According to the OECD's forecasts, it will take at least two years for output in the global economy to return to its pre-pandemic level with the recovery to be slow and vulnerable to becoming derailed if remaining containment measures and tracing measures ultimately prove to be ineffective. The group foresees a host of macroeconomic impacts as a result of the pandemic with hits to incomes, employment and investment. Further, there are risks around the productive capacity of economies going forward from the threat of company insolvencies, vulnerabilities in emerging markets and a focus on resilience that could see supply chains become more domestically focused. Looking at the detailed forecasts, the outlook is sobering with growth seen contracting most heavily in the UK (-11.5%) and across the euro area (-9.1%), while in the US a 7.3% fall is forecast this year with more moderate declines anticipated in Japan (-6%) and Australia (-5%).
The other major highlight from offshore this week was the US Federal Reserve's latest policy meeting. There were no surprises from the FOMC in leaving policy settings unchanged at this meeting. For the first time in 2020, the Committee published an updated set of projections in which the 'dot plot' containing individual members' estimates of the path of interest rates pointed to no change from the current 0-0.25% setting for at least the next couple of years. The median call on GDP was for a contraction of 6.5% in 2020 with the recovery to be drawn-out through to 2022. At the post-meeting videoconference, Committee Chair Jerome Powell reiterated that the actions taken by the Fed since the onset of the crisis had been aimed at supporting the flow of credit to businesses and households and mitigating risks of illiquidity that had so beset the markets back in March, while also noting that the current pace of asset purchases would be maintained at $80bn/mth on Treasuries and $40bn/mth in agency mortgage-backed securities. On the prospect of introducing a form of yield curve control, Chair Powell said that the Committee had not reached any conclusion, and indeed it was an "open question" as to whether such an approach would complement its existing tools.
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In Australia this week, the focus was on the latest business and consumer surveys, with both providing support to the thesis that the low point for sentiment and economic activity occurred between March and April when social distancing restrictions to slow the spread of COVID-19 were at their most stringent. As those restrictions started to be gradually eased from May conditions appear to have improved and that trend could be reasonably expected to continue given that there is still some way to go in the reopening of the economy, which in itself is occurring earlier than had widely been anticipated just a couple of months ago. For now, this provides a sense of optimism that the recovery is gaining some traction. But, caution should be exercised in trying to extrapolate this out too far because the bigger picture is the nation is now in the midst of its first major economic downturn since the early 1990s and just how businesses, households and policymakers will look to navigate through that unfamiliar environment is highly uncertain.
In terms of businesses, the NAB's Business Survey for May showed an improvement in confidence (from -45 to -20) and conditions (from -34 to -24), though both are still at very weak levels with the former at its lowest since the 1990s recession and the latter around GFC lows (see chart of the week, below). Since the onset of the pandemic, the deterioration in conditions has been broad-based across industries with the services sectors hit the hardest. In May's report, though remaining heavily negative, the conditions sub-components improved; trading (-31 to -18), profitability (-35 to -19) and employment (-34 to -31). In terms of the outlook, the lead indicators remain unequivocally weak across forward orders and capacity utilisation and this will clearly constrain sentiment, investment plans and hiring intentions moving through 2020.
Chart of the week
