Report Contents

November 5, 2020

Macro Series

Economic Risks

BY John Llewellyn, Llewellyn Consulting

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( 6 mins)

OECD: second waves and double dips

  • The first half saw the sharpest and broadest contraction in OECD economic activity since the Great Depression.
  • After a rapid rebound in Q3, when lockdowns were eased, recovery has slackened off in the face of viral resurgences.
  • Performance has differed considerably. In particular, the US has remained more resilient than Europe and Japan.
  • The outlook is uncertain, but second dips seem likely in the face of new lockdowns and voluntary social distancing.
  • A sustained and vibrant recovery must await better test, track, and trace systems, and a widely available vaccine.
  • Bankruptcies, joblessness, inequalities, and poverty stand to increase sharply, and many aspirations will not be met.
  • Real activity seems unlikely for the most part to re-attain pre-crisis (Q4 2019) levels for at least several years.
  • OECD CPI inflation remained uncomfortably low at 1.3% in September, while oil prices have softened once again.
  • Macro support will need to be sustained: with borrowing costs low the case is strong for boosting public investment.


US: is this the calm before the storm?

  • The US has enjoyed a robust recovery, resilient to infection rates, electoral uncertainty, and a fiscal policy hiatus.
  • Real GDP rose 7.4% q-o-q in Q3, business confidence and leading indicators are upbeat, the housing market strong.
  • The labour market has also improved but, at 7.9%, joblessness is still at levels seen only in major recessions.
  • The economy’s ability to weather a further surge in infections without a significant renewed slowdown is moot.
  • The Fed is also cautious about the outlook, fearing an at best uneven pick-up, and calling for targeted fiscal support.
  • PCE inflation has rebounded from its lows but remains well below target at 1.4% for the headline rate and 1.6% for core.
  • The US trade balance has widened sharply since the spring; protection has done nothing to cut the deficit with China.
  • Markets were more volatile ahead of the Presidential election, but financial conditions remain generally loose.
  • The US is likely to remain an apprehensive, polarised, and angry nation, redolent of 1968, if not 1860.

Bottom line: a vigorous recovery so far, but setbacks beckon, along with further turbulence, both market and political.

Watch for: rising infection rates; slowdown; more political dyspepsia; social unrest; equity and dollar falls; a yield target.


Euro area: no time for faint hearts at the ECB

  • GDP grew 12.7% in Q3, but activity has faltered since, with infection rates surging and lockdowns reimposed.
  • Manufacturing-heavy economies are proving more resilient than those, like Spain, more reliant on services and tourism.
  • Asymmetry in economic performance threatens to deepen longstanding divisions between north and south.
  • Credit standards tightened sharply in Q3, and the expectation is for further restraint in the period ahead.
  • Headline CPI inflation slumped to -0.3% y-o-y in August, with the core rate marginally positive at a record low 0.2%.
  • Deflation, tight credit conditions, and recent euro strength suggest the ECB will further expand its APP in December.
  • The suspension of budget rules has been extended, affording members continued scope for fiscal activism.
  • The EU’s Recovery Plan (some 5.5% of GDP) is impressive, focussing on the investment shortfall and levelling-up.
Bottom line: a second dip in Q4 and a major inflationundershoot, requiring a more dramatic macro policy response.
Watch for: enduring near-zero inflation; more negative rates; a more symmetrical ECB inflation target; US trade tensions.

UK: from annus horribilis to annus yet more horribilis

  • Hopes for a vibrant and sustained recovery have foundered on a second viral wave, and associated lockdown.
  • Q4 GDP is set to fall, and unemployment to rise towards 8%, despite an extension of the government’s furlough scheme.
  • Borrowing has so far fallen short of expectations, but net debt exceeded 103% of GDP in H1, a post-1960 high.
  • With a hard Brexit, which seems likely, the economy could struggle to grow much at all over the next year.
  • Even after a limited rebound in Q3, both headline and core CPI inflation remain historically, and uncomfortably, low.
  • The Bank of England has extended its asset purchases by a further £150bn and appears to retain an easier policy bias.
Bottom line: tough times ahead for the UK and a government already struggling to cope with multiple problems.
Watch for: a flood of bankruptcies; renewed recession; a negative Bank Rate; monetary finance. PM Johnson replaced.

Asia and Emerging markets: Chinese exceptionalism

  • Japan remains mired in a low growth, lowflation, quagmire. CPI inflation continued to run around zero in September
  • China is enjoying a robust recovery, has reattained its precrisis GDP level, and is providing support to the rest of Asia.
  • In contrast to China, economic outcomes have been weaker than expected in India, Argentina, Mexico, and South Africa.
  • Poor governance and geopolitical issues have left Turkey in crisis. The Turkish lira has depreciated 25% since Q4 2019.
  • Poverty and inequity stand to rise sharply: in the absence of more debt relief, a cascade of defaults is possible.
Bottom line: China will be the only G-20 economy to expand this year, while poverty and inequality swell in many other EMs.
Watch for: humanitarian crises; IMF packages; defaults; SDR issuance; monetary finance; GDP-linked bonds.◼

Charts of the month

Economic Risks 1


Economic Risks 2


Recommended reading

Brainard. L., 2020. Achieving a broad-based and inclusive recovery. Federal Reserve. 21 September.

Delong. B., 2020. The economic incompetence of Republican Presidents. Project Syndicate. 29 October.

Eichengreen. B., 2020. Scotland needs a plan for a new currency if it wants independence. The Guardian. 13 October.

Galbraith. J.K., 1987. A history of economics. The past as present. Penguin

IMF., 2020a. World Economic Outlook. A long and difficult ascent. Washington. October.

IMF., 2020b. Fiscal Monitor. Policies for the recovery. Washington. October.

IMF., 2020c. Global Financial Stability Report. Bridge to recovery. Washington. October.

Rogoff. K., 2020. Interview. Project Syndicate. 27 October.

Vleighe. G., 2020. Assessing the health of the economy. Bank of England. 20 October.

Wolf. M., 2020. America’s global role is at stake. Financial Times. 26 October.

Wren-Lewis. S., 2020. Starve a kid to save a quid. Mainly Macro blog. 26 October.

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