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The Global GDP Forecast at Renewed Risk

Posted: Tuesday, January 5th, 2021

Estimated Reading Time: 2 minutes

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The world’s economy took a big hit in 2020. The pandemic triggered an unprecedented recession, making it difficult to consider an accurate global GDP forecast for the year ahead.

Only one trading day into the new year and some of the major economies in the world announced tougher lockdown measures. Germany extended its lockdown until the end of January 2021. Also, the United Kingdom announced a full lockdown, with schools closing and limited mobility.

The fear is that the new virus variant that spreads much faster will suffocate the health system. Indeed, that is already the case in Germany and the U.K., forcing governments to take unpopular decisions.

Global GDP Forecast

From an economic perspective, the January lockdowns were not considered. As such, the risk is that the global GDP forecast projected by most investment houses and organizations are way overestimating economic growth.

JP Morgan Global GDP Forecast Projected at 5%

A study by JP Morgan released in December of last year sees the global GDP forecast at 5%. The GDP growth in the United States is seen below the one in the Euro area, at 3.3% vs. 4.6%. Unsurprisingly, China leads the way with 8.6%, as it contained the virus’ spread with more success.

Vaccines fueled optimism. From the moment their efficacy was announced back in November last year, the markets saw the end of the pandemic in sight. While that may be the case, the road ahead is full of uncertainties.

The risk here is that the financial markets’ recovery is well ahead of the economic recovery. Effectively, it means that the global GDP forecast is at risk of a downward revision, especially since the new lockdowns were not envisioned.

Regional Lockdowns

Last year the WTI oil price settled below zero for the first time. It happened in April, right after the maximum global lockdown ever registered on April 6th.

This time is different. Because some parts of the world had more success in suppressing the virus (e.g., Australia, New Zealand, Asia-Pacific in general), we are far from seeing similar lockdown levels.

Yet, a big chunk of the global growth comes from the developed world, especially the largest economies in the world – i.e., the United States, the Euro area. With unemployment at elevated levels and central banks already in full money printing mode, each month that the economic growth stalls brings more pain in the future.

Next Friday’s NFP report points to the sixth month of decelerating payroll growth. The Bloomberg median estimate for the jobs data in December of last year is just 50k.

The pandemic brought a global recession. However, the way out of it differs from country to country and region to region. When the two largest economies in the world still suffer, the other ones cannot outperform for a long time.

Unless that changes, we are in for a huge global GDP growth disappointment in 2021.

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