Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Special Report: Midyear outlook
July 13, 2020 12:00 AM

Global economy on the rebound, but plenty of potholes still seen

World economies to face crucial tests in the coming months

Sophie Baker
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Credit: Casey Moore

    Karen Ward thinks the recovery ‘will be a little more stop-start, more jagged.’

    The global economy looks to be rebounding from the shortest and deepest economic shock in history, economists say.

    But markets and investors are not out of the woods just yet. Concerns remain over just how short-lived the current rebound will be, how consumer behavior will change as economies reopen and the course of the COVID-19 virus itself.

    Developed market economies began to reopen in May and June, albeit with a number of cities and towns forced to revert to lockdowns as infection rates rose. A number of emerging markets remain deep in lockdown, with daily cases continuing to rise.

    The coronavirus pandemic and subsequent lockdowns across the globe led to a bottoming out in global stock markets in March and April. The MSCI ACWI lost 32.06% year-to-date through March 23. Since then, global equities have rebounded to a -4.73% return through July 9, and up 40.22% from that March low point.

    While economists agree markets are largely through the worst of the coronavirus-induced recession, they’re still trying to figure out just what this recovery looks like, with V-, U- and W-shaped recoveries still under debate.

    “I don’t think we have a letter of the alphabet — I’ve even been through the Greek alphabet,” said Karen Ward, London-based managing director, chief market strategist for Europe, the Middle East and Africa at J.P. Morgan Asset Management. “I think it will be a little more stop-start, more jagged.”

    Assuming a second wave of infections doesn’t hit markets, the recovery might look like a “swoosh” or check mark, said Megan Greene, global chief economist and senior fellow at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School, Cambridge, Mass. Any bounce back to good-looking data has to be put into context, that it’s “growth off a really low base.”

    Ms. Greene does not see a V-shaped recovery due to the “asynchronous way that the virus is affecting emerging markets to developed markets — to have a V-shaped recovery you need everyone rebounding at the same time,” she said.

    In June, the International Monetary Fund revised global GDP forecasts downward for 2020 to -4.9%. In April, the IMF had projected a 3% contraction. The IMF’s January, pre-COVID-19 global growth forecast, was for 3.3% expansion.

    Group of 20 GDP fell 3.4% in the first quarter, compared with a 1.5% drop in the first quarter of 2009 — the height of the global financial crisis, according to the Organization for Cooperation and Economic Development. And economists think second-quarter GDP will be even worse.

    But third-quarter data is expected to look pretty good — although that projection comes with a warning not to get too complacent.

    Pent-up demand

    “What we’re seeing at the moment is an economic recovery in play — most of that has been driven by the pent-up demand that grew during lockdown,” said Seema Shah, London-based chief strategist at Principal Global Investors LLC. “We’re seeing a surge in activity, which is a good thing, and also policy stimulus is helping.”

    Sources are largely cautious about the recovery, which will be “slow and protracted. The path is at least positive. Q3 will be a strong one. … (For) Q4 we have a few more concerns. You could see a lot of that recovery losing momentum, and demand could have been satiated,” Ms. Shah said.

    Sources also cited the fourth quarter as one that will not be so positive for markets given the potential for a second wave over the winter plus other risks related to Brexit and the November U.S. presidential election.

    BNY Mellon Investment Management’s most likely scenario is that the world gets back to a pre-crisis level of spending in mid-2021.

    “Broadly speaking, we’ve got a little bit more V-like” vs. the early days of the crisis, said Shamik Dhar, chief economist in London. A V-shaped recovery carries a 50% probability, up from 35% in a projection made in March. A U-shaped recovery — redefined from a W shape in early March — where gross domestic product spending returns to pre-crisis levels in the second half of 2022, carries a 30% probability, down from 35% previously. An L-shaped recovery, where a second wave hits in the third and fourth quarters this year and there is a permanent hit to output, sits at 15%, down from 20%; and an “inflationary” scenario, where growth in the U.S. recovers more strongly than expected, inflation picks up and the Federal Reserve is forced to tighten monetary policy faster than expected, sits at 5%, down from 10%.

    There are three reasons for the upward revision to a V-shaped recovery: the data; the economic background and policy; and the course of the disease itself. “Of those, the most important we think is the course of the disease. It will ultimately decide which economic course we end up on,” Mr. Dhar said.

    And 2021 is set to bring a fresh rebound in GDP. The IMF expects global growth of 5.4% next year, revised slightly downward from the previous forecast of 5.8% made in April. That compares with its pre-COVID-19 January forecast for 2021 of 3.4%.

    “2021 will see good recoveries,” said Amlan Roy, global chief retirement strategist, senior managing director at State Street Global Advisors in London. But it’s the structural changes to society that concern Mr. Roy. “The impairment of schools, societal things, is something which will guide how future behavior works. We will need to be brave,” he said. “This crisis is affecting 7.94 billion consumers — it’s shuttering in 7.94 billion consumers from their natural consumption. And 4.2-odd billion people are shuttered out — (told) ‘don’t come back into work,’” he said.

    The change in consumer behavior is weighing heavily on economists’ minds.

    “I am quite concerned that there are many cuts, in terms of employment, to come,” said Dambisa Moyo, global economist and author, based in New York. She is worried some companies may use the pandemic as an opportunity to become more digitized, as they have “seen they can be efficient with a fraction of the staff (and) in a more devolved manner,” she said. Ms. Moyo serves on a number of corporate boards.

    The impact of the pandemic “is no longer something that can be captured by the VIX or the MOVE indexes — this is aggregated uncertainty of … companies getting affected on a variety of dimensions,” Mr. Roy said.

    Share
    Bill Butcher

    In January, P&I spoke with experts about what they expected in 2020. We're revisiting those predictions and looking ahead.

    Share
    Getty Images

    Global outlook: What we wrote: Analysts said a recession was unlikely in 2020, but the decent returns on tap from risk assets would pale beside 2019's rate-cut-driven gains.

    Share
    Getty Images

    Global outlook: What has happened: Economists said the global economy endured the shortest and deepest economic shock in history. While markets appear to have recovered, experts said investors aren't out of the woods just yet as there are still concerns about over how short-lived the rebound will be. 

    Share
    Bloomberg

    Washington outlook: What we wrote: 2020 was shaping up to be a busy year in Washington as focus turned to the second phase of retirement security legislation.

    Share
    Bloomberg

    Washington outlook: What has happened: Congress has been busy passing emergency legislation for economic relief from the coronavirus pandemic. While passing any legislation during an election year is difficult at best, there could be more retirement security legislation in 2020 to address the multiemployer pension crisis and economic uncertainty caused by the pandemic. 

    Share
    Getty Images

    Europe outlook: What we wrote: While they expect to avoid a risk of recession, European money managers and investors will not be free from other risks in 2020.

    Share
    Bloomberg

    Europe outlook: What has happened: The coronavirus has brought about a recession in Europe, which has left European money managers with less time to cope with upcoming regulatory changes.

    Share
    Bloomberg

    Asia outlook: What we wrote: Asset managers in the Asia-Pacific region will face continued pressure to cut costs in 2020 even as they ramp up operations in China.

    Share
    Bloomberg

    Asia outlook: What has happened: Asia and Asian markets felt the impact of the coronavirus first. Experts say the fallout should accelerate asset allocation trends already in place among Asia-Pacific-based institutional investors as the year began.

    Share
    Getty Images

    U.S. outlook: What we wrote: In 2020, firms will increasingly look for ways to invest in technology to improve business efficiency and client services efforts.

    Share
    Bloomberg

    U.S. outlook: What has happened: After a volatile first two quarters, markets appear to have recovered from the initial shock of the coronavirus pandemic, but there are still concerns as to how long the rebound will last. 

    Share
    Getty Images

    Hedge funds outlook: What we wrote: Hedge fund managers foresee more volatility and more investment opportunities in 2020.

    Share
    Getty Images

    Hedge funds outlook: What has happened: With few exceptions, only macro and managed futures hedge fund strategies produced positive performance in the first quarter and the launches of new hedge funds fell to the lowest level since the global financial crisis. 

    Share
    Getty Images

    Real estate outlook: What we wrote: Real estate could offer protection against economic dips, despite expectations of lower returns in 2020.

    Share
    Bloomberg

    Real estate outlook: What has happened: In March, real estate investor Tom Barrack warned the U.S. commercial-mortgage real estate market is on the brink of collapse and predicted a "domino effect" of catastrophic economic consequences if banks and government don't take prompt action to keep borrowers from defaulting. More recently, real estate consultants and some investors are considering pressing pause on certain investments due to the coronavirus pandemic. 

    Share
    Getty Images

    Defined contribution outlook: What we wrote: Some DC sponsors are tackling financial wellness by linking retirement plans to paying off student loans or creating emergency savings. 

    Share

    Defined contribution outlook: What has happened: The coronavirus has forced some defined contribution sponsors to suspend or reduce their matching programs, while many others have had  to postpone or delay new initiatives.

    Share
    Bloomberg

    Investments outlook: What has happened: While cautious about a second wave of COVID-19 cases in the U.S., industry experts see some bright spots for institutions in search of investment opportunities in the second half of the year.

    Share
    Bloomberg

    Credit outlook: What has happened: A number of managers are busy raising capital to take advantage of the current market dislocation impacting companies, real estate and infrastructure assets either now or in the future.

    Pre-existing shocks

    While the coronavirus pandemic appears to be top of investors’ minds, there are a number of “big, short-to-medium-term relevant (issues) lurking beneath the surface, but (that) are still challenging,” said Eric Lascelles, chief economist at RBC Global Asset Management Inc. in Toronto. While these issues are big, Mr. Lascelles said they “still pale into insignificance vs. the clout of COVID-19.”

    One of those issues is the U.S. election in November.

    “It is very much nearing and the better market is suggesting (Democratic candidate Joe) Biden has a good chance at it,” Mr. Lascelles said, also noting the potential for a “Democratic sweep” in Congress. “There’s a real risk to financial markets (of a) less-favorable tax and regulatory regime in four months. It’s a mounting risk worth considering,” he said.

    “I think it’s going to be a tumultuous U.S. election season,” said Mike Pyle, managing director and global chief investment strategist at the BlackRock Investment Institute, New York. There’s a “divergent outcome of policy” depending on which candidate is victorious, Mr. Pyle said.

    Economists elsewhere in the world are also concerned about the presidential election.

    “For 2020 as a whole, we are moderately more pessimistic about global GDP than consensus, as fiscal stimulus will not likely keep up with (second-quarter) levels and unemployment begins to hurt spending later this year,” said John Vail, chief global strategist and managing director at Nikko Asset Management in Tokyo. “In particular, we believe that the U.S. election will cause great uncertainty and thus weak spending by most individuals and corporations.”

    London-based economists are also thinking about the Nov. 3 vote.

    “We’re seeing more come through now in research and discussions (regarding the) likelihood of a Democratic clean sweep,” said John Roe, an economist and head of multiasset funds at Legal & General Investment Management in London. “If we do get a clean sweep, it is likely some of the corporate tax cuts of the Trump era would be reversed, which would weigh on equity markets.”

    However, BlueBay Asset Management LLP is debating the implications of the election. “But it’s hard to start thinking about positioning portfolios for that,” said David Riley, chief strategist in London. “We’re not even at the point where we have the (candidate) debates — the campaign hasn’t really intensified yet. It will be a big deal.”

    The second area to watch is Brexit, with the U.K.’s transition period set to end Dec. 31.

    “Most would concede that as time passes, Brexit risks are mounting. We’re assuming a harder Brexit than (we were at) the start of the year. We can’t completely exclude the potential for a no-deal,” Mr. Lascelles said.

    BlueBay has a “bearish bias on U.K. assets and sterling,” with Mr. Riley allocating a one-third probability to a no-deal scenario.

    In that case, the U.K. would be subject to European Union tariffs, which would be “damaging for the EU, more for the U.K. — it would meaningfully weaken the recovery for the U.K. in 2021.”

    That’s not Mr. Riley’s base case, though. He thinks a deal will be reached: “Not a good deal, but not a cliff edge. There’s a lot to play for, but I think the focus will start to increase … as we come out of the summer.”

    Much of the post-coronavirus outlook is also based on the actions of central banks and governments. Over recent months, major central banks have injected trillions of dollars into the global economy, while governments have put in place schemes designed to keep households and businesses afloat.

    The big question for economists is what major central banks choose to do next — if anything.

    “I think it continues to be the case that the Fed is pretty strongly disinclined to move into negative territory,” BlackRock’s Mr. Pyle said. “The big conversation in the U.S. is the degree to which, either explicitly or implicitly, a form of yield-curve control would be the principal” response.
    BNY Mellon puts about a one-fifth probability on the Fed moving to negative rates. “But that will only happen if there’s another shock, and only” in the firm’s W/U or L scenarios, which carry a total 45% probability. “There’s probably a bigger chance that the market thinks the Fed will be forced into negative interest rates, but it will fight that and use other methods like yield-curve control or more (quantitative easing),” Mr. Dhar said.

    In the U.K., there was “reticence to go to negative rates. … I think that’s dampened a lot,” LGIM’s Mr. Roe said.

    Central bank actions

    Central bank actions have avoided the crisis morphing “into something more systemic — they did a great job,” said Michael Herzum, head of macro and strategy at Union Investment Institutional GmbH in Frankfurt. Mr. Herzum expects to see more quantitative easing and forward guidance.

    And central banks and governments have more firepower at their fingertips. “In the sort of traditional economics playbook, and traditional paradigm, the answer would be no,” they have no further ammunition, Ms. Moyo said. “But very crucially we’re now in … a new world order and anything is possible. We’ve seen the (Bank of England), Fed and (European Central Bank) buying corporate bonds. We’ve seen massive bailouts. Do they have room? Yes.”

    BlueBay’s Mr. Riley agreed, adding that there is “no limit on how big (central banks) could grow their balance sheets” and noting that the Bank of Japan’s and Swiss National Bank’s balance sheets are bigger than their countries’ GDPs, at more than 100% for Japan and 125% for Switzerland.

    Conversely, the Fed’s balance sheet is around 30% of GDP and the ECB’s about 40%. “On that basis, the Fed and the ECB could buy a lot more assets if they wanted to. But they may well have to extend the range of assets,” Mr. Riley said.

    On the government side, PGI’s Ms. Shah said a key concern is whether they will “be willing or able to continue rolling out these fiscal support packages.”

    But this fiscal side of policy “is where it’s mainly at right now. The monetary side has worked and is a blunt tool — the fiscal side is the bigger question: Is it sustainable, what are the long-term consequences?” Mr. Lascelles said.

    Related Articles
    Crisis speeds up threats that were expected years from now
    Future is looking worse for those most vulnerable
    Election in sight, but focus stays on secure retirement
    Recommended for You
    Sonja Laud
    European firms in regulation limbo
    Future is looking worse for those most vulnerable
    Future is looking worse for those most vulnerable
    Mike Volo
    Pandemic has DC sponsors holding off on plan upgrades
    Private Markets
    Sponsored Content: Private Markets

    Reader Poll

    August 10, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    The market opportunity in U.S. residential mortgage-backed securities
    Credit Indices Evolve with Enhanced Data Inputs
    Hedge Funds 2.0: Back to the future
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Crossroads: Politics, Inflation, & Bonds
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit