A More than Expected Slowdown in Global Growth - PFI Capital

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Monday, June 29, 2020 / 02:40PM / PFI Capital/Header Image Credit:  ETF Trends


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The IMF last week, released the June 2020 World Economic Outlook (WEO) update with growth forecasts declining more than the April Outlook. Unlike the January and April Outlook, growth outlook is now projected to decline more than expected as the global pandemic is having acute and adverse impact on the low-income households and low-skilled workers who do not have the options of working from home.

 

The IMF noted that with the exception of China, Chile, India, Malaysia, Thailand, Australia, Germany and Japan, real GDP growth in Q1'20 was generally worse than expected in the world. With the lockdowns enacted in April with the exception of China, where most parts of the country had reopened in April, a more severe contraction is expected in Q2'20.

 

As such, the IMF now projects world output to decline by -4.9% in 2020 compared to its previous 2020 projections of 3.3% growth in January and -3.0% decline in April. However, there will be a partial recovery of 5.4% growth in 2021 based on the IMF estimates. The projections imply that the global economy will record a combined loss of $12.5 trillion (equivalent to the GDP of Japan, Germany and the UK combined) in 2020 and 2021 as a result of the global health crisis. The 2021 growth projection of 5.4% is 0.4% lower than the April forecast.


The advanced economies are expected to have the largest decline in output in 2020 as there was already a deeper than expected hit to economic activities in Q1'20. For example, the US economy contracted by -4.8% in Q1'20, while the real GDP of France plunged by -5.8% and UK recorded GDP decline of 1.6% YoY, reflecting the direct effects of COVID-19 as well as the lockdown measures taken to reduce the spread of the Virus. Spain, Italy and France are expected to be have the worst output decline among the advanced economy as the IMF projects their GDP to decline by 12.8%, 12.8% and 12.5% in 2020 respectively. The European economies are projected to decline by -10.2% in 2020 based on the IMF estimate and we noted that the Eurozone printed GDP decline of -3.6% in Q1'20.

 

For the Emerging Markets and Developing Economies, the new IMF projection reflects a 3% decline in their overall economies, reflecting large spillovers from weaker external demand and disruptions in domestic activities which are expected to more than offset the improvement in financial market sentiment. Excluding China, the downward revision by the IMF for the Emerging Markets and Developing Economies over 2020-2021 is 3.6%.

 

Latest WEO Growth Projections for Selected Countries

Country

2019 (Actual)

2020F

2021F

United States

2.3%

-8.0%

4.5%

Germany

0.6%

-7.8%

5.4%

Italy

0.3%

-12.8%

6.3%

United Kingdom

1.4%

-10.2%

6.3%

Japan

0.7%

-5.8%

2.4%

China

6.1%

1.0%

8.2%

India

4.2%

-4.5%

6.0%

Russia

1.3%

-6.6%

4.1%

Brazil

1.1%

-9.1%

3.6%

Mexico

-0.3%

-10.5%

3.3%

Saudi Arabia

0.3%

-6.8%

3.1%

Nigeria

2.2%

-5.4%

2.6%

South Africa

0.2%

-8.0%

3.5%

Source: IMF, World Economic Outlook Update, June 2020

 

From the outlook, we also noted that China is projected to grow at 1% in 2020, and this is majorly supported in part by policy stimulus, as well as the recovery from the sharp contraction experienced in Q1'20 being underway. We however do not rule out an incidence of a second wave of the pandemic having its weight on the economy. Furthermore, according to the IMF, disruptions due to the pandemic, as well as significantly lower disposable income for oil exporters after the dramatic fuel price decline, imply sharp recessions in Russia (-6.6 percent), Saudi Arabia (-6.8 percent), and Nigeria (-5.4 percent), while South Africa's performance (-8.0 percent) will be severely affected by the health crisis.

 

For us, our model for the Nigerian economy is slightly modified as we take into account, Nigeria's compliance with OPEC production cut agreement and some variances. We also adjusted the average oil price for the year and take it into account in our forecast as well as portfolio and direct investments in the country. Our model further includes the pressure on the naira, adjusted foreign reserve and inflationary pressure throughout the year. As such, we expect the Nigerian economy to plunge by -3.92%, from our previous estimate of -2.84%.



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