As lockdowns ease and the economy opens up globally, certain countries could be on the path for an economic recovery earlier than expected, according to asset manager Vanguard.
Economies are beginning to recover from the effects of the Covid-19 coronavirus, but they are still a long way away from their pre-pandemic levels.
As such, the asset manager expects global trade will continue to contract into the third quarter.
However, it highlighted signs that economic growth is starting to pick up sooner than expected in the US, China, Australia and the eurozone.
“We are encouraged by recent high-frequency data readings, including in the face-to-face industries most vulnerable to the Covid-19 pandemic,” analysts at Vanguard noted.
It forecasted Japan’s economy seeing a moderate rebound, but warned the UK faces a risk of a second wave of infections and return to lockdown, as well as a no-deal Brexit.
This year the US entered into a recession, which Vanguard predicted was “likely the deepest economic contraction on record”.
The asset manager noted: “We also expect the recession to be short-lived – in fact, the shortest ever – with recovery likely starting in the third quarter.
“There are already some recent signs that US economic activity is picking up – such as a stronger-than-expected US jobs report and data showing that retail and food services sales rose 17.7 per cent, both covering May.”
Vanguard’s economic outlook for the US in 2020 included a contraction of 7 to 9 per cent, and a second-quarter contraction as deep as 30 to 40 per cent.
However, it anticipates positive growth rates in the third quarter with growth potentially reaching double digits in the second half of the year.
Performance of China and the US indices in 2020
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Source: FE Analytics
In China, Vanguard said that data suggests the country’s return to growth may occur sooner than expected, “perhaps as soon as the second quarter”. Its full-year growth outlook remains unchanged at 1 to 3 per cent because it expects China’s export industries to suffer a greater external demand shock during the second half of the year.
The asset manager said: “Face-to-face service activity remains well-below pre-Covid-19 levels and could experience a further setback with news of a recent disease outbreak in Beijing.”
However, it highlighted the country’s infrastructure investment, which is up 11 per cent year-on-year, describing it as “a bright spot”.
“Property and auto sales have also rebounded strongly, although retail sales remain in negative territory, down 2.8 per cent,” the asset manager noted.
Elsewhere, the eurozone economy contracted by 3.8 per cent in the first quarter and Vanguard expects it to contract by around 20 per cent in the second quarter before the economy begins to recover in the second half of the year.
“The spread of the virus has eased considerably in Italy, France, Spain and Germany, and high-frequency data is revealing increased economic activity,” Vanguard explained.
“Our outlook for a full-year euro-area economic contraction of 11 to 13 per cent is unchanged.”
The global asset manager also praised the proposed €750bn ‘Next Generation EU’ fiscal response to the pandemic.
“The programme, led by France and Germany, offers grants and loans to regions and sectors hit hardest by the pandemic and is an important first step toward a fiscal union,” it said.
In the UK, GDP fell by 20 per cent in April, and Vanguard expects a full-year contraction in the range of 8 to 10 per cent.
“We believe the UK faces a greater risk of a second wave of infections and a potential return to lockdown due to a relatively earlier lifting of containment measures.”
“In the absence of a trade deal by the end of the year, future trade will be conducted under broad World Trade Organization rules, a situation Vanguard views as akin to a ‘no deal’ Brexit that could increase trade-related costs and initially cause trading disruptions.”
Performance of UK and Europe ex UK indices in 2020
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Source: FE Analytics
In Australia, Vanguard’s outlook for economic growth in 2020 is still a 3 to 5 per cent contraction, but it is seeing improvement in economic data.
“High-frequency data reveals a faster pace of pickup in economic activity than expected,” the asset manager said.
“Data also showed the country’s GDP contracting by less than expected in the first quarter, with net exports rising on the back of increasing commodity prices and imports of capital and consumer goods falling.
“The first quarter captured only a small part of the Covid-19 lockdown restrictions, however, and we expect a much weaker GDP reading, around negative 6 to 8 per cent, for the second quarter.”
In Japan, the economy contracted for a second month in a row in the first quarter and Vanguard believes it will continue to contract in the second quarter by around 8 per cent. But there will be a moderate rebound in the third and fourth quarters, the asset manager forecasted, resulting in full-year GDP to contract by around 3 to 5 per cent.
Finally, the asset manager highlighted the International Monetary Fund’s prediction that emerging markets collectively will contract by 1 per cent in 2020, with emerging Asia bucking the trend with growth of 1 per cent.