Fourth quarter 2020 global macroeconomic outlook

February 2021

The lock-down of the global economy to slow the spread of the COVID-19 pandemic led the IMF to materially alter expectations for economic growth.

  • The IMF forecasts final global GDP to come in 3.5% lower in 2020, followed by a sharp 5.5% recovery in 2021.
  • In advanced economies, GDP is projected to decline by 4.9% for 2020, and recover by 4.3% in 2021, as economies reopen and vaccination progress is made.  The US was expected to fare slightly better, with an estimated 3.4% contraction in 2020 and a recovery of 5.1% in 2021.  Actual figures for 2020 showed US growth came in above expectations, contracting only 2.5%.
  • The euro-area was forecasted to take the greatest hit to growth, declining 7.2% in 2020 and recovering 4.2% in 2021.  Actual numbers also came in above estimates declining only 5.1%.  The Japanese economy is expected to decline by 5.1% in 2020, but only recover by 3.1% in 2021.
  • Growth projections are also weak for many emerging economies (Brazil, Mexico, Russia, Saudi Arabia), with China being the notable exception with expected and actual growth both coming in at 2.3%.  China is expected to see significant growth in 2021 of 8.1%.  The growth expectations are due primarily to the Chinese government’s ability to quickly impose aggressive distancing measures, largely isolate and contain the virus, and then quickly move to re-open their economy.
  • Overall inflation is projected to be slightly below long-term averages in 2021, consistent with decreased economic activity, with inflation in most developed economies expected below 2.0%.

In an effort to stem the expected significant declines in economic activity, fiscal and monetary authorities across the globe responded with immediate and aggressive stimulus measures.

  • US fiscal and monetary responses have been unprecedented.  Fiscal authorities released over $3.5 trillion in directed stimulus and are discussing the next round of support, while monetary authorities cut policy rates effectively to zero, deployed trillions of dollars in stimulus measures, backstop liquidity, and funding programs to mitigate the economic deterioration.  Monetary policymakers are actively considering additional measures, including yield curve targeting and maturity extension of QE purchases if conditions warrant.
  • Japanese authorities took measures similar to those in the US, directing fiscal stimulus where needed most, including loans to small businesses and direct stimulus to consumers, while the central bank continued, and expanded, their quantitative easing purchase program.  The Bank of Japan loosened collateral and liquidity requirements, and initiated 0% loans to businesses directly hit by the virus.  They continue to keep short-term interest rates in negative territory (-0.1%) and target a 0% rate on the ten-year government bond.
  • Countries in the euro-area launched stimulus packages targeting areas hit hardest by virus-related restrictions.  The European Central Bank also took directed measures, with targeted long-term refinancing operations for small and medium sized business, keeping rates at historic lows, and launching a 750 billion euro emergency purchase program, which was subsequently expanded to include lower-quality corporate debt.  The majority of funds from the program will be distributed to the countries and sectors most impacted by the virus, and will take the form of grants and loans.
  • Fiscal and monetary policy in China was already accommodative prior to the onset of the COVID-19 crisis, but as the pandemic developed, policymakers took further steps to support the economy.  Additional tax cuts, low-interest rate loans, and extra government payments to qualifying citizens represented the bulk of the fiscal response.  On the monetary side, policy rates were cut, repo facilities were expanded, and reserve requirements were lowered further.

We acknowledge the wide breadth of new concerns being presented by the pandemic, and among those we are considering are the following: 1) Economies opening too soon from virus-related restrictions amid uncertainty regarding new virus variants and vaccine deployment challenges, and ultimately needing to re-deploy lockdown policies; 2) Consumers permanently, or for an extended period of time, changing economic behavior; 3) Persistently high unemployment due to a significant number of companies not surviving the economic downturn, and; 4) Virus-related fears affecting the future of globalization.