Growth, inflation and labour market all easing
Extremely large falls in Q2 GDP for many advanced and emerging economies are likely, while in Australia we expect a large fall of around 8.5% in Q2, following the 0.3% decline in Q1.
There was a massive plunge in activity across many countries in March/April, with the notable exception of China where the fall in activity occurred earlier (February). High frequency indicators point to a subsequent upturn in activity in May and early June. Business surveys have also shown some improvement but they remain very weak. As a result, extremely large falls in Q2 GDP for many advanced and emerging economies are likely, although with activity now strengthening, there may be a (partial) bounce-back in Q3. We continue to expect that a full recovery will take a long time. Our forecast is for the global economy to contract by 3.7% in 2020 (previously 3.8%), before increasing by 6.2% (previously 6.5%) in 2021. While there is a higher degree of uncertainty around forecasts in the current environment, the extent of the declines already seen to-date combined with our expectation of a protracted recovery, points to 2020 having the largest fall in annual growth since at least the 1950s, and most likely since the Great Depression.
The pattern of growth in our forecasts is broadly similar to last month, following the integration of the Q1 national accounts and an extension of our forecast horizon to the end of 2022. We expect a large fall of around 8.5% in Q2, following the 0.3% decline in Q1. The accounts suggest that the early stage of COVID-19 impacts may have been larger than we anticipated with a significant fall in services consumption, given the significant lockdowns on activity only occurred in the last two weeks of the quarter. We expect a rebound in activity in H2 2020 and continued above trend growth in 2021. We see growth returning to around trend of 2.8% in 2022. While we see a rebound in growth from Q3, pre-COVID levels of activity are not fully recovered until 2022 and therefore we see unemployment still above 6% at end 2022 after peaking at around 8½% in the next few months. Given this protracted recovery we expect the RBA to remain on hold for an extended period with the cash rate unchanged over the forecast period and the target for 3-year yields to remain in place. We also see a role for ongoing fiscal support as existing measures wind back. We will continue to monitor business confidence which has taken a huge hit in recent months, as ongoing depressed confidence will put the recovery at risk – with investment spending and hiring intentions likely to remain weak.
This month we recorded a podcast to accompany the Forward View – Australia, giving you a 10 minute summary of our key forecasts. To listen, just click the link below.
Find out more in NAB’s World on Two Pages June 2020
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