World — 2020 growth forecasts improve but economic scarring to worsen

The IMF now expects the global economy to contract 4.4% in 2020, up 0.8ppts from its June estimate. Economic activity normalised faster than anticipated in the June quarter in China (where public investment drove activity), and the US and EU (where public subsidies supported household incomes).

The IMF expects China to grow 1.9% in 2020, almost twice as fast as forecast in June. Recent data confirms China’s robust recovery; GDP growth improved to 4.9% y/y in the third quarter, while imports surged 13% y/y to a record US$203bn in September. China’s outperformance has buoyed Asian exports, of electronics in particular. Increased regional trade interdependence following US-China trade tensions has supported this trend. The WTO forecasts Asia’s exports to contract 4.5% this year, compared to almost 12% and 15% respectively in Europe and North America. Export earnings in China, Vietnam, Taiwan, Singapore and Malaysia have already surpassed their pre-pandemic levels (based on a 3-month moving average). This bodes well; these countries accounted for almost half of Australia’s exports last year.

However, ascent out of this crisis will be long and uneven. Following a rebound in 2021, the IMF expects global growth to slow to about 3.5% in the medium term, owing to continued social distancing and damage to the supply potential of economies (‘scarring’). This implies an output loss relative to pre-COVID expectations that will grow from US$11 trillion over 2020–21 to US$28 trillion over 2020–25 (Chart). Further, risks abound. The virus is resurging in Europe and the US, necessitating tighter lockdowns. And progress on developing and distributing a vaccine could be slower than anticipated. This would undermine confidence and fuel financial market instability. Increased import tariffs, the ceased functioning of the WTO’s appellate body, and the spread of trade disputes to the technology sector all heighten trade risks. Rising geopolitical tensions and swelling public debt could also weigh on the recovery over the longer term.