The Impact of the Pandemic on Global Growth
As the global economy grapples with a resurgence in Covid-19 cases in key developed nations, the International Monetary Fund (IMF) warned this week that the world economy faces an uneven recovery. Efforts to regain control over the pandemic are now set to continue into the winter months, with data suggesting that the pace of recovery is now slowing on a global scale, pushing back expectations for when growth will return to pre-pandemic levels.
While the fund revised growth expectations down over the longer term, it offered a less-dire view of this year’s recession following massive monetary and fiscal stimulus, with new forecasts suggesting that world GDP will shrink by 4.4% this year, compared to earlier forecasts for a 5.2% decline in June.
While better than initially expected, the expected contraction in global GDP still represents the deepest since the Great Depression, owing to government-imposed national lockdowns earlier this year as the virus took hold. The report sets the scene for the annual meetings of the IMF and World Bank which are set to take place this week, with a key point on the agenda being potential debt defaults in developing countries resulting from economic costs of the pandemic.
The IMF’s latest World Economic Outlook report also reinforced recent calls from central banks across the globe for continued support from governments to sustain the recovery in the coming months. The fund highlighted how the impact of the downturn has been cushioned by policy incentives, including a European pandemic-recovery package and large-scale central bank purchases. It found that this unprecedented support helped ease financial conditions in advanced economies and in most emerging and developing economies, supporting an upward revision to its 2020 forecasts. It should be noted that forecasts assume that monetary policy is maintained at current levels through 2025, helping to alleviate debt service burdens for many countries, while social distancing measures will continue into next year but gradually fade over time as vaccine coverage expands.
A Better Than Expected Global Economy?
Looking closely at the data from the IMF, the upward revision to growth forecasts for 2020 reflects better than expected Q2 growth in the US and the Eurozone, a stronger than expected recovery in China and indications of a faster global recovery than first expected in Q3. While data suggests that the pace of recovery has since slowed, the initial bounce back is encouraging given continued challenges in the epidemiology, suggesting that longer lasting effects from the pandemic and recession may be avoided (with the continued support of governments and central banks).
The US economy is projected to contract by 4.3% this year against the previous estimate of 8%, the most improved forecast among major economies, however that is without factoring in any additional fiscal stimulus before the end of the year. Should the Trump Administration and House Democrats come to an agreement on proposed stimulus, it is likely that this will provide further economic support moving into the winter months and act as a stronger base for 2021 growth, which is currently pegged at 3.1% in 2021, down from the previous forecast of 4.5% as the pace of recovery wanes. The Eurozone economy is expected to contract by 8.3%, compared to a prior estimate of a 10.2% decline, before expanding by 5.2% in 2021, down from 6%.
Illustrating the uneven nature of the recovery, one major economy is still expected to expand over 2020, with Chinese growth projected at 1.9% over the year, before a projected 8.2% bumper-growth year in 2021.
For more information on our expectations for additional fiscal stimulus, please see the attached market update.
Overall, according to the fund’s estimates, the global economy is now expected to recover from the pandemic by the end of 2021, later than original expectations as the pace of recovery slows moving through Q4. Global GDP by the end of 2021 is expected to be 0.6% higher than at the end of 2019, however strong growth in China is likely to drive a significant portion of this recovery. Most other nations are expected to return to pre-pandemic activity levels by 2022.
Key factors which could impact growth expectations moving into 2021 are the potential for further stimulus, the positive resolution of key sources of uncertainty including Brexit and the US Presidential Election, and the approval of a vaccine earlier than expected. Overall, with the global economy in a better than expected position for 2020, looking ahead to a booster year for growth in 2021 and onwards given highly accommodative monetary and fiscal policy, we remain optimistic on the medium and long term outlook, despite near term volatility. As a result, our portfolios are well positioned to benefit as the global economy recovers and key risks abate.
Key Events We Are Watching This Week:
- Wednesday: IMF/ World Bank Virtual Meeting
Friday: US Retail sales for Sept
- Monday: Chinese GDP for Q3
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global stock markets continued to display high levels of volatility over the week as countries across the world battle with virus challenges, mixed economic data, and uncertain stimulus expectations. The portfolios gained over the week, benefitting from a high level of diversification in asset classes and geographies, with key markets gaining on stimulus expectations and economic data releases.
Over the week, we took steps to redeploy remaining cash holdings in the lower risk portfolios, topping up existing positions and adding back risk as we continue to see the medium- and long-term outlook strengthening. This action brings the portfolios back in line with native equity exposure for each model. Looking ahead, we are optimistic on the medium-term outlook from here, accepting further volatility in the near term, but confident in our positioning, with well diversified portfolios which have been designed to weather these market conditions. Year to date, in comparison to the benchmarks, we have recovered from the March coronavirus decline, and we are in a strong position moving forward.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
On this day in 1892, Arthur Conan Doyle published “The Adventures of Sherlock Holmes” collection of 12 stories originally published in “The Strand Magazine”. The original character and stories have had a profound and lasting impact on mystery writing and popular culture, with tales being adapted into films, plays and other media for over 100 years.
Have a great week,
Jason & Gina