The global economy appears headed for a rebound in the third quarter after the first recession in more than 11 years
JLL Research is reporting the global economy experienced a historic decline in real GDP during the second quarter, producing the first recession in 11 years since the Global Financial Crisis. Quarter-over-quarter, real GDP declined by roughly 7% in the second quarter. Forced closures of businesses by government edict, businesses operating at limited capacity, and consumers avoiding activities due to fear of falling ill, produced a dramatic decline in global economic activity. Because of the near-universal nature of the pandemic, no corner of the globe came through unscathed and many countries endured their worst quarterly contraction on record. Yet, despite the unprecedented severity, the recession should prove short, as we predicted. The economy likely reached its nadir around April and has been mounting a recovery since. Throughout the summer both hard and soft data indicated that the economy was stabilizing, poised to begin a recovery. The global economy should produce a record-breaking rebound in the third quarter. As businesses reopened (even at limited capacity) and consumers slowly began resuming some semblance of typical activity, the economy snapped back. While official GDP releases remain forthcoming, data released thus far strongly indicates that the economy should rebound at a robust pace. Growth during the quarter should reach roughly 7%, leaving the level of global GDP about 4% below the level from year-end 2019 before the onset of the recession.
However, the path forward remains beset with massive uncertainty. The global economy still faces two key risks. First, the pandemic continues to follow an uncertain trajectory. In several key countries around the world, the number of cases is trending up again. The outbreak could further intensify as cold weather returns to the northern hemisphere during fall and winter, the typical cold and flu season. That could require additional (at least partial) shutdowns of certain economies and potentially cause consumers to once again opt out of certain activities. At a minimum, outdoor dining should become more challenging and likely more limited when cold weather returns. Second, fiscal support is ending in several key countries and the appetite for further support seems diminished. Households and businesses clearly benefitted from this support, which led to increases in consumer spending and job creation. Meanwhile, the pace of recovery has clearly slowed in recent months and economic growth will likely decelerate in the coming quarters. The pace of deceleration will depend upon how these uncertainties unfold.
Loose monetary policy still supportive
Central banks around the globe continue to maintain generally loose monetary policy stances to support their economies and keep financial markets operating smoothly. Central bank policy rates remain incredibly low by historical standards, with several at or near record-low levels. Asset-purchase programs have generally proceeded apace and will likely continue for the foreseeable future. Although money supply has grown accordingly, central banks around the world seem relatively unconcerned about the potential for accelerating inflation. Experience from the previous cycle, when central banks struggled to hit target rates of inflation, demonstrates the asymmetrical risk structure in inflation targeting that exists in several key economies such as the U.S. and Japan. In fact, the recent change in policy stance by the U.S. Federal Reserve, toward targeting an average, more dynamic inflation rate through a business cycle as opposed to a rigid, static target rate, reflects the lack of concern over inflation.
Fiscal policy remains necessary
With economic growth poised to slow in the coming quarters, fiscal policy support will remain vital. The pandemic has impaired the economy’s ability to self-correct because the usual stabilizing mechanisms have not worked. In a typical downturn, the price level in the economy declines in a response to a reduction in aggregate demand. This decline in the price level typically spurs businesses to invest in productive capacity (due to reduced input costs) and spurs households to consume in response to lower prices. However, with many households unable (because of business closures or limitations) or unwilling (because of health concerns) to consume certain goods and services, then neither consumption nor investment can fully recover in a typical manner until the pandemic subsides, or at least diminishes significantly. Until then, government spending will remain critical to plugging the hole left by the private sector in several important economies.
Growth (in the U.S.) looks set to continue but at a far slower pace than the robust third quarter.
In the U.S., a strong rebound in the third quarter will belie the challenges the economy faces in the fourth quarter. Although the labor market and consumer spending continue to recover, the rate of improvement has slowed significantly in recent months, due in no small part to the expiration of fiscal stimulus for households at the end of July. Support for companies that received job funding also expired, and major companies have already signaled impending job cuts if no additional stimulus measures pass. Unfortunately, the prospect of continued fiscal support looks bleak after recent negotiations produced no progress and appeared to break down. With COVID-19 cases already rising, the risk of additional shutdowns will loom over the economy during the colder fourth quarter and first quarter months. Growth looks set to continue but at a far slower pace than the robust third quarter.
In Asia, the outlook appears mixed. China’s economy continues to recover, supported by familiar drivers in the form of domestic investment and exports. But waning government support and a slowing recovery in other parts of the world will constrain the growth rate. In Japan, after a record contraction in the second quarter, growth looks challenged heading toward the end of the year. In India, the combination of a worsening pandemic and tepid fiscal policy portend a tough recovery road ahead.
In Europe, the economic trajectory broadly mirrors that of the global economy – a relatively strong snap back in the third quarter followed by slowing growth. Thus far, the manufacturing recovery has outperformed the services recovery, with more consistent performance across countries. Rising COVID-19 case levels, particularly in some key metro areas, put the nascent recovery at risk. Furlough schemes have helped to prevent unemployment from spiking the way that it has in other countries such as the U.S. but rising unemployment remains a risk as some of these schemes expire.
Outlook and implications for the U.S.
Despite only one quarter remaining, an exact path forward for the balance of the year remains unclear. In the near term, most economies will require continued fiscal and monetary policy to help support the economy. The trajectory of the pandemic will dictate the cycle going forward, but individuals retain a lot of agency relative to typical downturns. If societies can keep the pandemic at manageable levels, then all else equal, the global economy should perform relatively well. If the pandemic intensifies and case levels rise, the economy faces a tougher road with the potential for shutdowns and consumers opting out of certain economic activities.
For the U.S., a relatively weak dollar should theoretically help with exports to other countries. Yet, the trade deficit is widening. Both exports and imports are recovering globally, but slower growth in many industrial countries, relative to the U.S., could hamper the fortunes of U.S. exporters. Capital inflows into the U.S. tend to continue during downturns, even when the U.S. is the epicenter of recessions, because of the flight to quality. We see evidence of that phenomenon in this crisis, including in commercial real estate (CRE). While cross-border CRE investment has declined, the U.S. remains a market of interest to many investors. The relative outperformance of the U.S. economy could provide support to CRE transaction volumes, especially if the U.S. economy continues to transition to recovery.