Global growth has been modestly marked down as COVID-19 roars back, but a solid recovery is still expected in 2021.
A more targeted approach to virus management should dramatically reduce the impact of the virus relative to the first phase.
Economic repair from the effects of the pandemic may be occurring more rapidly in Canada than in the US.
The US election has the potential to substantially affect the forecast, but the extent to which this may occur depends critically on who wins the Presidency and controls the Senate.
The sharp rise in COVID-19 cases is leading to a modest scaling-back of growth forecasts owing to markdown of near-term economic prospects, but a phase-1 like collapse of economic activity will be avoided. We currently expect global GDP to fall by 4.1% in 2020 and rebound by 5.4% next year. Our previous forecast was for a decline of 3.9% this year and a rebound of 5.6% in 2021. The rise in infections also serves as a stark reminder that downside risks to the outlook remain very high and that it will take many quarters to recover lost output. Sustained policy support remains essential to assist firms and households, and premature withdrawal of fiscal support, as seems to be occurring in the US, will slow the pace at which the global economy rebounds next year.
Policymakers seem to have taken the lessons from the first phase of the pandemic to heart. Though the virus has come back with a vengeance in many countries, as feared and expected, the response of authorities has been far more targeted and parsimonious. Full-scale lockdowns of economies have not been implemented even as this second wave seems more broad-based than the initial outbreak of COVID-19. Moreover, households seem better adapted to life in pandemic, though employment remains well below pre-pandemic levels. Global indicators of household spending, for instance, continue to point to a rebound in consumption.
The pace of the rebound observed in 20Q3 was never going to be sustainable, as it reflected a one-time boost in growth as economies re-opened from depressed levels of activity. We are now transitioning to a slower phase of the recovery, as the slow grind to return to pre-pandemic levels of economic activity continues. Unemployment rates remain well above pre-COVID levels with impacts disproportionately affecting low-wage service sector employees, and many industries remain under intense pressure. The pace of this transition will be dictated by the evolution of the virus, how governments respond to it, the extent to which business and household behaviour continues to evolve, and the nature of government supports.
In the very short run, we have scaled back our forecast for economic activity during 20Q4 and 21Q1. In the US this reflects lower fiscal support and virus-related drag, which will reduce growth in 20Q4 to 1.9% SAAR relative to the 5% we had forecast in our last update. In Canada, we now expect growth of 2.4% SAAR in 20Q4, well below the 5.1% we anticipated in our last forecast. This flows exclusively from the resurgence of the virus and containment measures instituted by some provinces. These revisions are partly offset in 2021 by the inclusion of extended wage subsidies and more generous employment insurance benefits, but growth next year is nevertheless expected to rebound less aggressively than previously assessed (now 5.4% vs 5.6% previously). There is likely to be upside risk to the amount of fiscal support provided next year given the Federal Government’s clearly expressed intentions in the Speech from the Throne. We will assess and incorporate new initiatives if they are announced in the upcoming budget.
Importantly from a Canadian perspective, it appears the repair from the impact of the pandemic may be occurring more rapidly than in the US. The number of full-time employees has recovered much faster in Canada than it has in the US, for instance (chart 1). This almost certainly reflects Canada’s more effective approach to managing the virus and its public health and economic consequences.
Our outlook does not incorporate the potential impact of the US election. It appears, at this point, that Mr. Biden will defeat President Trump. A President Biden, however, would be unable to alter the course of fiscal policy if Republicans maintain control of the Senate. In fact, it could well be that Senate Republicans block attempts by the new administration to support the economy as it continues to process the impacts of the pandemic. As Chairman Powell has noted many times, there remains a clear need for extensive fiscal support in the US economy. The current politicking around the extension of employment benefits is a taste what may come if Mr. Biden wins and the Republicans keep the Senate. If so, that would be negative for the outlook. Conversely, a Democratic Senate would likely be much more supportive of enhanced fiscal support, which could lead us to raise our forecast for next year. Finally, while President Trump seems unlikely to win at the moment, a victory is not out of reach. A second Trump mandate would likely see more fiscal support given the President’s newfound appreciation for stimulus. One thing is certain: the electoral distraction will be over soon, and a return to governing and a focus on the needs of the economy will be a welcome relief from the past few weeks.
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