Ravi Chandran
In unparalleled global recession underway, world GDP is expected to fall by 3.9% in 2020
Fitch Ratings has made further large cuts to global GDP forecasts in its latest Global Economic Outlook (GEO) in response to coronavirus-related lockdown extensions and incoming data flows.
Fitch Ratings is updating its global economic forecasts more frequently than its usual quarterly publication cycle, given the speed at which the coronavirus crisis is evolving.
“World GDP is now expected to fall by 3.9% in 2020, a recession of unprecedented depth in the post-war period,” said Brian Coulton, Chief Economist at Fitch Ratings. “This is twice as large as the decline anticipated in our early April GEO update and would be twice as severe as the 2009 recession.”
Fitch’s Economics team, led by chief economist Brian Coulton, analyses global macroeconomic trends and their impact on credit markets around the world. The team publishes global macroeconomic research, forecasts and commentary focusing on 20 major advanced and emerging economies.
The decline in GDP equates to a USD2.8 trillion fall in global income levels relative to 2019 and a loss of USD4.5 trillion relative to our pre-virus expectations of 2020 global GDP. Fitch expects eurozone GDP to decline by 7%, US GDP by 5.6%, and UK GDP by 6.3% in 2020.
Unparalleled global recession more visible in Eurozone
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 spared as unparalleled global recession gets underway
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.
Fitch Ratings expects 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.
Lockdown episodes contributing to unparalleled global recession which is underway
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.
Near term jobs losses to be more impactful as unparalleled global recession gets underway
According to the latest Economics Dashboard from Fitch Ratings the near-term job losses from the coronavirus crisis might be more impactful than implied by the GDP contraction.
Following the adoption of stringent lockdown measures in some of the largest developed economies, job losses have surged as some sectors have seen a virtual standstill in activity.
“The sectors hit hardest by lockdown measures are highly labour-intensive and are larger contributors to employment than they are to GDP. Labour market dislocation could amplify the medium-term impact of the crisis,” said Marina Stefani, Director at Fitch.
Fitch’s economics team has looked at the composition of employment and economic output by industry in the US, the UK and the four largest Eurozone economies to understand the lockdown impact on jobs. The service sector, likely worst affected by the crisis, is by far the largest employer in all the above mentioned economies except Germany, and accounts for more than 50% of total employment.
Within services, the travel, tourism and retail sectors employ more than 20% of the national workforce, reaching almost 30% in Spain. However, the contribution of these sectors to GDP is significantly smaller. The GDP impact of the lockdown might therefore not reflect the full extent of potential job losses.
