Why we upgraded our forecast for global GDP growth

We have upgraded our forecast for global GDP growth for 2020 to a decline of 4.6%, a better outcome than our previous forecast of a fall of 5.4%.

What is the background to the new forecast?

Since May, there has been further easing of lockdowns, particularly in Europe, and economic activity has picked up. The US has seen a second wave of outbreaks of Covid-19 and cases in India and Brazil continue to rise rapidly. There are signs, however, that treatment of the virus is improving, leading to lower fatality rates.

What has happened to the recovery in activity since May?

The economic recovery continues, but at a somewhat slower pace. Mobility data shows that, after an initial burst of pent-up demand, spending is progressing more slowly. The goods sector benefited from an easing of restrictions but services, such as hotels and airlines, still have to adjust to a world of social distancing and limits on the size of gatherings.

What led us to upgrade our forecast for global GDP in 2020?

The US economy turned in a better-than-expected performance for the second quarter of 2020 and that is the main factor behind our upgrade to the global forecast. We increased our forecasts for Japan and the emerging market countries too, while we reduced our forecasts for the eurozone and UK.

We expect a further recovery of the global economy to take place in Q3, before growth slows down in the last three months of the year.

Longer term, we still think that the global economy will experience a U-shaped recovery, meaning that it will be gradual (rather than a rebound in a V-shape as was hoped early on in the pandemic).

What else did we factor in?

Inflation is expected to remain low which means that central banks are unlikely to increase interest rates in the near future.

We anticipate a change in occupancy at the White House although the US Congress is expected to remain split after the election. This would limit the new president's ability to use tax policy to boost the US economy.

However, international trade tensions may ease and this might help US-China relations. We still see the risk of a second wave of Covid-19 cases.

What happens if we look out to 2021?

For 2021, our forecast for global growth is now 5.1% (previously 5.3%). The return to positive growth will be helped by supportive fiscal and monetary measures from governments and central banks.

We have factored in the arrival of a vaccine midway through 2021. This is critical in overcoming business and consumer caution which is likely to hold back investment and spending otherwise.

How does the picture differ across regions?

US: after a better-than-expected performance for Q2 2020, we have now revised our US forecast upwards from -8.2% to -4.1% for the full year. If Joe Biden wins the US presidency, we would expect US growth to receive a minor boost as a result.

Eurozone: we reduced our growth forecast from -6.1% to -7.8% for 2020. There was a worse-than-expected second quarter as, overall, the share of the eurozone economy affected by Covid-19 was greater than previously expected.

UK: growth cut from -8.5% to -10.4% for 2020. Similarly to the eurozone, the Q2 GDP release showed that GDP fell by 20.4%, meaning about 30% of the economy was hit by lockdown – up from 20% hit in Q1.

Japan: the second virus wave hampers the recovery near term but fiscal support, and an upturn in the industrial cycle and a recovery in global trade, should help growth reach -4.6% in 2020, up from our previous forecast of -5.4%.

Emerging markets (EM): ‘First-in, first out’ from Covid-19 for China, which returned to GDP growth in Q2. India surprised on the upside too, leading us to revise the EM growth outlook slightly higher to -2.7% in 2020. We increased the 2020 Brazil-Russia-India-China (BRIC) forecast to -1.6% (from -2.2%).

What other scenarios might we face?

We have updated our scenarios to reflect the shifting balance of risks. The historic decision by the EU to set up a recovery fund offers much needed support and marks a step toward fiscal union. This and the central bank’s decision to expand its support programme mean we no longer see a meaningful risk of a crisis in the eurozone.

We continue with the different letter shaped recoveries (V, W and L) and our Modern Monetary Theory (MMT) fuelled fiscal expansion (whereby central banks have to directly fund government spending).

We introduce a “Democrat sweep” scenario where the Democrats win the US presidency and the Congress. This gives the new president more scope to expand fiscal policy and consequently results in a rise in growth and inflation compared to the baseline scenario.

Our largest risk scenario is Covid-19 second wave, though the overall balance of probabilities points towards a sharp global recovery.