As the virus spread globally, even emerging markets that at one point were viewed as unlikely to resort to lockdowns have since been forced to adopt them; India is a case in point. In fact, one reason that global economic performance is decidedly worse than it was during the Global Financial Crisis (GFC) is the current lack of resilience in emerging markets. China served as a growth anchor for the world economy in the last global recession, but it cannot play that role today. (China is, however, one of the very few economies likely to record modest positive GDP growth this year.)
The United States is officially in recession as of June, according to the National Bureau of Economic Research (NBER).4 The NBER noted that “the usual definition of a recession involves a decline in economic activity that lasts more than a few months.” However, other considerations such as intensity and breadth matter; these warranted “the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”
The US recession may turn out to be not just briefer, but much briefer. Throughout this episode, we’ve been highlighting many data incongruities that illustrate the unusual nature of this economic contraction and which suggest that the recovery could be unprecedentedly swift as well. Extraordinary monetary and fiscal stimulus will play a key role here. With Fed monetary policy seemingly here to stay, fiscal stimulus so far has delivered support to consumer spending. Personal income in the US spiked 10% in April, despite a 15% unemployment rate. The personal savings rate shot up to a never-before-seen 33%, implying a decent financial cushion for consumers. It’s not all that surprising that US retail sales jumped by a record 17.7% in May, and that mortgage applications for home purchases are at an 11-year high. This is clearly not a typical recession. And although the recovery will vary across sectors – e.g., travel, hospitality, and events will likely be under pressure for some time – evidence of improvement can be found.
For these reasons, we continue to lean more positive than consensus on US GDP growth: We expect a 3.4% decline in 2020. We also expect stronger-than-consensus 3.9% GDP growth in 2021, based on our expectation that the policy response to a second-wave outbreak will not include broad lockdowns, and that there will be measurable progress on medical solutions to the virus that will allow the most vulnerable populations to benefit by late 2020 or early 2021.
The eurozone presents an especially interesting case in the current COVID-19 drama. Cyclically, it has been one of the worst-affected regions, with vulnerabilities stemming from high levels of economic openness, dependence on global tourism and demand for luxury goods, elderly populations, and macro policy constraints. But this is also the region that may emerge from this crisis in much better shape from a structural standpoint — the intensity of this shock is energizing transformative integration efforts to a much greater extent than was seen during the GFC or the Euro crisis.
After years when monetary policy in the form of ECB rate cuts and quantitative easing seemed to mark the limits of macro policy support available to the region’s economy, we are now finally witnessing a meaningful fiscal policy response. This is not just at the national level (including traditionally austere countries like Germany) but also — most importantly — at the supranational level. The EU has adopted a EUR750 billion recovery plan that represents a major step forward in unity. A sizable increase in the EU budget is currently under debate and, with the support of core allies, Germany and France, will likely be approved. At the same time, the European Central Bank is stepping on the stimulus gas pedal, having nearly doubled the size of its Pandemic Emergency Purchase Program to EUR1.350 billion.
We expect the eurozone economy to contract by 6.6% in 2020, before rebounding to grow by 5.0% in 2021. Unsurprisingly, Germany is expected to outperform that trajectory, given sizable counter-cyclical stimulus, stronger consumer finances, and less dependence on tourism. Also unsurprisingly, Italy is likely to underperform this year, although a normalization in tourism flows and favorable base comparisons should allow it to keep up with the rest of the region in 2021. France’s experience will likely fall in-between these two.
The COVID-19 crisis negates many of the structural long-term advantages of emerging market (EM) economies while accentuating their shortcomings. Prime among EM’s perceived advantages had been broadly favorable demographics. Abundant and relatively cheap labor resources had been a structural advantage that supported an export-led growth approach in many emerging market economies in Asia and beyond. But abundant labor is not an advantage when that labor is idled by the necessities of social isolation policies. In fact, last quarter we noted high population density as a key risk factor that could greatly exacerbate disease containment difficulties and escalate healthcare costs.
Unfortunately, over the last two months, Brazil and India have become poster children for a demographic advantage turning into a drag, as infection rates spiked. If there is a silver lining here, it is that EM populations are generally younger, and youth seems to greatly reduce COVID-19 mortality rates. Nonetheless, the containment measures and the loss of economic activity associated with these outbreaks mean that GDP in emerging markets as a whole will contract by close to 2.0% this year, an extraordinary development given typical annual expansion rates over 4.0%. In effect, COVID-19 has wiped out emerging markets’ structural growth advantage. This will not be a permanent change, but it is noteworthy nonetheless.
Another feature of the COVID-19 crisis is that it heightens heterogeneity in EM economic performance. At the moment, it appears to be more of a duality story — China on one hand, and most other EM countries on the other. As China contained its virus spread early on, its economic recovery began as early as Q2 — one quarter ahead of the rest of the world. China’s superior policy implementation capacity — both social and economic — place it favorably within the EM universe. In fact, one could even describe its performance as unique: It is the only large economy, advanced or developing, that is likely to eke out modest positive GDP growth this year.