Global Economic Outlook - Growth in the time of COVID-19


A key theme of our November Global Economic Outlook (GEO) was the decline in downside risks to growth. Since then, the two key prevalent risks have eased further, with the signing of the Phase-1 US-China trade deal and the approval of the UK-EU divorce agreement. However, the interim upward growth forecast adjustments we had made, especially for China, have been more than offset by the arrival of COVID-19.

This has changed the outlook in just a matter of weeks, especially for the short term. The hit to economic activity will be severe in China in 1Q20: As a first approximation, we have reduced our 1Q20 China GDP growth forecasts by about 2pp to 4.0% yoy. There should be a rebound once the epidemic fades, but this is likely to be only partial - we put the hit to full-year growth in the order of 0.4pp. Consequently, our global growth forecast is now lower, albeit by just 0.1pp thanks to a 0.2pp upward revision for the US.

That said, this forecasting round has felt much more like aiming for a moving target than normal. The sudden geographical spread of COVID-19 outbreaks is introducing additional downside risks not just to the countries affected but also to the global economy as a whole. The key risk is that what, at the time of writing, remained an epidemic in a few hot spots turns into a pandemic, i.e. a truly global outbreak. The risk of it doing so has clearly increased in the past few days, prompting us to lift the risk of a pandemic to 25%. This could easily knock 0.25-0.75pp off global growth in 2020.

The battle is won, the trade war's not lost

The US-China Phase-1 trade agreement has lifted a large dark cloud from the global horizon, but only partially as the vast majority of US tariffs on imports from China (about two-thirds) remain in place. They will continue to depress trade. At the same time, we regard the agreement as thoroughly problematic: it represents a decisive move from free to managed trade, it is wide open to arguments about whether agreed targets are being met and it is bound to hurt a swathe of economies that will face lower Chinese demand for their exports.

Meanwhile, global trade has continued to stabilise up to the end of 2019, but COVID-19 is practically certain to have punched a hole into trade growth at the start of 2020. The only question is how large and for how long. As the virus spreads internationally, a deeper and longer impact becomes ever more likely.

 Global growth set to slow sharply, full-year figures an imperfect guide

In terms of annual growth rates, we expect the global economy to slow further in FX terms, but on a PPP basis growth is steady at 3.0%. However, 4Q-on-4Q growth will slow substantially more sharply, especially in the US, where we maintain our call for a recession in around mid-2020, but also in the euro area. Emerging economies as a group, however, are likely to expand more rapidly than in 2019.

We believe a US recession will bring the Fed back into easing mode, which will be followed by most other central banks. That said, in the near term we do not see much merit in policy rate cuts as a response to COVID-19, except in China and perhaps South Korea. Fiscal measures are far more appropriate and efficient, in our view.

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This editorial contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of Societe Generale. This interview is dedicated to institutional and professional investors and is not deemed to be seen and used by retail investors for investment purpose. The viewers shall consult their own financial advisers to make their own appraisal.