Expectations of a V-shaped global economic recovery flattened last week, giving way to more realistic U-shaped or even saucer-shaped scenarios of post-coronavirus growth.
Markets were lifted 10 days ago by the bounce back in US jobs growth in May, showing a rise of 2.5 million non-farm payroll jobs. It suggested the US economy, and by extension the world, was on course for a V-shaped economic recovery. Since then, however, the barrage of gloomier economic prognoses has been relentless, returning the emphasis to more protracted recovery scenarios and, in turn, bringing stock market rallies to an abrupt halt.
Markets should have already been cautious about reading too much into the May US employment figures. Coming after 20 million jobs were lost in two months, the rebound was encouraging but still a long way from signalling the all-clear. Payrolls are notoriously volatile statistics at the best of times, and so can be expected to be equally if not even more erratic at the worst of times, with the unemployment rate at 13.3 per cent still higher than at any other time since the 1940s. The idea that jobs will simply recover as quickly as they were lost always appeared quite fanciful; it will probably take many months – if not years – to get the economy back to where it was before the virus, a point usefully highlighted by the US Federal Reserve’s gloomy forecast a few days later.
Even before the Fed said anything, the World Bank had chimed in with its updated economic outlook forecasting the world to shrink by 5.2 per cent this year. This represents the deepest recession since the Second World War, with advanced economies set to slump by 7 per cent and emerging ones by 2.5 per cent.
The Organisation for Economic Co-operation and Development’s analysis a day later was worse as it looked at two scenarios. In the first, global gross domestic product would drop 6 per cent this year if a second virus wave is avoided, while in the second scenario, global GDP fell 7.6 per cent in a second wave followed by 2.8 per cent growth in 2021, with output not returning to pre-recession levels for at least two years.
The OECD said: “Most people see a V-shaped recovery but we think it is going to stop halfway. By the end of 2021, the loss of income exceeds that of any previous recession over the past 100 years outside wartime with dire and long-lasting consequences for people, firms and governments.”
The OECD also singled out the UK as likely to be the worst-performing, with growth falling by 11.5 per cent in its first scenario while dropping by 14 per cent under its second. As bad luck would have it, UK GDP reported for April last week already showed the UK contracting at an unprecedented 20.4 per cent month-on-month.
While the Fed left interest rates unchanged at 0.0 per cent to 0.25 per cent at its meeting last week as expected, the central bank said the economy faces considerable risks over the medium term and strongly reiterated its commitment to using the spectrum of its tools for as long as necessary to provide support to the economy. In his comments following the meeting, the Fed chairman Jerome Powell was forceful, indicating that interest rates are expected to remain at current levels over the forecast period as he said “we are not even thinking about thinking about raising rates”. The dot plot released with the statement showed that all but two members expect interest rates to remain at the current level through to 2022.
The economic growth projections released along with the statement explained why the Fed took such a dovish view, showing that its members expect unemployment to fall to only 9.3 per cent at the end of 2020 and to 6.5 per cent in 2021, with no indication of a return to pre-Covid levels of below 4 per cent.
US GDP is expected to contract by 6.5 per cent in 2020 before rebounding only partially in 2021 by 5 per cent, while inflation was forecast to remain below the central bank’s target until 2022. While the Fed did not say so explicitly, its outlook lent credence to other forecasts that recovery, when it comes, will be U-shaped at best.
Tim Fox is chief economist and head of research at Emirates NBD