The biggest downward revisions are in the eurozone, where the measures to halt
the spread of the coronavirus have already taken a very heavy toll on activity
in 1Q20. We have cut Italy's 2020 GDP forecast to -8% following official
indications that GDP already fell 5% in 1Q20 and after a recent extension of
the lockdown there. Official estimates also point to France and Spain
experiencing near 5% declines in GDP in 1Q20, with the Spanish outlook hit
particularly hard by the collapse in tourism. Even allowing for a slightly less
negative outlook for Germany - where the headroom for policy easing is greater
and the benefits of a recovery in China will be felt more directly - eurozone
GDP is expected to shrink by 7% this year.
No country or region has been spared from the devastating economic impact of
the global pandemic. We now anticipate that GDP in both the US and the UK -
where lockdowns started a little later than in the eurozone - will decline by
more than 10% (not annualised) in 2Q20, compared to forecasts of around 7% in
our early April update. This will result in annual GDP declines of around 6%,
despite aggressive macro policy easing.
A notable feature of this update is sharp further downward revisions to GDP
forecasts for emerging markets (EM). Falling commodity prices, capital outflows
and more-limited policy flexibility are exacerbating the impact of domestic
virus-containment measures; Mexico, Brazil, Russia, South Africa and Turkey
have all seen big GDP forecast adjustments. With China and India both now
expected to see sub-1% growth, we expect an outright contraction in EM GDP in
2020, a development unprecedented since at least the 1980s. We expect supply
responses and a relaxation of lockdowns to help oil prices to recover in 2H20
from current lows, which are being exacerbated by storage capacity issues
in the US and elsewhere.
Several major economies recently have extended lockdown measures, and we now
need to incorporate national lockdowns of around eight or nine weeks as a
central case assumption for most major advanced economies. This contrasts to
our previous assumption of around five weeks. An extra month of lockdown would,
all else being equal, reduce the annual flow of income (GDP) by around 2pp, as
outlined in our previous GEO update.
In addition, incoming data - including official 'flash' GDP estimates for 1Q20,
monthly activity indicators for March and weekly labour market data - point to
a daily loss of activity through lockdown episodes of closer to 25% than the
20% assumed previously. This is consistent with the recently released outturn
for growth in China when GDP declined by 10% qoq in 1Q20, a period encompassing
entry to and exit from a five-week lockdown.
"Macro policy responses have been unprecedented in scale and scope and
will serve to cushion the near-term shock. But with job losses occurring on an
extreme scale and intense pressures on small and medium-sized businesses, the
path back to normality after the health crisis subsides is likely to be slow.
Our forecasts now show US and eurozone GDP remaining below pre-virus (4Q19)
levels through the whole of 2021," added Coulton.