export orders continued to contract in June and will remain weak in the near term. Meanwhile, we expect import momentum to stabilise following the decline in recent months, as China's domestic recovery continues. However, services imports will be down much more than goods imports due to the virtual halt of outbound travel.

• Domestic demand to recover gradually: we expect the household consumption recovery to continue, albeit from a weak starting point and only gradually, as consumers may remain cautious about their spending amid the uncertainty over income and job prospects. We think investment will do better, especially in new industries, infrastructure and real estate. That said, many SMEs • Policy easing to support the recovery: while China did not opt for a big stimulus package because of concerns about excessive leverage and financial instability, the government work report presented to the National People's Congress in May provided a mandate for meaningful macro policy easing. The government is supporting growth by extending relief measures announced earlier this year and boosting infrastructure investment. Policies already rolled out include cuts in taxes and social security contributions and lending support. On the definition we focus on, this year the government budgets for an increase in the fiscal deficit of around 4 percentage points of GDP. On the monetary front, the aim is to let money supply and total social financing grow "at notably higher rates" than last year.

We forecast a return to robust year-on-year GDP growth in H2, bringing growth to 2% for 2020 as a whole. There is no growth target set by the government for this year. However, as noted in the government work report presented to the National People's Congress in May, a stable economic performanceas in economic growthremains important as it underpins efforts to stabilise employment, which is the top priority for this year. We expect slow growth this year to be followed by an expansion of 8.1% in 2021, when both private consumption and exports are expected to rebound strongly.

Medium-term challenges will persist beyond the coronavirus shock, including the ongoing trade and tech tensions with the US, an overall slower real estate activity trend, and stillsignificant excess capacity in heavy industry. In addition, the reform agenda remains large, notably as regards SOEs, the financial sector and ensuring high-quality urbanisation. Indeed, continued implementation of supply side reforms is vital to enable robust organic growth over the medium term.

The next decade will see much slower growth in China. We expect a more subdued pace of capital accumulation. We also think total factor productivity (TFP) growth will be slower, in part because gains from further integration into the global economy will be more modest than in the past, especially given the backdrop of US-China tech tensions.  The outlook for the economy remains extremely challenging. While business and consumer spending has regained ground following the lifting of the state of emergency, we expect a gradual and protracted recovery as lingering virus concerns weigh on spending while exports struggle as the world tries to escape recession. We forecast a 6% fall in GDP in 2020 before growth of 2.8% next year.

 While monthly data confirm that activity hit its low point in Q2, lingering domestic weakness and faltering exports will weigh on growth. Industrial production fell by 24.1% y/y in May while export volumes dropped 20.6% y/y, with the weakness in the car sector particularly marked. And with business sentiment plummeting and the manufacturing PMI still very low in June, the weakness in industry will likely weigh on overall momentum despite improving service sector activity (the services PMI rose to 45.0 in June, up sharply from May's dismal 26.5 print but still below the 50 mark).

 Risks remain skewed to the downside. GDP fell in Q1 2020 which, following the 1.9% drop in Q4 after the consumption tax hike, implies the economy was in recession even before the bulk of the impact from the pandemic was felt. If disruptions from the coronavirus turn out to be longer lasting, or if a renewed wave of infections triggers new restrictions, the impact on the economy will be significantly worse.

 The government has passed two fiscal packages to contain the deterioration in the economic outlook, raising the total amount of new spending since the start of the year to beyond 10% of GDP. Measures focus on financial support for households and firms (via subsidies, loans, capital injections). While this support is helpful, belated and relatively slow policy implementation has been a problem and some of the funding will not be spent unless conditions worsen. Meanwhile, the BoJ continues to focus on support for corporate credit while keeping short and long-term rates unchanged. GDP probably contracted very sharply in Q2 2020 as household and business spending fell amid the state of emergency in effect from April to May. While we expect growth to bounce back in Q3 as activity and spending regains ground, the subsequent recovery will likely be very gradual as external demand stays weak and concerns over the virus linger. A renewed pick-up in infections and a return to restrictions on activity are downside risks. We forecast GDP to shrink 6% in 2020 (compared to 6.5% last month), before growing 2.8% in 2021 (3.2% last month).

• Gradual but fragile consumption recovery: while mobility indicators have begun to recover since late May, we caution against overly optimistic expectations for consumption. Indicators of spending point towards a very gradual recovery after sharp declines in April and May (convenience store sales were down 10% y/y, car sales down 30% y/y in Q2). Service industries are likely to remain particularly vulnerable as not all of the demand lost in recent months is recoverable; hospitality sectors still suffer from border closures and lingering concerns about the virus continue to weigh on domestic demand. Rising unemployment, falling wages, low confidence, slow government support, and a generally vulnerable consumer outlook after last year's consumption tax hike point towards a very protracted recovery. A renewed acceleration in COVID case numbers in Tokyo and the possibility of resumed restrictions, albeit localised, on movement and activity are important downside risks.

• Business investment plummeting as pandemic hits sentiment: we expect business investment to drop sharply in 2020 amid the disruptions caused by the coronavirus pandemic. The latest Tankan business survey showed that sentiment collapsed in June 2020, dropping to -31 from -4 previously and marking the sharpest decline on record. While firms' forecasts suggest the economy hit its low point in Q2, projections across most sectors are firmly skewed to the downside. Meanwhile, machinery orders, a leading indicator of capital spending, fell 18.3% y/y in April while machine tools orders fell more than 50% y/y in May. With business capex plans revised sharply lower, the near-term outlook for investment remains very challenging. • Depressed production: industrial production was down 24.1% on the year in May (after -15.9% y/y in April) while the manufacturing PMI nudged up to 40.1 in June (after 38.4 in May) but was still below the 50 mark that separates expansion from contraction. We expect industrial production to remain very depressed in 2020.

• BoJ boosts support for corporate credit: the BoJ in June upgraded its support measures for corporate credit, including corporate debt purchases and its new COVID lending programme. This follows a broad range of measures adopted in recent months to contain the fallout from the pandemic, including higher ETF/REIT purchases, US dollar funds supply operations, and unlimited JGB purchases in addition to support for corporate credit. The Bank's -0.1% policy rate and 0% bond yield target, however, remain unchanged and we believe cuts are unlikely. Meanwhile, headline inflation was 0.1% y/y in May, with the core rate (excluding fresh food) at -0.2% and core-core inflation (excluding fresh food and energy) +0.4%.

• Despite upgrade, fiscal spending continues to face obstacles: the government in mid-June passed a second fiscal relief package to follow up its initial response of late-April, raising the total amount of new spending since the start of the year to beyond 10% of GDP. Together, both packages provide support to households (cash transfers) and firms (subsidies, loans, capital injections) as well as limited support for the recovery phase. The measures will help the economy, but their belated and slow implementation will constrain their effectiveness. In addition, a non-negligible portion of the second package is unlikely to be spent unless COVID infections worsen.

• Deteriorating earnings will weigh on equities: after equities sold off in mid-March, central bank support for corporate credit worldwide has stabilised markets and removed tail risk. However, we expect valuations to suffer as the real economy deteriorates, putting pressure on earnings. Meanwhile, we see the yen continuing to crawl higher, appreciating to 106 by end-2020.  Monthly figures confirm the massive damage caused by lockdowns in April, but recent hard data show that activity was recovering in May as quarantines were lifted, while forward-looking indicators show that sentiment continues to improve. Dragged down by the April collapse, we expect Q2 GDP to contract by over 10%, before bouncing back strongly in Q3 and with a more gradual recovery thereafter. But with the pandemic hitting some countries harder than others and various degrees of policy responses put in place, the recovery will be uneven across the region. We expect eurozone GDP to contract 7.9% this year before a solid pick-up to 6.1% growth in 2021.

 Monthly indicators continue to show the magnitude of the economic fall in April, coinciding with the most stringent lockdowns being in place in most countries. But forward-looking sentiment data is rising strongly, as investors remain optimistic about a relatively short recession. The first available hard data is also offering positive signs of an initial rebound in activity, especially in the consumer sector, with retail sales and consumer spending rising more than expected in May.

 We expect GDP to have fallen more than 10% q/q in Q2, but with activity already picking up in May, base effects will lead to a strong rise GDP in Q3. That said, we do not expect eurozone GDP to return to its pre-crisis level until mid-2022.

 Countries continue with their fiscal plans in response to the crisis but the road to a joint fiscal response remains fraught with obstacles, with several countries objecting to large parts of the €750bn recovery plan presented by the European Commission. Although a decision on the plan could be made this month, there is a substantial risk that the final agreement is postponed until after the summer. We expect GDP to contract 7.9% in 2020, before growing 6.1% in 2021

Data shows activity rising in May but still well below pre-crisis levels

Forecast overview

Following the sharp fall in GDP in Q1, later monthly figures show that economic activity collapsed further in April, coinciding with the peak of lockdown measures in most European countries. But more recent data indicates that activity was recovering in later in Q2. After collapsing in March and April, PMIs rose strongly for a second consecutive month in June, suggesting that economic conditions may be returning towards normal. Meanwhile, sentiment indicators continue to improve, driven by a rise in forward-looking expectations as investors anticipate a deep but short-lived recession.

More importantly, the first available hard data shows a strong initial bounce in activity in May, particularly in the consumer sector, as lockdowns started to be lifted across the continent. But despite the recovery already under way, we expect euro area GDP to suffer a massive fall in Q2, probably exceeding 10% q/q, although we anticipate a strong bounce in Q3. For 2020 as a whole, we now forecast GDP will fall 7.9%, which would be the largest single-year fall in GDP in the history of the euro area.

The final economic damage will largely depend on the length of the containment measures that governments put in place, as well the size of the fiscal policy response. We expect that eurozone economies will exit from the crisis at different speeds given the different policy responses put in place across the region, but also as a result of the different economic structures across countries. Following the initial strong rebound in activity, there is much uncertainty about the speed of the recovery, and activity in some sectors such as tourism could remain depressed for a longer period, especially if a second wave of infections requires extension of social distancing measures.

The coronavirus outbreak and the severe containment measures has led to a short-term economic collapse, but we expect a strong rebound in 2021 as restrictions are eased, daily activities resume, and the impact of monetary and fiscal policy stimulus starts to feed through. These factors underpin our forecast: sharp rebound as containing measures are lifted. However, the longer-term recovery will be largely shaped by the final damage done to the labour market. Although most countries have put policies in place to protect jobs, a surge in unemployment once public support is removed would cause lasting damage to household incomes and slow the subsequent recovery. We see consumer spending declining 9.1% in 2020 but rebounding 7.2% in 2021.

 Investment will fall sharply in 2020: investment rose strongly in 2019, partly reflecting swings in investment data in Ireland. But the collapse in economic activity and sentiment and the surge in uncertainty this year will have a big impact on capital spending as well. With the crisis risking permanent damage to large parts of the corporate sector, the outlook for business spending could be heavily affected despite strong public interventions put in place to cushion the impact. We now see fixed investment falling 11.2% in 2020.

 Double-whammy hits exports: the impact that travel bans are having on tourism and the sharp decline in global merchandise trade owing to the collapse in activity mean that total exports will plunge in H1 this year. But the fall in domestic demand will also cause imports to decline sharply, so the contribution from net trade to growth should be only marginally negative. We expect exports to decline 11.1% this year, before rebounding by 8.4% in 2021 as travel restrictions are lifted and global trade gradually returns to normality.

The ECB continues to announce new measures in order to ease financial conditions. Following the launch of a new pandemic asset purchase programme (PEPP) in March and changes to the TLTRO programme to improve liquidity conditions, the ECB has announced an increase and an extension of the PEPP. The central bank will now purchase €1.35tr of bonds until June 2021, and will also reinvest principal payments until the end of 2022, a move that allows governments enough space to increase their debt issuance substantially and which has helped calm bond markets and lower risk spreads in peripheral countries.

On a longer-term horizon, the weak growth and inflation outlooks mean that we still expect monetary conditions to remain ultra-loose for an extended period; we do not expect interest rates to start to rise until 2023.  Retail sales back above last year's levels in May and further gains in key surveys reinforce our view that the economy is headed for a swift rebound. But there are some signs of weakness and lingering shifts in consumer behaviour, so we still expect GDP to contract by a record-setting 9% q/q in Q2 followed by a 5% rebound in Q3 and a more protracted recovery thereafter. We stick to our 2020 GDP call of a 6.1% decline and see a rebound to growth of 5.2% in 2021.

 The May retail sales report was impressive evidence of a swift rebound in economic activity after the dreadful March/April data. Pent-up demand boosted sales to a 13.9% m/m gain, leaving them well above pre-pandemic levels. What is more, the composite PMI rose to 47.0 in June from 32.3 in May and 17.4 in April, while the ifo expectations index jumped fairly close to its early-2020 levels. But strength in online and food retail sales may point to a slower recovery in other service sectors, underscoring the risk of lasting changes in consumer behaviour. Equally, the uptrend in alternative economic indicators such as Google mobility data and the truck toll mileage index tapered off over the course of June, supporting the view that a full economic recovery will take until late-2021 and that the crisis will leave some lasting scars.

 Labour market news is cautiously positive. The unemployment rate only edged up to 6.4% in June from 6.3% in May (and 5.0% in January) as the rise in jobless stabilised. In addition, the number of workers on the government's furlough scheme also appears to have peaked. But people are likely to return to work only slowly and firms' hiring is cautious. These factors may boost precautionary saving, thus slowing the recovery.

 The temporary VAT cut in H2 2020 will weigh further on inflation, even though passthrough may be limited to 50%. So we now see CPI inflation slowing to 0.6% in 2020 from 1.5% in 2019, down from our earlier call of 1.0%. Next year base effects will lift inflation to 1.8%, but we still think that underlying inflation will remain muted.  Data for May suggest that the post-lockdown rebound was stronger than anticipated. However, as fiscal support for the recovery has been delayed by President Macron's cabinet reshuffle, we now see a slower recovery in H2. We now expect French GDP to contract by 10.2% in 2020 (versus -9.8% last month), before rebounding by 7.3% in 2021, 0.6pp lower than a month ago. Output will remain below its pre-crisis level until at least 2022.

 Hard data for May delivered some positive surprises, suggesting the mechanical postlockdown rebound of consumption from 11 May has been stronger than anticipated. Household consumption of goods rose by a very strong 36% m/m, offsetting more than two-thirds of the combined losses recorded during the lockdown.

 Similarly, new car registrations bounced spectacularly in May and even slightly exceeded year-earlier levels. While public bonuses to buy an ecological car certainly played a role, this still shows the willingness of consumers to spend part of the savings accumulated during the lockdown.

 But we have downgraded our growth expectations for H2 as the fiscal plan to support the recovery has been delayed after Macron decided to reshuffle the government after his party suffered a major setback during the municipal elections, which saw a strong rise in support for the Green Party.

 Although Macron has vowed to "reinvent his presidency" with this reshuffle, we do not expect any major shift in economic policy. In the short term, support to the postpandemic ailing economy will continue to be a priority at the expense of containing the fiscal deficit. The business-friendly reform agenda should then resume, with reforms to the pension and health systems and public administration at the top of the list.  There are now signs of an ongoing rebound in activity and spending after the pandemic inflicted massive damage in March and April, but there are still huge challenges facing the economy. We still expect GDP to contract by a record 12.5% q/q in Q2, which, even assuming an 11% rebound in Q3, will likely lead to a 9.3% fall in 2020 as a whole. With the recovery fairly gradual apart from in the very near term, we see average growth of 5.7% next year.

 The uncertainty over the forecast remains extremely high. But we continue to estimate that Q2 experienced a double-digit drop in the quarter. The PMIs, having touched unprecedentedly low levels in April, were close to the 50 expansion-contraction mark in June; however, other surveys such as ISTAT business confidence, despite rebounding in June, remained at dismally low levels. Moreover, daily economic data, such as electricity demand, continue to run some way below their pre-crisis levels.

 Job cuts continued in May, but at a slower pace than in March and April. Since February Italy has lost more than 500,000 jobs. The unemployment rate, at 7.8%, was higher than in April but remained lower than in February. However, this measure of labour market stress is distorted by a temporary plunge in the participation rate (which is likely to unwind as the economy re-opens). A slow recovery in jobs growth would be very damaging to the outlook as the skills of unemployed workers decline the longer they are out of work, eroding their productivity and making it harder to find a new job.  Although the Spanish economy shrank sharply in April due to the coronavirus and the containment measures imposed by the government, latest data shows that activity is now bouncing back as lockdowns are lifted. The April collapse will lead to an historically large contraction in GDP in Q2 before a strong rebound in Q3 and a gradual recovery thereafter, but this will still leave GDP well below pre-crisis levels at end-year. Our forecast now sees GDP falling 10.6% this year (from -9.8% last month), with tourism expected to recover only slowly over the summer months, and then expanding 7.6% in 2021.

 After the sharp decline in GDP in Q1, latest data confirms that activity suffered a huge collapse in April, possibly exceeding 30%. But forward-looking sentiment data and real-time activity indicators suggest that activity recovered strongly in May, especially on the consumer side. Retail sales grew more than expected in May and employment regained some of the massive losses seen in March and April. However, there are still over 1.5m workers under furlough schemes who are not currently officially classified as unemployed. Overall, we expect GDP to have fallen 18% q/q in Q2.

 Our forecast remains linked to the evolution of the disease, as this will determine the length and severity of the containing measures. As lockdowns are lifted and normal activity resumes, favourable base effects should lead to historically sharp growth in Q3, but some sectors will remain depressed for a longer period as social distancing restrictions cause permanent damage.

 The evolution of the tourism sector will be particularly important, as it represents 12% of Spain's GDP. Despite the efforts now under way to revive tourism, a full recovery is likely to take a long time, with knock-on adverse impacts on related sectors.  GDP data for April suggests that the lockdown has had a much greater impact on activity than the March data showed. As a result, we have cut our near-term forecast and now expect GDP to fall by 10.9% this year. Although we forecast a strong recovery, with growth of 10.3% now seen in 2021, it will be early-2022 before activity returns to pre-pandemic levels.

 GDP fell by 20.4% m/m in April, leaving output down more than 25% on its prepandemic level. This suggests that the lockdown had a much greater impact on activity than the March data had indicated. Retail sales and high-frequency data suggest activity began to recover through May and June, in line with the gradual relaxation of the lockdown restrictions, but we now expect GDP to fall by around 21% in Q2 as a whole. This would still be a smaller decline than the 25% and 35% estimates made by the Bank of England and OBR in their recent scenarios.

 The likelihood that the Q2 GDP decline will be smaller than the BoE forecast appeared to be the main factor behind the MPC's decision to slow the pace of asset purchases at its June meeting. The MPC authorised a further £100bn of purchases to be completed over a period of six months. This is in contrast to the £200bn of purchases authorised in March, on track to be completed within four months. The MPC's less dovish commentary suggests the chances of further policy stimulus have fallenunless a second wave of the virus brings renewed lockdowns.

 We have changed the Brexit assumption underpinning our baseline forecast. While we still assume an FTA will be agreed with the EU, we now expect it to become operational from January 2021. The earlier introduction of trade barriers will dampen the post-pandemic recovery, lowering the level of GDP at end-2022 by 0.4pp relative to our previous assumption that implementation would be delayed for two years. 

The monthly GDP release for April reported a 20.4% monthon-month decline in output. With the ONS indicating that the next release will see the March fall revised to 6.9% from 5.9%, this suggests that output was more than 25% below normal levels during the period of full lockdown restrictions. This was a far larger decline than our analysis of the March data had implied, which had suggested that GDP was running at roughly 85% of its normal level during the week of lockdown at the end of that month.

There was huge sectoral variation in the April data. The hospitality sector was particularly badly hit, with output at just 8% of its normal level in April. But at the other extreme, output in the public administration and real estate sectors has been largely unaffected. The key reasons why activity fell so much across the economy are.

• Temporary closure of firms: many businesses classed as 'non-essential' were temporarily closed if staff could not work from home. Other firms opted to close and to furlough workers because restrictions on movement caused a sharp drop in demand, meaning it was not financially viable to open.

• Lower working hours: the closure of schools for most children prevented many parents from working, while there has been a higher incidence of sickness.

• Lower discretionary spending: around 40% of consumer spending usually takes place in crowded areas and this was drastically reduced while social distancing measures were in place.

Retail sales data and high-frequency indicatorssuch as mobility data, shipping visits to UK ports and electricity demandsuggest that the trough in activity was in April, with a gradual recovery taking hold in May and early-June as lockdown restrictions began to be eased. The recovery is likely to have gathered pace in the second half of June and early-July, first with the re-opening of non-essential retail and then parts of the hospitality sector coming out of hibernation. We expect GDP to fall by around 21% in Q2, with Q3 then seeing output growth of about 13%. 

Some social distancing restrictions are unlikely to be fully lifted until a vaccine is available (we assume this will happen in early-2021). Therefore, during this period, many firms will be operating well below normal capacity, limiting the pace of the recovery. We now expect GDP to rise by 10.3% in 2021 after a fall of 10.9% this year, meaning the economy returns to its pre-pandemic level of output in early-2022. The key drivers of the rebound are:

• Income support schemes: the government has sought to support employment by introducing schemes that are paying the bulk of the wages of furloughed workers and supporting the income of the self-employed while social distancing measures remain in place. These schemes will be crucial in limiting the rise in unemployment and reducing the risk that recession becomes depression. We expect the various policy measures to result in public sector net borrowing rising to about 14% of GDP this fiscal year. But with the measures temporary in nature and the BoE buying large quantities of gilts, we do not expect the government to have problems financing the extra borrowing.

• Loose monetary policy: the MPC cut Bank Rate by 65bp to its effective floor of 0.1% in March and restarted quantitative easing. Some £300bn of asset purchases, consisting of gilts and private sector securities, were authorised across the March and June MPC meetings and are due to run until the end of the year.

• Very low inflation: we expect CPI inflation to slow to close to zero in the summer and remain there until next spring, due to the collapse in oil prices and the prospect of a further softening in core inflation in reaction to much weaker activity. Very low inflation will provide a sizeable boost to household spending power.

The government opted not to seek an extension to the Brexit transition period and, having set out its plans for operating its borders, it now looks almost certain the new UK-EU relationship will come into force from 1 January 2021. We assume a free-trade agreement will be agreed, but this will still introduce trade barriers in the form of customs bureaucracy and some regulatory barriers. Our modelling suggests these barriers will dampen the pace of the postpandemic recovery by 0.4pp by end-2022.  The revival in industrial activity in China has boosted the short-term outlook for the Asian economies. However, prospects vary greatly across the region, with weakness seen lingering in India, Philippines and Indonesia. There is also little to be optimistic about in Latin America, which has become the epicentre of the pandemic. Although many restrictions have been removed, activity has turned only marginally upward amid ongoing fears about the virus, while fresh spikes in cases in several countries threaten the anticipated recovery path. Meanwhile, the fragile rebound in oil prices should backstop sentiment in the oil producing countries, but soft output growth is set to extend into the medium term against the backdrop of sub-par demand.

 Weak demand has kept price pressures in check, with inflation generally surprising to the downside and expectations well anchored. Consequently, our baseline forecast sees more rate cuts in Asia, Latin America and Russia. However, several central banks have grown more cautious in the face of financial stability concerns and there is the risk of unexpected hawkish decisions, like in Turkey, which surprised in June by hitting 'pause' on easing. 

Despite the significant relaxation of lockdown measures since 8 June, the improvement in mobility is already beginning to stall according to Google's latest data. Our analysis indicates that this is in no small part due to the still rising count of Covid-19 cases. This clearly doesn't bode well for recovery prospects, which are also hampered by weak fiscal support. While the case for further fiscal stimulus remains strong, the likelihood of this looks increasingly low amid growing risks of a rating downgrade to junk by Moody's and Fitch. Another intensifying headwind is the escalation of border tensions with China. Though we think an outright military conflict will be avoided, we expect efforts to lower Chinese imports and discourage Chinese investments to gather force. A gradual and well-planned withdrawal strategy might achieve this without much economic harm to India eventually. But news wire reports suggest that we might be headed for a hasty decoupling that would raise input costs and worsen the woes for industries like electronics and pharma, which are heavily reliant on China for intermediate imports.

GDP growth slowed to only 0.4% y/y in Q2, a multi-decade low amid a contraction in service sector activity and a deceleration in manufacturing output. However, there are signs that activity picked up in May-June, consistent with our 2020 GDP growth forecast of 2.3%. Indeed, based on Google's workplace mobility dataa timely proxy for economic activityactivity is now already significantly higher than a year ago. Industrial production improved further in June, rising 7.6% y/y. This was a marked turnaround from the 13.4% contraction recorded in April, at the height of the global and domestic lockdowns. Manufacturing activity rose by a solid 10.4% on the year, underpinned by a strong rebound in electronics and computers. The rise in electronics output bodes well for exports, at least in the short term. Indeed, goods exports in USD terms only contracted by 2% y/y in June, after doubledigit declines in the previous two months. Assuming that renewed lockdowns are avoided, we are likely to see a relatively strong growth rebound in H2 2020 and 2021.

Data releases have been broadly consistent with our expected 16.4% q/q GDP contraction in Latin America 

Source: Oxford Economics/Haver Analytics 4q-2019=100 q/q% during Q2. Differences in the reach and enforcement of lockdowns accounted for the discrepancies in activity losses in April and May across the region, but we expect LatAm activity to have reached a trough at the start of the second quarter. However, a second wave of infections and protracted social distancing measures pose a substantial risk to our forecast of a 12.8% q/q regional GDP rebound in Q3. In Chile, overall data remain consistent with our current estimate of a 14.4% q/q contraction in Q2, while Argentina could see a larger 17.8% q/q contraction. However, renewed restrictions in Chile and Argentina after premature relaxation pose a substantial risk to our expected Q3 recovery paths of 6% q/q and 17.3% q/q, respectively. In Brazil, Mexico and Colombia, we expect uninterrupted easing of restrictions since late May to cap Q2 contractions at 17.9% q/q, 15.8%, and 6%, respectively. Lack of aggregate demand is keeping regional inflation contained, but central banks have grown more cautious as risks to financial stability increase. We expect additional monetary easing in Brazil, Mexico and Colombia, but interest rates will stay well above the zero lower bound.

Official data from the General Authority for Statistics showed the Saudi economy shrank by 1.0% y/y in Q1, led by a 4.6% contraction in the oil sector. But in line with trends seen in several emerging markets (eg India and Turkey), non-oil growth was comparatively resilient, expanding by 1.6%, supported by strong government spending. Although restrictions are now being eased from their April/May peak, we expect a sharper economic decline in Q2, with both oil and non-oil GDP declining. Saudi PMI readings remain in contractionary territory, amid subdued demand conditions, and the surveys suggest employment is declining at the fastest pace ever recorded. While activity will bounce back in H2, the tightening in fiscal policy and significant scaling back of the Hajj pilgrimage means the non-oil economy will still probably decline by over 8% this year, leading to a full-year GDP contraction of 7.1% in 2020. A revision of spending plans and easing of spending restraint could result in a slightly less pronounced contraction for 2020. Separately, Dubai's GDP shrank by 3.5% in Q1, and an even worse outcome in Q2 remains our baseline forecast. 

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