SINGAPORE (July 14): The world economy has begun to rally somewhat due to the re-opening of economies in several countries, but the analysts at Fitch Solutions aren’t fooled. With several countries including the US and China imposing a second round of localised lockdowns and even closing internal borders in the case of Australia, a return to unemployment could await the global economy as intermittent locking and unlocking saps momentum from the world’s nascent recovery.  

While Fitch reduced its global growth forecast slightly from 3.6% to 3.9% since June, it has been the first time in months that the research house has been able to make upward revisions to their growth forecasts. The analysts believe that risks are starting to become more balanced compared with several months ago due to global re-opening, though they admit that considerable downside risks continue to plague the Covid-19 economy. Expansionary fiscal and monetary policy is likely to continue into the medium term. 

Despite growing Covid-19 cases -- especially in the US -- Fitch believes that people will learn to live with the increased health risks and there exists little political will to renew nationwide lockdowns as governments attempt to support their flagging economies. Nevertheless, there remains the possibility of localised lockdowns taking place as countries look to balance the need for economic recovery with public health concerns, resulting in a bumpy and uneven recovery. 

“Figures from the restaurant sector show that the number of diners visiting US restaurants has stalled as infection rates rose in recent weeks,” notes Fitch’s commentary yesterday. Fears of a second wave of infections combined with a weak recovery could see another wave of job losses by businesses since profitability would come under pressure, they add, systaining unemployment for a sustained period. This would further impact private consumption and headline growth, worsening the cycle of recession brought on by the pandemic. 

Worse, the global uncertainty is compounded by significant geopolitical and political risks in the coming months. Should the Presidential Election results in November be disputed, says Fitch, global financial markets could find themselves rattled and thus weigh on growth. US-China tensions could also further worsen economic performance as relations between both powers sink ever further into acrimony. 

A chill in the Global North
Fitch has revised its 2020 growth forecast for developed markets (DM) down from -5.4% to -5.1% on the back of a weaker than required economic recovery in 3Q2020, which is unlikely to offset the losses in 1H2020. While the composite Purchasing Managers Indices (PMI) in June rose across DMs, they remain in contractionary territory and are unlikely to have bottomed out. 

Despite improved business optimism arising from a lifting of lockdowns, many businesses continue to assess the macroeconomic conditions as poor, possibly leading to reduced corporate hiring and investment activity in future. Consumers are therefore likely to remain bearish about the future amid high unemployment and uncertain incomes. Amid this atmosphere of pessimism, many households are postponing major purchases over the next twelve months. A consumer-led economic rally in 3Q2020 is therefore unlikely to take place. 

DM woes are only compounded by trade tensions between the US and the EU, which receives far less attention than the US-China trade dispute. The Office of the US Trade Representative (USTR) has initiated a formal review on whether to raise tariffs on European exports previously targeted as part of the Airbus-Boeing trade dispute, as well as to place new tariffs on unaffected European goods. The WTO has allowed the US to legally pursue such measures in a favourable ruling in October last year. 

Empowered by the global trade body, the US is likely to use the threat of tariffs as a bargaining chip in trade negotiations against the EU despite economic damage from Covid-19. “We believe this to be a credible threat – albeit with a low macroeconomic impact due to the low volume of trade likely to be affected,” says the Fitch report. More optimistically, however, the EU and the UK, which left the regional bloc in January, have taken a step towards a trade deal following a conference between Prime Minister Boris Johnson and EU heads of government in June, though the risk of a catastrophic “no-deal” Brexit remains squarely on the cards. 

Asia leads emerging markets
Fitch also downgraded its growth forecasts for emerging markets (EM) in 2020 from -1.5% to -1.7% in July, though this represented a much smaller change than previous months. The research house has cheered, however, of recent data highlighting some signs of stability. The risks to its forecast are no longer completely weighted to the downside, they report. 

“It now seems clear that swift action by central banks in both EMs and DMs has allowed the global economy to avoid a financial crisis, at least for now. The spread between EM government bonds and US Treasuries narrowed over the past month after spiking earlier in the year, reducing financing pressure,” says the research house. While many EM debt loads remain large, swift action by the World Bank and the G20 – which ramped up their efforts in July to cut debt servicing payments – has soothed investor fears in EM.

Asia is in pole position for EMs despite a slight downward revision in forecasts for Thailand from -4% to -5.4% growth, with Fitch predicting 0.1% growth in 2020. This has been driven by relatively strong growth figures from the Chinese economy, which is expected to see positive growth of 1.1% in the coming year - the only major economy to expand in 2020. Countries that have successfully controlled Covid-19 such as China and Taiwan look well-placed to perform strongly in 2021 compared to other less successful countries like India and Indonesia, which may face second waves of the pandemic. 

This struggle to cope with Covid-19 has been identified by Fitch as the main downside risk for EMs. With infections jumping in Latin America as well as low-income EMs in Africa and Asia, economic recovery could be a long and difficult road. Nevertheless, despite the severe human tragedy of Covid-19, some of the economic effects are easing, says the research house, as EMs begin to ease lockdown rules in July, with a repeat of economically costly lockdowns unlikely going forward.