Very strong post-COVID rebound underway in Q3, leading to upward revisions to growth forecasts in some countries.
There remains much economic damage to repair, and a return to pre-COVID levels of economic activity is still several quarters away for many sectors.
The global outlook for 2020 has improved markedly from the forecasts made at the peak of the pandemic earlier this year. Indicators of household spending and business activity (chart 1) continue to point to a more rapid and substantial rebound than earlier anticipated. Equity markets, facilitated by seemingly multi-year commitments by central banks to keep policy rates low, have reflected this strength, though gains tend to be concentrated in a few sectors. Despite this more positive turn of events, there remains real economic damage to undo, and this is perhaps most evident in labour markets where unemployment rates continue to be much higher than pre-COVID levels (chart 2). Economic activity remains well below pre-COVID levels and we still expect it will take a few quarters to recoup those losses. As this occurs, the economic adaptation will continue for sectors hit hard by the impacts of a more socially distant way of living. It is far too early to declare victory on this battlefront.
Risks remain tilted to the downside. The virus remains challenging to control as can be seen by the resurgence in many countries. We’ve incorporated some of these downside risks in our forecast, but there simply is too much uncertainty over the evolution of the virus and what measures may be put in place to deal with a rebound in the virus to properly account for that in a forecast. It is also increasingly obvious that non-virus risks remain important, notably in the US as we approach the final stretch of the election campaign. Civil strife, trade tensions and other, yet unknown but sure to happen, efforts by President Trump to sow discord in the hope of being re-elected all pose downside risks to the US and global economies.
Incorporating recent data points and events into our view, the outlook for 2020 is a bit less gloomy than in our last forecast. The rebound in economic growth in the second half of 2020 is now expected to be stronger than we thought last time around, particularly in Canada and the US. In those countries, Canada looks set to experience more rapid growth than the US for the remainder of the year, though that reflects in large measure the rebound from more stringent lockdowns north of the border. While the inflationary impulse from the pandemic is still expected to be negative, some aspects of the supply shock’s impact on inflation are starting to come into view. Unit labour costs, for instance, increased sharply in Canada and the US (in Canada’s case, the most rapid increase in almost 35 years). As we await additional fiscal resources that might be deployed in a number of countries to further support firms and households, or to facilitate the post-COVID transformation of economies, it is clear central banks will, at a minimum, keep policy as stimulative as it is now for many quarters.
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