We are sticking to our forecast, first set out in Shape of Recovery: Square Root & Hockey Stick (5th June 2020) that global GDP, which contracted about 7.0% qoq in Q2 (a number flattered by China’s GDP), will rise a record-high 3.0% qoq in Q3.
However, this implies that world GDP will still only be at the level which prevailed three years ago, according to our estimates (see Figure 1).
The key take-away is that global GDP growth collapsed in April, surged and peaked in May-June but lost momentum in July.
We estimate that global growth weakened further in August and was likely very modest in September, partly as result of governments, particularly in Europe, tightening and/or re-introducing targeted lockdown measures, at a regional/state or national level, in the face of rising covid-19 case numbers.
This economic growth pattern, which stands out in the US, Eurozone and UK, is critical when forecasting growth in Q4 and beyond which admittedly remains an exercise in faith as much as rigorous analytical work as conventional economic relationships and wisdoms are still being tested to breaking point.
This caveat aside our core scenario is that global GDP growth will slow in Q4, potentially quite sharply, and not just because of less favourable base-effects.
We think the risk in coming months is tilted towards tighter, not looser lockdown measures which will, all things being equal, curtail economic activity particularly in a service sector which had only started to find its feet.
At the same time some governments have started to unwind fiscal easing measures and financial packages, which will likely weaken already shaky labour markets.
We are sticking to our forecast, first set out in Shape of Recovery: Square Root & Hockey Stick (5th June 2020) that global GDP, which contracted about 7.0% qoq in Q2, will rise a record-high 3.0% qoq in Q3. However, this implies that world GDP will still only be at the level which prevailed three years ago, according to our estimates (see Figure 1).
Governments opting for health path of least regret…with negative knock-on to economies
Most countries are still facing a triple health, economic and social shock (see Figure 2) – although there are a few notable exceptions. For example in New Zealand the number of new daily cases of covid-19 remains extremely small and there have been no reported covid-19 deaths in the past three weeks. Prime Minister Ardern’s government recently lowered its Alert Level to 2 for Auckland and to 1 for the rest of the country although strict social distancing measures and travel restrictions remain in place.
The near-term outlook is ultimately clouded by the fluid, at times self-reinforcing and often unpredictable inter-play between:
1. The complex mathematics and science behind the spread of the covid-19 pandemic. The coronavirus outbreak is now nine months old but governments, central banks, corporates and households still face a critical “known unknown”, in our view, namely the rate of transmission (R0) (see Governments and policies adapting to critical known unknown, 27th March 2020).
2. The often unprecedented measures which governments still have in place to contain the covid-19 pandemic and their impact on corporate and consumer behaviour and ultimately economic growth. These of course include targeted lockdown and associated social-distancing and self-isolation measures which continue to vary greatly in their scope and nature and the extent to which they are being enforced or adhered to.
3. The forever changing landscape for policy measures designed to mitigate the slump in global supply and demand. While governments continue to introduce new fiscal stimulus measures (e.g. the European Union’s €750bn Recovery Fund), some are being rolled back or withdrawn completely.
However, what stands out in our view is that while the number of new daily cases of covid-19 worldwide has risen rapidly in the past six week months to 286,000 from about 264,000, the number of new daily covid-19 deaths has fallen to about 5,200 from around 5,900 in mid-August. This pattern has held true in many countries, including in Europe where the number of new deaths has remained very small (at least relative to March-May) despite a surge in the number of new cases. A number of factors, beyond a slightly higher number of people being tested, explain this “discrepancy”. These include the fact that the bulk of the increase in new cases has been among younger people (who are more likely to survive), the use of drugs to minimise the effects and potency of the virus and health systems’ greater experience in treating patients.
Lockdown “light” + limits to fiscal stimulus = negligible growth in September and near-term
Nevertheless, faced with surging case numbers and concerns that health systems may be overwhelmed during the winter months – when they will also be dealing with the seasonal flu virus – many governments, particularly in Europe, have opted in recent weeks to tighten existing lockdown and social distancing rules and guidelines, introduce new, targeted measures at a regional/state or national level and re-introduce measures which had been unwound earlier in the summer.
Changes to national lockdowns and social distancing rules will likely remain the by-product of complex negotiations between i) country-leaders, ii) health ministers, scientists and health experts who typically favour a more cautious approach; iii) finance and economy ministers, heads of industry and corporations who on the whole are pushing for a relaxation of national lockdowns; and trade unions, workers and households whose views on lockdowns are arguably diffuse. However, we think the risk in coming months is tilted towards tighter, not looser lockdown measures which will, all things being equal, curtail economic activity particularly in a service sector which had only started to find its feet.
At the same time some governments have started to unwind fiscal easing measures and financial packages, which will likely weaken already shaky labour markets. For example the British government’s “furlough” scheme had until end-August paid for 80% of furloughed employees’ wages (up to a maximum of £2,500/month). Since 1st September the furlough scheme has covered only 70% of the wages of the three million employees still in the scheme (up to a maximum of £2,187.50/month), with the 10% balance paid by employers (see UK & Sterling Facing Potential Quadruple Whammy, 4th September 2020).
This has both put further financial pressure on already struggling British companies and contributed to significant lay-offs which will in coming months be reflected in a significant increase in the artificially low UK unemployment rate of only 4.1% in May-July. This has in turn curbed the private sector’s ability to invest and consume. Indeed the UK Composite PMI flash estimate (based on survey data for the first half of September) fell to 55.7 (a 3-month low) from 59.1 in August, with the key service particularly hard hit (see Figure 3). This suggests that UK GDP growth may have slowed to a trickle in September.
The UK Chancellor of the Exchequer’s Jobs Support Scheme, announced today, will only partly compensate for the furlough program, due to be terminated on 31st October, while the reduced rate of VAT (5%) for hospitality and tourism companies will be extended until March, not extended to other sectors. Finally, the delay of Rischi Sunak’s Autumn budget to 2021 only postpones a likely announcement of higher taxes, in our view.
The Eurozone Composite PMI flash was even weaker than in the UK, falling to just 50.1 in September from 51.9 in August and a 2-year high of 54.9 in July, pointing to near zero GPD growth in the month, in our view, while US data suggest that economic growth continued to lose momentum in August and September as detailed below.
Global GDP growth likely slowed in July and again in August
Macro indicators suggest that global GDP growth had already started to slow sharply in July and weakened further in August.
Historically, the Global Composite Output Index (referred to as the “Global Composite PMI”), a weighted index of economic activity in manufacturing and services, has correlated closely with quarterly global GDP growth (see Figure 4).
Based on precedent the far smaller increases in the global Composite Output Index in July and August of 3.2 percentage points and 1.4pp, respectively, point to a marked slowdown in global GDP growth (see Figure 5).
Monthly data at a national and global level corroborate this trend. Growth in global supply (as proxied by industrial output), and in demand (as proxied by retail sales) slowed sharply in July. Global industrial output growth almost halved in July to +3.1% mom (see Figure 6), according to World Bank data, and the global manufacturing PMI points to a further slowdown in August. Global retail sales growth slowed further to 6.4% mom (see Figure 7).
In the United States macro and financial market indicators point to a significant loss of momentum in economic growth in July and August (see Figure 8).
The collapse in US consumer confidence to a six-year low of 84.8 in August from 91.7 in July, due in part to the stop-start loosening of state-level lockdown measures in our view, is of particular concern, as is the S&P 500’s collapse in September. Our detailed analysis shows a strong, positive historical correlation between US consumer confidence, disposable income (including wages & salaries), households’ net-worth (including equity holdings) and household consumption growth, with the latter accounting for over 80% of US GDP growth in 2013-2019 – see The key quartet: US income, confidence, net worth and consumption (18th October 2019) and US Consumer – From King to Prince (8th October 2019).
In the United Kingdom, one of the few countries to publish monthly GDP data, growth slowed to 6.7% mom in July from 8.7% mom in June and we estimate that it halved in August (see Figure 3).
Global GDP collapsed 7.0% qoq in Q2 and 11.5% qoq excluding China
While GDP data for Q2 are now “old” and on the surface of limited use, it makes little sense in our view to estimate global growth in Q3, let alone forecast growth in Q4 2020 and beyond, without at least fleshing out the numbers for the first half of the year and having a sense of the starting point. We estimate that global GDP contracted a record 7.0% quarter-on-quarter in Q2 2020, based on:
1. GDP data for OECD economies and another eleven large economies, including China, India, Russia and Brazil, which in aggregate account for about 83% of world GDP (PPP-basis); and
2. An estimate of GDP growth in the rest of the world (based on partial GDP data for Q2).
Our estimate is in line with the World Bank’s figure of a 7.8% qoq contraction, with the modest difference due in part to different country weightings (see Figure 9). This followed a contraction of about 3.0% qoq in Q1, according to our estimates, and as a result global GDP in Q2 was back to H2 2016 levels. Put differently three years worth of growth was wiped out in the first half of the year (see Figure 1).
Our estimate of a 7% qoq contraction in Q2 is smaller than our three-month old forecast of 9% (see Shape of Recovery: Square Root & Hockey Stick, 5th June 2020). The smaller-than-expected contraction was in large part due to a stronger-than-forecast recovery in Chinese GDP growth in Q2 (+11.5% qoq). GDP growth in Q2 was indeed considerably faster in China than in any other major economy although this was in part due to “favourable” base effects, with Chinese GDP having contracted 9.8% qoq in Q1 (see Figure 9).
If we exclude from our calculations China (which accounts for about 20% of world GDP on a PPP-basis), we estimate that global GDP contracted about 1.5% qoq in Q1 and 12% qoq in Q2 (see Figure 10). To put this in context global GDP growth ex-China averaged about 0.7% per quarter in 2016-2019 and at the peak of the great financial crisis, in Q4 2008-Q1 2009, bottomed out at only -2% qoq.
Every major economy was in technical recession in H1 2020, bar India, Chile and China
Every other major economy recorded negative GDP growth in Q2 (see Figure 11). Asia-Pacific economies on the whole performed better but India suffered the largest GDP contraction (about 26% qoq). Among developed economies the United Kingdom underperformed with GDP down 20.4% qoq, in line with our forecast of -20.6% qoq (see Retail Sales Key to UK Economic Growth Recovery, 30th July 2020).
Moreover, every major economy recorded negative GDP growth in both Q1 and Q2 and was thus in recession based on the IMF’s definition, with the exception of India (+0.3% qoq in Q1), Chile (+3.0% qoq in Q1) and China. Hong Kong, Japan and Mexico were already in recession in Q1 (having recorded negative growth rates in Q4 2019) and the European Union, United Kingdom Canada, Singapore and Thailand came extremely close (see Lessons learnt from Q1 collapse in global GDP, 21st May 2020). Only a handful of economies, mainly in Asia-Pacific, avoided double-digit GDP contractions in the first half of the year (see Figure 12).
The darling (growth) buds of May…and June
GDP paths have varied across individual economies, with in particular Chinese growth collapsing in Q1 (as a result of lockdown measures having been introduced very early in the year) before rebounding sharply in Q2 (see Figure 10). However, monthly data at a national and global level reveal that for most countries economic activity contracted the fastest in the month of April, when national lockdowns were implemented, with both global industrial output and global retail sales posting record falls (see Figures 5 & 6).
Conversely, global and most national GDP growth rates likely surged – and peaked – in May-June. Global industrial output growth was only +2.7% mom in May but global retail sales – the sale of goods – recovered sharply (+14.6% mom) according to World Bank data. This was due in part to pent-up demand from March-April and the fact that households were largely deprived of opportunities to spend on services as the hospitality, leisure, entertainment and travel industries remained largely closed (these included restaurants, bars, hotels, cinemas, theatres etc…). This was certainly the case in the United Kingdom (see Retail Sales Key to UK Economic Growth Recovery, 30th July 2020).
Global retail sales growth remained strong in June (+8.3% mom) while industrial output growth more than doubled to +5.9% mom. At the same time governments started to gradually unwind the lockdown measures which had held back activity in the service sector – a critical sector particularly in developed economies. The result was a record monthly increase of 11.5 percentage points in the Global Composite Output Index albeit from a still low base (see Figure 5).
 At a national level a recession is typical defined as two consecutive quarters of negative quarter-on-quarter seasonally-adjusted GDP growth.