Head of Macroeconomic Research
Summary: Yesterday, the IMF released its latest report on the global economy and the impact of the COVID-19 crisis, updating previous estimates published in April. Without much surprise, the IMF predicts a deeper contraction in global economy this year with recession reaching -4.9% followed by a weaker rebound next year at +5,4% vs prior +5,8%. France is ranked among the worst performing economies in 2020, with a GDP drop reaching minus -12.5% - which seems a bit too pessimistic considering that France suffered less from lockdown than initially anticipated.
The main conclusions of the report:
IMF WEO Forecasts (April)
IMF WEO Forecasts (June)
The expected impact of the crisis on the global level of debt
Comment:
The IMF WEO report unveils a more realistic outcome of the world economy going down in 2020 and 2021 than the April report. However, forecasting has been proved to be very difficult in this crisis. It explains why there is so much divergence between economic forecasts. For instance, based on the 74 GDP forecasts available on Bloomberg, which includes the latest IMF forecast, the current forecast spread among analysts for China ranges from -3% to +3.5% this year. This major divergence is mostly explained by the fact economic models are not able to integrate the pandemic factor and assess precisely hysteresis effects linked to the crisis.
However, the report is a useful reminder that the crisis will be much deeper than what markets are assuming and that the scenario of a V-shaped recovery is not a done-deal considering the numerous downside risks to growth. The recovery is likely to be very slow and uneven with an increase of NPL that could destabilize the banks from H2 this year, an explosion of deficit that will force central banks to inject liquidity on a quasi-permanent basis, and an unavoidable increase in unemployment when extended indemnity programs to save jobs will end.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
