SUMMARY

  • Risk of Retreat

The first wave of the economic recovery from the pandemic has generally exceeded expectations. Policy interventions in the form of large fiscal packages, asset purchases and government loan schemes have prevented household and business failures. Economies appeared well-positioned to recover as health-related restrictions were lifted.

But the recovery remains vulnerable to recent surges in COVID-19 infections and the expiration of government support programs in major world economies. It is increasingly likely that the pace of recovery could flatten in the second half of 2020 and beyond.

Following are our views on how major world economies will fare this year and next.

United States

  • With several U.S. states either closing down portions of their economies or pausing their reopening plans, the U.S. economy faces the risk of losing momentum. Tradeoffs that prioritize safety today will pay dividends in economic activity in the future. We expect real gross domestic product (GDP) to return to growth in the third quarter, but the economy won’t recover all of its lost output until well into 2021.
  • The June employment report revealed a continued rebound, as payrolls increased by 4.8 million. The unemployment rate has already dropped by more than three percentage points from its April peak. However, the labor market has still lost more than 14 million jobs, the labor force is three million workers smaller than it was in February, and the most recent report didn’t capture the economic effects of the fresh surge in COVID cases.

Eurozone

  • The incoming data show that activity in the region started to recover in May. Both the consumer and industrial sectors have rebounded as the eurozone economy emerged from lockdowns. But progress will be gradual; a return to last year’s output will likely take six to eight quarters.
  • The eurozone unemployment rate has increased in the past couple of months, but only slightly. Labor market support schemes, including furlough and short-term paid leave aimed at preventing layoffs, have eased the hit to labor market metrics. That said, those measures come with expiration dates. As those dates arrive, we expect the unemployment rate to gradually move up.
  • Member states have failed to agree on the €750 billion recovery fund proposed earlier this year. Even if progress is made, the fund is unlikely to offer meaningful assistance as disbursements will be part of the European Union’s seven-year budget.