July 2020

Special Report • Global Economic Outlook

Untamed
Virus
Uncertain
Recovery
 Contents

UNTAMED VIRUS, UNCERTAIN RECOVERY:

GLOBAL OUTLOOK • BLOOMBERG ECONOMICS

Introduction
2 Global Outlook
Goodbye, “V” for victory.
Hello, “W” for worry
4

Now comes the hard part:

Lessons for policymakers
7

For 30% of the unemployed,

joblessness could be long term
9

Americas Europe
A short thrill ride ends The coronavirus exposes
with a thud for the U.S. Europe’s economic divide
12 27

The misery index looks The U.K. crawls out

lousy for Trump of a deep hole
14 30

Heat map of the Americas What Sweden reveals about

16 a post-lockdown world
33
Asia Heat map of Europe
35
Why China can’t recover
when the world is still sick
18
Emerging Markets
How a Biden presidency could From high-risk returns
reshape U.S.-China relations to return-free risks
20 37

No Olympics as Japan Africa’s debt threat

races to recover 40
22
Bloomberg Economics’
Heat map of Asia Global Forecasts
25 43
Introduction

Six months ago, Covid-19 wasn’t on

anyone’s radar. Three months ago,
there was hope the virus could be
quickly contained. Now it appears
all-consuming. Some major
economies face an unchecked
outbreak. Those that have bent the
curve are discovering that in an
interconnected global economy, no
one recovers till everyone does.
Bloomberg Economics is dropping
its estimate for global growth in
2020 to –4.7%, the lowest on record
since World War II. With risks
tilted to the downside, that might
not be low enough.

2 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS

Global
Outlook
Global Outlook
Goodbye, Hope and Clarity.
Hello, Gloom and Confusion
By TOM ORLIK and BJÖRN VAN ROYE
Hopes for a V-shaped recovery required a number of conditions
to be met. The novel coronavirus needed to come under control
in the second quarter so lockdowns could end. Massive stimulus
needed to move quickly into place, replacing lost income and
preventing a scarring recession.
Many major economies haven’t met those conditions. Those
that have face a drag from the rest of the world. Our expectation
is for a stepped recovery. Disease or not, relaxing lockdowns will
mean a significant bounce in the third quarter. After that, labor
market fallout and post-pandemic caution will slow the progress
back to economic health.
Our baseline forecast (below) sees 2020 global gross
­domestic product contracting –4.7%, down from –4% in our last
round of forecasts, and, before the virus hit, expected growth of
3.3%. Output doesn’t return to its pre-pandemic peak until the
second quarter of 2021.
In our pessimistic scenario, the pandemic runs longer, high
unemployment and business bankruptcies mean a slow recovery,
and residual social distancing limits economic activity. In that
scenario, global output for 2020 contracts 6.7%. Output recovers
to its pre-virus peak only in the fourth quarter of 2021.
With the pace and depth of the recession rendering many
traditional indicators out of date before they’re published,
Global Growth: Evolution of a Forecast
World GDP growth and forecasts, year-over-year change
Actual Pre-pandemic projection
March projection April projection June projection
Forecasts
Q1 2016
Source: Bloomberg Economics
4 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS
Bloomberg Economics has used a set of alternative, high-frequency
numbers—gauges such as electricity demand and traffic conges-
tion—to create daily activity indicators across major economies.
Output collapsed in most major economies in March, began
a slow recovery in April, and accelerated in May (below). In June
some economies already appear to be losing steam, with activity
still well short of pre-virus levels. Those common features mask
Daily Activity
Index of daily activity, January 8 = 100
U.S. Brazil Germany France Italy U.K. China India Japan
125
100
75
50
1/8/20 6/19/20 25
Sources: Google.com, Apple.com, Indeed.com, Moovitapp.com, Shoppertrak.com, German
Federal Statistical Office, Bloomberg NEF, Bloomberg Economics
significant differences. China and Germany have regained a lot of
ground; the U.K. hasn’t.
What happens to global growth in the second half depends
on three factors: when the virus gets under control; whether suf-
ficient stimulus is in place; and to what extent post-pandemic
10% caution from households and businesses restrains activity.
In our last forecast, it was at least plausible to assume the
outbreak could be brought under control in the second quarter.
If others could follow China’s lead, a brief period of intense controls
0 would bring cases down to a manageable level. Lockdown condi-
tions could ease and activity recover. As the following chart shows,
that view now appears wildly optimistic.
For the foreseeable future, the messy reality looks to be
Q4 2021 -10 uncontrolled outbreaks in some countries, with sporadic local
outbreaks everywhere else. Countries that have controlled the
virus and are ready to get back to work face a drag on demand
from those still under lockdown.
 Global Outlook

Virus Daily Case Count Group of Seven Policy Moves

Confirmed cases of Covid-19 Policy response

U.S. Brazil Canada Germany France Italy Partial Adequate
U.K. Russia China India Japan

2m Monetary Fiscal

Rates cut to 0-0.25%. $2.9t stimulus

U.S.
Unlimited asset purchases. (15% of GDP)

Short-term rate at -0.1%; 10-year yield target at 0%,

1 with no limit on JGB purchases. ¥234t stimulus
Japan
REIT and ETF purchases doubled. (42% of GDP)*
CB and CP purchases more than tripled.

€220b stimulus
Germany ECB deposit rate at -0.5% already testing effective
1/29/20 6/16/20 0 (6.6% of GDP)
lower bound.
€57b stimulus
Sources: Johns Hopkins University, Bloomberg France Asset purchases expanded by €120b by yearend.
(2.6% of GDP)
Pandemic Emergency Purchase Program to buy €1.35t
in bonds. €75b stimulus
Italy
(4.2% of GDP)
The outlook for control of the virus has deteriorated since
Rates cut to 0.1%. £189b stimulus
the last round of forecasts. The economic policy response has U.K.
Purchase of £300b in bonds. (9.2% of GDP)
exceeded expectations, albeit with a clear divergence between
Rates cut to 0.25%. C$324b stimulus
the fiscal-space haves and the stimulus-short have-nots: Canada
Program to buy C$5b in government bonds a week. (14% of GDP)
• Most advanced economies are doing what’s required. In
the U.S., the Federal Reserve has lowered rates to zero and *Package includes existing measures.
unleashed a barrage of unconventional policies. A divided Congress Source: Bloomberg Economics
found enough common ground to provide stimulus worth about
15% of GDP. In Japan and much of Europe, the pattern is the same.
• China, which in 2008 wowed markets and steadied growth
with an enormous credit splurge, this time has taken a different transport, and other contact-intensive sectors. The labor market
approach. Stimulus is smaller, with less positive spillovers to the reallocation shock may be significant, with as many as 30% of the
rest of the world. Fiscal policy is doing the heavy lifting. newly unemployed struggling to find work.
• In many other emerging markets, policymakers are either • The experience in Sweden, where the government’s
unwilling or unable to provide the required support. High borrow- response to the virus has relied largely on voluntary changes,
ing costs and dependence on foreign funding constrain stimulus. suggests that even after the lockdown ends, the ceiling on ­activity
As for restraints on the recovery, our view remains that in could be about 5% below the pre-virus high.
contrast to the 2008 financial crisis, the virus recession doesn’t Pulling those pieces together, we see a stepped recovery.
reflect underlying imbalances. Countries that get the virus under As lockdowns ease in the third quarter, businesses reopen, and
control quickly and have adequate stimulus to replace lost income employees return to work, easy gains will lead to rapid acceleration.
should see a relatively rapid initial rebound. In the fourth quarter, with a longer slog to replace jobs lost to
That doesn’t mean there will be a swift return to pre-pandemic post-pandemic restructuring, as well as a lid on activity without
normalcy. a vaccine in place, the pace will slow.
• Absent a vaccine, post-pandemic caution may lead to • In the U.S., growth for the year comes in at –6.5%, down
changes in consumer behavior, which is bad news for retail, ­hospitality, from 2.3% in 2019 and more than twice as bad as the –2.5% drop

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 5

Global Outlook

• For other emerging markets, unchecked virus outbreaks,

Growth Forecasts for the Group of 20 inadequate stimulus, plunging demand for exports, capital
­outflows, and crumbling commodity prices add up to a deep down-
2020 GDP growth forecast turn and faltering recovery. For India, Brazil, Russia, and South
Pre-pandemic Current Africa, our forecast is for 2020 growth of –10.6%, –6.4%, –6.1%,
and –9.0%, respectively.
-12% - 6% 0 6% A contraction of 4.7% in the global economy is a disastrous
outcome, dwarfing the 0.1% drop in 2009. It’s also, in a sense, a
China
best-case scenario, embedding optimistic assumptions about
Indonesia
the trajectory of the disease and pace of recovery. Bloomberg
South Korea
Economics has also considered a more pessimistic scenario.
Australia
In different combinations for different countries, the down-
Japan
side forecast includes first outbreaks that rage longer, second
Turkey
outbreaks requiring a return to partial lockdowns, and more dam-
Saudi Arabia
aging recessions, with higher unemployment and increased busi-
Germany
ness bankruptcies leading to a slower recovery. For China and the
Russia
U.S., trade hostilities will resume, with average tariffs rising from
U.S.
about 20% today to about 30% at the start of the fourth quarter.
Brazil
Put that together, and global GDP contracts 6.7% in 2020 and
Canada
barely regains its pre-virus level in the fourth quarter of 2021 (below).
Mexico
Could things get that bad? The history of forecast revisions in the
Euro area
age of Covid-19 shows even the bleakest forecasts sometimes aren’t
South Africa
bleak enough. —With assistance from Richard Marquit
U.K.
Argentina
France
India
World GDP Level Under Baseline and Pessimistic Scenarios
Italy

Source: Bloomberg Economics World GDP level, Q4 ’19 = 100

Actual June forecast Downside forecast

Forecasts
during the great financial crisis. We assume a further round of
fiscal stimulus hitting in July. 104
• In the euro area, we expect an 8.8% contraction. Extraor-
dinary efforts by the European Central Bank, a move toward fed- 100
eralizing fiscal stimulus, and outsize support from Germany are
all positives. They won’t prevent a crunching contraction, with 96
cash-strapped Italy and Spain underperforming.
• In China, the economic shock from the virus came earlier 92
and has been contained more quickly, opening the path to a
­speedier recovery. Even so, with a drag on demand from the rest Q1 2016 Q4 2021 88
of the world, we put growth for the year at just 2.1%. We don’t
Source: Bloomberg Economics
think the U.S. will move on tariffs. If it does, that would be an
added drag.

6 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS


Now, for the Hard Part …
By STEPHANIE FLANDERS
“FILL THE HOLE.” THAT WAS THE FIRST commandment for p
­ olicymakers
at the start of the Covid-19 crisis: Work out the short-term hit to
households and businesses from locking down your economy,
then match it. How the support was designed mattered less than
the amount and how quickly the money went out the door. The
job then was simply to keep the economy afloat. Managing the
recovery will be a lot harder.
Many advanced economies rose to the first challenge
­reasonably well. Their fiscal and monetary support has largely
matched or exceeded any short-term hit (see chart). Among
emerging-­market countries, China and Indonesia managed the
same feat. Other emerging markets came into the crisis weaker,
and their response has fallen far short. Without more global
support, they could suffer a permanent hit.
Even rich governments with ample capacity to borrow on
world markets and credible, supportive central banks are going
to find decisions getting more difficult. Mistakes could prove cost-
lier. This leads to a new commandment for the next phase of the
crisis: Don’t create extra obstacles to recovery on top of those
caused by Covid-19.
Central bank governors and finance ministers can’t do much
directly to prevent a second wave of infection. The timetable for
moving out of lockdown and loosening social distancing guidelines
largely isn’t up to them. All of that will have a huge impact on the
shape of the recovery. But there’s still plenty that economic
­policymakers can do to improve the outlook—or make it worse.
Removing support too quickly is an obvious mistake to avoid.
Where monetary policy is concerned, there seems little risk of
that in 2020. The major central banks are all expected to maintain
their exceptional support to banks and the broader economy at
least through the end of 2020.
Some have suggested inflation is more likely now than after
the global financial crisis. That may be true. But deflation is still
enemy No. 1. Current market expectations are for annual inflation
in the developed economies to average about 1.5% over the next
five years. Undershooting that level by 1 to 2 percentage points
would be catastrophically worse for the global economy than
SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS
Global Outlook
overshooting by a similar amount. Central banks, especially the
European Central Bank, should make this crystal clear in their
messaging about policy.
Managing the fiscal side of the recovery is more complicated.
It’s not sustainable for governments to maintain the same level of
support until their economies get all the way back to where they
were. This isn’t a matter only of what’s affordable, though even
the U.S. probably can’t run a budget deficit of more than 15% of
gross domestic product indefinitely. The deeper issue is that many
of the Covid-19 stimulus packages weren’t designed to “stimulate”
the economy at all. They were meant to keep everything on hold.
That’s the right thing to do during lockdowns. It could also be
helpful in the early recovery phase if, by protecting the incomes of
furloughed workers, you’ve put money in their pockets that they’ll
spend. But you can’t afford to discourage employers from bringing
people back to work in sectors that might otherwise be on the mend.
This is critical for the U.K., where a temporary job retention
scheme is paying most of the wages of almost 9 million people—
25% of the country’s workforce. At least some of those people
would probably be working part time if the program were better
designed. Introducing more flexibility, beginning in August, will
better support the recovery. It’s also made the scheme easier to
extend if the return to work takes longer than hoped.
In theory, paying unemployed U.S. workers extra benefits,
which in some cases amount to more than 100% of their previous
wage, could also stand in the way of the recovery by discouraging
them from looking for a job. But these federal top-ups are due to
expire in July and will probably be lower if renewed. The much
larger risk for the U.S. in the second half of 2020 is that paralysis
in Congress will lead to federal support for households being
removed too quickly—just as states cut spending and lay off
workers to meet legal mandates to balance their budgets.
An early end to business support programs seems less likely.
As we move through the initial bounce-back phase, there will be
greater concern that these are keeping “zombie companies” afloat
and discouraging important adjustments. This has long been an
issue for Europe and Japan. It’s surely a greater risk now in the
7
Global Outlook

Filling in the Holes: G-20 Income Shocks and Fiscal Support

Income gap as a percentage of 2020 GDP

Fiscal response* as a percentage of 2020 GDP

0 4 8 12 16%

India†

Italy

France

U.K.

South Africa
U.S. than before given the sheer scale of cheap liquidity to
­businesses, either directly through federal loan programs or via
Argentina
the Federal Reserve’s promise to buy corporate debt.
More investment-grade debt—a stunning $1 trillion—was
Euro area
issued by U.S. companies in the first 50 days of 2020 than in the
first 11 months of 2019. Encouraging even healthy companies to
Mexico pile up more debt isn’t healthy long term and risks making it that
much harder to tighten monetary conditions later. Short-term
Canada grants and/or more equity-like support would be better. But it’s
not the way most governments have gone.
In an ideal world, governments would pursue a twin-track strat-
Brazil
egy by offering targeted support to the 5% to 10% of the economy
worst hit by social distancing, and more traditional safety nets for
Russia
everyone else. But drawing the line between the two will be tricky.
The longer social distancing is in place, the greater the
U.S. chance that businesses will find ways to adapt. Governments need
to encourage this kind of adjustment while not forgetting the
Turkey corners of the economy—live theater, parts of the hospitality
industry—that can’t operate while Covid-19 remains a threat.
To invest in the long-term health of the economy, not only
Germany
will the most affected sectors need careful support, but the worst
affected people will, too. Bloomberg Economics’ analysis of the
Saudi Arabia
scale of the reallocation shock, plus what we know about the
long-term costs to younger workers of being unemployed at the
Indonesia start of their careers, highlights the importance of imaginative
training and retraining programs for young people affected by the
Japan crisis. These could ultimately be just as important as propping up
ailing companies.
Getting all these judgments right will be difficult—much
Australia
more difficult than “filling the hole.” But added together, they could
make an enormous difference to the shape in which countries find
China
themselves in 2021 and beyond.
Inevitably the focus will shift to the long-term legacy of the
Excludes South Korea. crisis for government balance sheets, the long-term credibility of
*Includes automatic stabilizers and discretionary measures. †Fiscal year ending March 31, 2021. central banks, and the scope and resilience of global supply chains.
Source: Bloomberg Economics estimates
But voters will be more focused on how well the most vulnerable
parts of society have been protected.

8 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS

 Reallocation

A Permanent Side Effect:

Millions of Lost Jobs
By BJÖRN VAN ROYE, SCOTT JOHNSON, and TOM ORLIK

THE PACE OF RECOVERY IN THE labor market depends on a critical We break down the explanation for the change in unemploy-
question: Is the Covid-19 recession primarily a temporary shock, ment into three shocks:
when lockdowns force businesses to close and falling incomes • A demand and supply shock should quickly reverse course
hurt demand? Or is it a structural reallocation shock, with some and unemployment fall as lockdowns end and stimulus replaces
jobs lost forever and a wait before new opportunities are created? missing demand. As shown in the table at left, in our model this type
If it’s the former, control of the virus combined with significant of shock is captured by more job separations and unemployment
stimulus will enable a rapid recovery. If the latter, major economies and less hiring and fewer vacancies.
face a painful and protracted period of high unemployment. • In the wake of the pandemic, continued fear of contagion
Focusing on the U.S., where monthly data on job openings might mean that consumer tastes change, benefiting some busi-
and layoffs provide a timely window into what’s going on, we use nesses, which start to look for more workers, and disadvantaging
a model-based approach to determine the share of job losses others, which let their employees go. In our model, the key char-
attributable to shrinking demand and supply, structural realloca- acteristic of a reallocation shock is a simultaneous increase in
tion, and disincentives to work as a result of generous unemploy- separations and vacancies.
ment benefits. The results suggest that about 30% of job losses • When workers have a disincentive to look for jobs, the
are the result of a reallocation shock and won’t be quickly recouped. result is a search shock. This may be a particular issue for some
The outlook for the labor market is likely a phased recovery. workers in the U.S. now as their unemployment benefits are tem-
The end of lockdowns, combined with a substantial slug of ­stimulus, porarily more generous than their wages. In our model, this shows
will bring unemployment toward its pre-pandemic levels. But the up as a simultaneous increase in vacancies and unemployment.
reallocation shock means that almost a third of newly unemployed
workers face a longer struggle to return to work. Case Study: The U.S.
Armed with this approach, we use the U.S., the only economy with
timely and detailed labor market data available, to investigate the
Three Types of Labor Market Shock nature of the Covid-19 shock. Our main conclusions:
• About 30% of the increase in total unemployment from
Efftect of shock
February to May can be explained by a reallocation shock and so
Leads to higher values Leads to lower values
risks being long-lasting.
• About half of it can be explained by the aggregate demand
Separations Job finding Vacancy Unemployment and supply shock and should begin to quickly reverse as lock-
rate rate rate rate
downs ease.
Demand and supply + - - +
Reallocation + - + +
Search - - + +
U.S. Job Loss Decomposition: Then and Now
Source: Bloomberg Economics Jobs lost, by cause
Demand and supply shock Search shock Reallocation shock

0 6m 12m 18m
We investigate the nature of job losses during the Covid-19
Great Recession
recession using a set of structural Bayesian VAR models. We aim
to identify the drivers of unemployment shocks by imposing sign Covid-19
restrictions. The model closely follows the simple empirical search
Source: Bloomberg Economics
and matching model in the spirit of Pissarides (2011) and Hairault
and Zhutova (2018).

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 9

Reallocation

• The remaining 20% of the increase stems from a decline

in job-matching efficiency—potentially reflecting the current period U.S. Job Loss Decomposition: Sector Breakdown
of unusually liberal unemployment benefits. That should also Jobs lost, by cause
reverse quickly, assuming disincentives to work are removed. Demand and supply shock Search shock Reallocation shock
An important caveat to our analysis: It’s possible the end of
lockdowns will trigger another reallocation shock. If consumer 0 2m 4m
tastes swing quickly back to their pre-crisis norm, extra workers Leisure and hospitality
in e-commerce warehouses or food delivery could find themselves
again employed in shops and restaurants. If that happens, our 30% Wholesale and retail
estimate for reallocation would be too high.
Among sectors, leisure and hospitality, retail, education and Education and health care
health care, and professional and business services all face a
significant reallocation shock. Manufacturing

First a V, Then a U-Shaped Recovery Professional and business services

Understanding the nature of the shock provides clues about the
likely path of recovery. Assuming lockdowns end, stimulus makes Transportation
up for lost demand, and disincentives to work are ironed out, a
substantial number of the unemployed, about 70%, could return to Financial services
work quickly. We already see some of that happening in the U.S.,
with a surprise positive reading in the May and June jobs reports. Information
For the remaining 30%—the victims of the reallocation
shock—the path back from unemployment may be longer. Workers
Source: Bloomberg Economics
who need to change companies or sectors might need to update
their skills, move, or build a new network. In addition, with profits
shifting from employment-intensive small companies to capital-
i­ntensive big ones, reallocation might end up being a net negative balance among the shocks will change over time. In the initial
for labor demand. period of the crisis, with lockdowns in place, the demand and
For advanced economies, the labor recovery is likely to look supply shock dominates and the right response is generous income
like the beginning of a V shape, with the majority of jobs coming subsidies. As lockdowns ease, the reallocation and matching
back quickly, followed by an elongated U, with a significant portion shocks come to the fore, and the policy response should change
of the unemployed searching longer before finding a job. to meet the challenge.
Policymakers face three different challenges: Dealing with
the supply and demand shock requires them to replace missing
income for the unemployed and keep furloughed workers attached
to their companies. To speed the process of reallocation they
must remove barriers to the process of creative destruction,
encouraging the movement of workers and capital between com-
panies and sectors. Similarly, dealing with the matching-efficiency
shock requires removing generous benefits, giving workers the
incentive to increase their search efforts.
One way out of the perplexity is to think about how the

10 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS

 The
Americas
The Americas
A Dead Cat Bounce
For the U.S. Economy?
By YELENA SHULYATYEVA, ANDREW HUSBY, and ELIZA WINGER
A SHARP REBOUND IN THE THIRD QUARTER won’t be enough to pull the
U.S. economy out of a deep, pandemic-induced slump for the
year—particularly if a spike in new coronavirus infections scrambles
reopening plans and federal help is inadequate. Growth in 2021
will depend largely on when a Covid-19 vaccine is available, whom
voters send to the White House and Congress, and how much
additional stimulus legislators approve.
The government’s aid packages more than offset the massive
loss in wage income at the peak of the crisis, but more will be needed
in the second half for the economy to find firm footing. Consumers—
the engine of U.S. growth—will initially spend more freely as lock-
downs ease, but then pull back as they keep a close eye on household
finances, many of them damaged long term by the massive disloca-
tion of the labor market. Fearful of further virus outbreaks, house-
holds will continue to save, putting a damper on spending. Delayed
or inadequate government aid will exacerbate a slowdown.
Closing the Wage Income Gap
Value of payments, seasonally adjusted at an annual rate
Wages and salaries Government social benefits to persons
$10t
6/2000 5/2020
Sources: Bureau of Economic Analysis, Bloomberg Economics
Consumers have been laid low by the Covid-19 shock. The
fundamentals that shore up their spending—employment, wage
income, confidence, and the ability to physically go out and spend—
were severely hurt by lockdowns. In just two months, as the f­ ollowing
chart shows, the crisis erased almost all the post-Great Recession
gains in personal consumption expenditures. The official unem-
ployment statistics underestimate the true extent of damage in the
12 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS
labor market because of problems correctly classifying the status
of many workers. We expect unemployment to decline below 10%
by yearend after peaking at 13% in the second quarter.
Catching Up Back to Trend Is Critical
Personal consumption expenditures, seasonally adjusted at an annual rate
Actual Trend
$13t
11
6/2002 5/2020 9
Sources: Bureau of Economic Analysis, Bloomberg Economics
Fiscal Aid Will Need More Oomph
Our baseline scenario assumes gross domestic product will rebound
5 21% in the third quarter, after a 37% contraction in the second. A
second-half rebound averaging about 13% will leave growth deep
in negative territory for the year, at –6.5%. To steady the economy,
we expect a fiscal package of $500 billion to $1 trillion is likely
0 before the election, but we don’t expect a package until the second
half of July as Republicans take a “wait-and-see” approach.
The Trump administration has indicated the added $600 a
week to unemployment benefits won’t continue through yearend.
A Congressional Budget Office study showed that extending the
payments into the second half would mean about 5 of every 6 recip-
ients could receive unemployment benefits that exceed the weekly
amounts that they could expect to earn from work. Instead of a full
extension, an alternative could be to map added benefits to “full
wages,” or reduce the additional amount to about $300 a week.
We expect some aid before the election either as a “return
to work benefit” or another round of targeted stimulus checks. In
addition to help for households, the small-business Paycheck
 The Americas

­ rotection Program could be extended; Congress also may find

P Baseline: This assumes continued loosening of lockdown
some agreement on narrow aid to state and local governments.
The Fed Refrain: “Whatever It Takes”
With interest rates near zero, the Federal Reserve will be required
to support the recovery using nontraditional tools and guidance.
Rates are expected to remain at rock bottom for a multiyear p ­ eriod.
The most recent dot plot shows the central bankers united on
unchanged interest rates through 2021. Only two members see
hikes in 2022.
The Fed has finished tapering long-term asset purchases, trying
to absorb any supply in the market and keep rates under control as
it faces increased Treasury issuance, which could push long-term
yields higher later this year. Its toolkit will also include enhanced
forward guidance and tailored emergency lending facilities to better
serve the needs of businesses and state and local governments.
High unemployment and spare capacity in industry implies
inflation will remain shy of the Fed’s target for an extended period.
Over the past 50 years, recessions have consistently proven to be
disinflationary; there’s little reason to anticipate an alternative
outcome in the current downturn. The risk is that, with inflation pres-
sures already muted before the crisis, a moderate bout of disinflation
could push the economy close to the brink of deflation. This is a
critical reason why Fed officials favor providing additional support.
Three Possible Outcomes
The following table highlights a range of economic scenarios for
the recovery.
restrictions over the summer. However, moderate measures to
contain the spread of the virus, such as social distancing restric-
tions and work-from-home advisories, are reintroduced in the
winter. We also assume a resurgence of Covid-19 cases will result
in significant uncertainty, leading consumers to change their spend-
ing behavior. In particular, increased savings rates would depress
demand. After an initial, possibly strong, bounce, payroll gains will
level out; job cuts, delayed by the Paycheck Protection Program,
will pick up as that aid ends.
Upside: A large portion of the drop in employment reverses
quickly over the summer months. Smart policies through the fall
and winter limit further virus outbreaks. Another targeted round
of fiscal policy emerges before the election. A vaccine or reason-
ably effective treatment becomes available sooner, reducing the
virus threat significantly for all but the most at-risk populations.
Downside: A failure to extend fiscal support into the second
half of the year in the absence of a sustained pickup in job growth
leads to an abrupt drop in personal income and, in turn, a double
dip in personal spending. This is exacerbated by a severe second
outbreak of Covid-19, leading to broad-based lockdowns over the
course of the fourth quarter.
A resurgence of the trade war between the U.S. and China
would create an additional headwind to recovery in the fourth
quarter. It’s unlikely trade tensions will escalate any sooner,
because that would restrain a rebound and discourage investors
going into the election.

U.S. Forecast

Indicator Q4 ’19 Q1 ’20 Q2 ’20 Q3 ’20 Q4 ’20 Q1 ’21 Q2 ’21 Q3 ’21 Q4 ’21 2019 2020 2021
GDP (Percent QoQ, annual rate)
Baseline forecast 2.1 -5.0 -37.0 21.0 5.5 3.0 8.0 5.5 4.5 2.3 -6.5 5.2
Upside 2.1 -5.0 -37.0 30.0 10.0 9.0 6.0 4.5 4.0 2.3 -3.9 5.9
Downside 2.1 -5.0 -37.0 18.0 -6.0 2.5 5.0 5.0 4.5 2.3 -9.8 4.2
Unemployment rate 3.5 3.8 13.0 10.6 9.1 8.7 7.5 6.8 6.6 3.5 9.1 6.6
CPI (Percent YoY) 2.0 2.1 0.5 1.0 0.7 0.6 2.1 1.6 1.6 2.0 0.7 1.6
Fed funds rate 1.75 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 1.75 0.25 0.25

Forecasts as of June 17, 2020. Full-year GDP growth rates are Q4-over-Q4. CPI and unemployment rate annual forecasts are Q4 averages. Fed funds rates are upper bound of the target range.
Source: Bloomberg Economics

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 13

The Americas
For Now, the Misery Index
Adds Up to a Biden Win
By ANDREW HUSBY
THE COVID-19 SHOCK HAS DRAMATICALLY upended the lives and
l­ ivelihoods of tens of millions of Americans, with lockdowns ­driving
a steep recession. A record high reading for the “misery index”—
the sum of the unemployment and inflation rate—suggests
­economic factors won’t be working in President Trump’s favor in
the November election.
The Trump administration entered 2020 at the helm of the
longest U.S. economic expansion on record, touting not only unem-
ployment at a 50-year low but also record highs for equity markets.
The U.S. and China signed a phase one trade deal that put tariff
escalation on hold. Wage gains, particularly for low earners, were
becoming increasingly well entrenched.
The lockdown required to manage the public health crisis
made a recession inevitable. Still, missteps have exacerbated the
costs, and the lesson of history is that Trump will face consequences
at the ballot box. Since World War II, each of the four times a reces-
sion began in, or extended into, the second half of a president’s
term, the incumbent party has failed to retain the White House.
Key swing states have experienced not only sharp moves
higher in unemployment as a result of economic lockdowns, but
also shifts in the polls toward the presumptive Democratic pres-
idential nominee, former Vice President Joe Biden.
The most important economic evidence—unemployment
and inflation developments— points toward a Biden win. However,
not all signs are bleak for Trump. House prices, wages, and stocks
have all performed well over the past four years and compare favor-
ably to times when the incumbent party stays in the White House.
A Strong Record for the Index
Created by economist Arthur Okun in the 1970s, the misery index
captures the key elements of Ronald Reagan’s famous question
for voters in 1980: “Are you better off now than four years ago?”
The index strongly suggested then that Americans weren’t. Reagan
handily defeated the incumbent, Jimmy Carter.
A four-year horizon makes for effective campaign trail fodder.
Bloomberg Economics’ analysis suggests economic performance
over the year preceding an election is more predictive. Trump’s
upset over Hillary Clinton, for example, appeared to capitalize in
part on weakening economic conditions shortly before the 2016
election, not on the steady improvement since the beginning of
­President Obama’s second term in 2012.
14 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS
High Inflation and Unemployment Are Bad for Incumbents
Misery index, six-month moving average, year-over-year change
Actual Bloomberg Economics forecast
Incumbent party loss
8%
4
0
-4
10/1951 10/2020 -8
Sources: Bureau of Labor Statistics, Bloomberg Economics
For our analysis, the misery index is calculated using the
official U-3 unemployment rate and the year-over-year change in
the headline consumer price index. The change in the index is
based on the six-month rolling average through the month pre-
ceding the election (October) compared with year-earlier levels.
A rolling average is used to capture broad trends that may take
time to be recognized by households. It also reduces volatility.
When voters go to the polls on Nov. 3, the index will likely be
in the vicinity of 10%, about a 6 percentage-point increase from
a year earlier. We key that estimate off the Federal Reserve’s
median projection of 9.3% unemployment in the fourth quarter
of 2020 and inflation below 1% for the same period.
Excluding Democratic nominee Carter’s win in 1976, when
fallout from Watergate loomed larger than economic trends, and
acknowledging the unique role of World War II hero Dwight Eisen-
hower’s popularity in 1952 and 1956, the index has only been wrong
twice. Bill Clinton’s win in 1992 included a significant third-party
bid, and George W. Bush won narrowly in 2004. In both cases, the
index signal wasn’t sending a very clear signal one way or the other.
Now it’s never been stronger in favor of the challenger.
 The Americas

Swing States Move Away From Trump Better Off Than Four Years Ago?

Average four-year change for all election years since 1952, ending in October
 re-pandemic
P
When incumbent party loses presidency
Unemployment rate in February; polls from December 2019 to February 2020*
When incumbent party holds presidency
Now Estimate for October 2020
Unemployment rate in April; polls from May 1 to June 14†

8%
Dot color indicates Unemployment rate
whether the Democrat
or Republican won the Nev. Biden Trump
30%
state in 2016

Line color indicates Mich. 4

direction of poll shift
since the pandemic

Ohio 20
N.H.
Pa.
Wis. 0
Ariz. Fla. Texas
Colo. N.M.
Va. Ga. Unemployment Wage growth* S&P 500† Home prices†
N.C. rate
Minn. Iowa 10
Wage growth, stock, and home price changes are inflation-adjusted. *Since 1972. †Annualized.
Sources: Bureau of Labor Statistics, online data from Robert Shiller, Bloomberg Economics

16 12 8 4 0 4
Net polling margin, in percentage points
*Two states use October 2019. †Two states use April 2020.
Sources: MIT Election Data and Science Lab, fivethirtyeight.com, Bloomberg Economics
The Pandemic Reshuffles Battleground States,
But a Blue Wave Isn’t a Sure Bet
Focusing on 16 battleground states that will likely determine the
outcome of the 2020 election, we looked at economic performance
and polling data before and after the start of the Covid-19 crisis. All
of them saw deterioration in the labor market. With unemployment
rising, 10 of 16 states also saw a shift in sentiment toward Biden.
In general the results align with that from the misery index,
suggesting Trump’s odds of carrying a number of key battleground
states have lengthened significantly. And a number of “safe” red
states, including Georgia and Texas, show signs of drifting closer
to a contended race.
8 0
Indicators such as recession, unemployment, and inflation
suggest a clear-cut erosion of the president’s prospects. At the
same time, it’s important to acknowledge he’s a unique candidate
and the economic environment also is unprecedented. Voters’
views on shutdowns and their costs may yet shift before Election
Day, particularly if the economy appears to headed for a faster
rebound. If key voters treat the pandemic more as a natural disas-
ter than the outcome of mismanagement, the negative implications
for Trump could wane.
The chart above shows the unemployment rate and
­inflation-adjusted measures of wages, home prices, and the
S&P 500 during election cycles since 1952, comparing October
with the same month four years prior. While the unemployment
rate is sharply higher now, other factors compare favorably with
periods when the incumbent party retained the presidency. In the
context of the biggest downturn since the Great Depression, it
might be cold comfort for Trump, but stock prices, home prices,
and even wage growth all continue to suggest he could still win.

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 15

The Americas
Economic Forecasts
2020 GDP growth forecast
Above -6%
-6% to -7%
-7% to -8%
Below -8%
1 Canada
GDP growth: -7.3%
Central bank rate at yearend: 0.25%
Timely stimulus and central bank support
will blunt the pain for households but
can’t prevent severe contraction.
Recovery will be slow and uneven. The
oil price shock means investment will
lag longer.
2 U.S.
GDP growth: -6.2%
Central bank rate at yearend: 0.00%-0.25%
The U.S. recovery is turning out to be
slightly quicker than expected. Lockdowns,
however, severely affected underlying
fundamentals, dealing a significant blow
to employment and wages. Delayed and
potentially inadequate fiscal measures,
as well as the reacceleration of Covid-19
cases, will exacerbate the slowdown into
yearend. The presidential election looms.
3 Mexico
GDP growth: -7.7%
Central bank rate at yearend: 3.00%
Government policies continue to weigh
on domestic demand and undermine the
economy’s ability to recover in the second
half from the pandemic. Weak activity in
the U.S. would add headwinds. Abating
inflation and increasing economic slack
should allow the central bank to continue
gradually cutting interest rates.
4 Colombia
GDP growth: -5.7%
Central bank rate at yearend: 1.50%
A robust economy prior to the virus
shock, as well as fiscal and monetary
stimulus after it, should limit the
downside to 2020 growth. Subdued oil
prices are a drag and put pressure on
external and fiscal imbalances. Easing
inflation and increasing economic slack
should allow the central bank to continue
gradually cutting rates.
16
2
3 the coronavirus crisis, but operational
4
5
5 Peru
GDP growth: -6.8%
Central bank rate at yearend: 0.25%
Large fiscal and monetary stimulus should
bolster growth in the second half after
stringent containment measures led
to a sharp drop in the first. Weak global
demand and subdued copper prices limit
the upside. Interest rates are at their floor.
Policymakers are committed to providing
additional accommodation using
conventional and unconventional tools.
6 Chile
GDP growth: -6.5%
Central bank rate at yearend: 0.50%
Expansionary fiscal and monetary policy
should support growth in the second half.
Weak global demand and subdued copper
prices limit the upside. Concerns about
constitutional reform and social unrest
are a drag. Interest rates are at their lower
bound, but the central bank is committed
to providing additional accommodation
through quantitative easing.
SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS
7 Brazil
GDP growth: -6.4%
Central bank rate at yearend: 2.25%
Brazil announced several measures
to mitigate the economic effects of
problems and political battles reduced
the effectiveness of some. A widening
output gap leaves room for record-low
interest rates through the end of 2021;
the central bank may experiment with
bond purchases.
7
6 8
8 Argentina
GDP growth: -9.5%
Central bank rate at yearend: 36.00%
Strict lockdown policies helped curb the
coronavirus, but with no room for policy
stimulus, Argentina’s recession will be
deep. Capital controls will be around
longer because of a greater reliance on
money issuance to fund the government.
That will lead to a measured pace of peso
depreciation as well as negative real
interest rates.
Asia
Asia
Chinese ‘V’ Hopes May Go
Down the Global U-Bend
By CHANG SHU and DAVID QU
CHINA’S ECONOMY WAS THE FIRST to suffer a blow from the novel
­ oronavirus. Now it’s leading the recovery. Production has bounced
c Service sectors such as restaurants and tourism continue to operate
back, and external demand should pick up as other economies reopen,
helping to power the world’s factory. Even so, it won’t be easy going.
Consumption is far from pre-pandemic levels. And significant risks
loom from another wave of outbreaks in China or abroad.
We’ve raised our gross domestic product growth forecast
for 2020 slightly, to 2.1% from 2%. Following a 6.8% contraction in
the first quarter, the economy appears to be growing somewhat
faster in the second quarter than we’d expected. The risks to our
forecast, if less severe than in the first half, remain on the downside:
a second wave of Covid-19 infections, credible given a recent out-
break in Beijing, and strained relations with the U.S., with the pos-
sibility of a renewed trade war.
China’s Growth
China GDP growth and forecasts, year-over-year change
Actual December projection April projection June projection
Q1 2016 Q4 2020
Sources: National Bureau of Statistics, Bloomberg Economics
Uneven Progress
China’s recovery is characterized by wide variations in progress
across the economy, with splits along several lines: supply
vs. ­demand, public vs. private demand, and manufacturing vs.
services. Production has swung back quickly. The demand side,
though, has come back more slowly, mainly because private
demand has been sluggish. We estimate public investment rose
in May for a third straight month, while private investment continued
to lag c
­ onsiderably.
18 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS
Consumption is the weakest link, with retail sales still s­ hrinking.
well below normal levels. Externally, the gradual reopening of other
major economies should help lift demand. But with Covid-19 cases
still rising in some countries, and the possibility of a second outbreak
in others, the pace of recovery is highly uncertain.
Recent economic developments have largely been in line
with our expectations, though April-May data were tracking at
slightly higher growth of 3.8% year-on-year in the second quarter
compared with our previous forecast of 3.5%. With third-quarter
and fourth-­quarter growth still forecast at 5.3% and 6.1%, respec-
tively, the full-year expansion is likely to be 2.1%, up from our April
forecast of 2%.
Decoding China’s Growth Target
This year, China abandoned a decades-long tradition of setting a
growth target. That let the government devote more resources to
broader objectives such as protecting employment and relieving
corporate stress. Freed from the responsibility of hitting a politi-
cally motivated growth number, local officials can also steer clear
of piling on more debt.
Even so, a goal is implicit in the government’s economic plans.
Based on the budget deficit target, deficit-to-GDP ratio for the year,
7% and China’s long-held goal of doubling 2010 GDP by 2020, our cal-
culations suggest the target is about 3% to 3.5%.
0 China’s Implicit Growth Target
China GDP, year-over-year change
Actual Government target or target range
-7
16%
Bloomberg Economics'
expected target range
and forecast
8
2006 2020 0
Sources: National Bureau of Statistics, Bloomberg Economics
 Asia

Focusing on Fiscal Support
Fiscal stimulus is key to supporting the recovery, more so than the
headline budget figures suggest. The government widened the
official budget deficit to 3.6% of GDP this year, more than the 3%
recorded in the wake of the global financial crisis. In reality, the
stimulus is much larger: The issuance of special government bonds
is set to rise sharply, with 1 trillion yuan ($141.4 billion) of “anti-virus”
bonds to be issued by the central government, and 3.75 trillion yuan
of special bonds from local governments.
With this additional debt, the combined deficit rises to 8.2%
of GDP. But this still understates the actual budget position because
the deficit was limited by the use of a stabilization fund, a reserve
fund used to smooth out fluctuations in annual budgets. Stripping
this out reveals a fiscal deficit of more than 11% of GDP, up sharply
from 6.5% of GDP in 2019 on a comparable basis.
by an additional 40 bps by yearend, compared with our previous
forecast of 50-60 bps. The reserve requirement ratio could be cut
by a further 100 bps. The People’s Bank of China is focusing on
improving credit access and lowering funding cost, and increasingly
deploying targeted measures to be more effective.
The PBOC has made clear its intention to accelerate credit
growth. It suggested growth of M2 and credit could be higher than
the nominal GDP expansion, a notable departure from its position
of keeping them broadly in line. M2 growth so far in 2020 is 11.1%,
significantly higher than 8.7% in 2019.
The central bank has used special lending known as ­rediscount
and relending loans, as well as a new program for ­purchasing com-
mercial bank loans to support sectors and regions most affected
by the pandemic, with an emphasis on small private companies.
Recent surveys of small and midsize companies suggest funding
conditions have improved.

A Bigger Fiscal Impulse The Risks of a New Virus Outbreak and Trade War
Downside risks are glaring. Domestically, the recent increase of
new Covid-19 cases in Beijing shows the risk of a second wave of
Budget deficit the pandemic derailing China’s recovery. Another hurdle is the
Official target Central government special bonds ­possibility that the ­government fails to head off a rise in corporate
Local government special bonds Use of budget stabilization and other funds
bankruptcies and unemployment. The combination of a rising case
Adjusted fiscal stimulus package as a share of GDP
count and ­increased stress from bankruptcies and unemployment
11.0% could lower growth for 2020 to 1.4%.
¥12t
Rising tensions with the U.S., which could result in a flare-up
of the trade war, could also damage the economy. We consider a
risk scenario where the average tariff rate on U.S. imports from
China rises to 30% in 4Q, from 20% now. Analysis using the National
6
Institute Global Econometric Model (NiGem) suggests only a
2.6%
modest impact, with growth for 2020 not materially different from
the baseline 2.1% forecast and a fraction of a percent shaved off
in 2021. That said, the model understates the impact because it
2015 2020 0
doesn’t fully account for uncertainties that trade ­tensions
Sources: Ministry of Finance, Bloomberg Economics would trigger.

China Forecast
The central government will directly transfer the increase in
funding this year that results from the wider official budget deficit
and anti-virus bonds to lower-level governments in cities and towns. Indicator Q4 ’19 Q1 ’20 Q2 ’20 Q3 ’20 Q4 ’20 2019 2020 2021
This should spur policy changes on the ground: Large funding gaps GDP (Percent YoY)
in the past have forced local governments to either cut spending Baseline case 6.0 -6.8 3.8 5.3 6.1 6.1 2.1 8.2
or rely on shady back-door arrangements to raise funds. Upside case 6.0 -6.8 4.2 5.8 6.3 6.1 2.4 8.2
Downside case 6.0 -6.8 3.7 4.2 4.5 6.1 1.4 7.5
Supporting Main Street with Monetary Policy Trade war case 6.0 -6.8 3.8 5.3 5.1 6.1 2.1 7.9
Reversing its normal pattern, the government’s monetary policy CPI (Percent YoY YTD) 2.9 4.9 4.2 3.6 2.8 2.9 2.8 0.5
has been less aggressive than its fiscal policy. Economywide e
­ asing One-year loan prime rate 4.15 4.05 3.85 3.65 3.45 4.15 3.45 3.35
has been moderate, with just 30 basis points of reductions in the
one-year Loan Prime Rate since the outbreak began. Forecasts as of April 21, 2020
Sources: National Bureau of Statistics, Bloomberg Economics
We expect this gradual loosening to continue, though less
than we’d previously expected. We now see the one-year LPR falling

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 19

Asia
Trade War Redux: What Are
The Odds—and the Costs?
By TOM ORLIK, MAEVA COUSIN, and DAN HANSON
THE YEAR STARTED WITH a trade truce between the U.S. and China.
It could end with the resumption of hostilities, compounding the
blow to growth from Covid-19 and drawing comparisons¬with the
Great Depression, when tariffs deepened and prolonged the slump.
You’d expect countries around the world to coordinate a
response to a pandemic caused by a virus with no respect for
national borders. A uniform health-care and scientific strategy could
save lives and speed the search for a vaccine. Synchronizing ­stimulus
measures and keeping trade flowing would provide the best chance
for a rapid recovery.
Of course, that’s not how it’s playing out. The U.S. and China
are engaged in a war of words over the origins of the pandemic.
Their tit-for-tat moves to expel journalists, China’s expanding
reach in Hong Kong, new U.S. controls on Chinese-listed compa-
nies and researchers, and the ongoing Huawei Technologies Co.
case all add to the tension.
Worse, the Covid-19 shock means that China isn’t living up
to its side of the phase one trade deal the two countries signed
Phase One Purchases Are Off Track
Cumulative value of 2020 U.S. exports to China
Phase 1 target Actual
$150b
100
50
12/2019 12/2020 0 Trump administration is reworking the bilateral relationship. Across
Sources: USA Trade Online, Bloomberg Economics
20 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS
in January. Its purchases of U.S. goods identified in the agreement
totaled just $20.4 billion in the first four months of this year. To
meet the ambitious target, they would have to be at $47.6 billion.
The shortfall in agricultural purchases—politically significant for
President Trump—is especially marked.
Looming on the horizon is the U.S. presidential election. At
the start of the year, it looked like the strong U.S. economy and
claims of a trade-war win against China would be key planks of the
Trump campaign. Now the president has neither. In 2016, tough-
on-China was a winning tactic. With Trump trailing his Democrat
rival, Joe Biden, by a wide margin in the polls, it’s hard to believe
he won’t reach for the same playbook.
Tariff levels average about 20% for both trading partners.
Using the NiGem, we explore what happens if they rise to 30%.
China would take a hit to GDP of about 0.3%, with the impact
peaking in 2022. For the U.S. and the world as a whole, the cost is
about 0.2% of GDP. That estimate likely understates the scale of
the shock. Weaker market and business confidence would mean
a bigger hit, and one that would arrive sooner after tariffs
are announced.
Also important to keep in mind, relative to the start of the
trade war, economic conditions have substantially changed. In
2018, Trump’s Tax Cuts and Jobs Act supercharged growth. Stock
markets roared to record highs. China, embarking on a painful
deleveraging process, didn’t look so resilient. Still, growth above
6% a year was within Beijing’s comfort zone. In 2020 both countries
face an historic slump—with nothing to cushion the blow if hostil-
ities resume.
For all those reasons, we expect both sides to pull back from
the brink. That doesn’t mean tensions won’t continue to rise.
With actions across the U.S. government—from kicking out
Chinese journalists, to restricting visas for students and research-
ers, to tightening listing requirements for Chinese companies—the
trade, finance, education, and research, its focus is shifting from
seizing opportunities to guarding against risks. That won’t have
the immediate negative impact of a tariff hike. But it’s a slow-burn
drag on growth potential.
 Asia

the region. Still, engagement was the overarching strategy and

Mapping U.S. Strategy and Tactics With China tactics remained focused and procedural.
• Trump’s first term looked completely different. Engagement
was out, containment was in. From tariffs and sanctions to listing
Circle size corresponds to China GDP as a share of U.S. GDP
requirements, visa restrictions, and an arrest warrant for a top
Chinese executive, the range of policy instruments was wide and
50% Strategy of extreme engagement Obama,
their deployment unpredictable. If Trump wins a second term,
Term 1 expect more of the same.
• A win by Joe Biden, we think, would soften but not funda-
Obama, mentally alter the U.S.’s shift away from engagement. The array of
Term 2 policy instruments would remain wide, but there would be greater
transparency and predictability as a Biden administration restored
Wide and Narrow and
unpredictable procedural governance norms. The strategy might look closer to Trump’s than
tactics 0 tactics Obama’s, the tactics more like Obama’s than Trump’s.

Biden

Trump
Strategy of extreme containment

Source: Bloomberg Economics

What happens after the November election? One way to

think about U.S.–China policy is in terms of the intersection
between strategy, where administrations operate on a spectrum
from engagement to containment; and tactics, which can be narrow
and procedural or wide and unpredictable.
• As shown in the scatter chart, in his first term, President
Barack Obama favored engagement as a strategy. His tactics were
procedurally predictable and focused on a narrow set of trade
instruments. China hawks in the Trump administration call that
approach naive. But it was a positive for business executives
and investors.
• With Obama’s pivot to Asia, strategy in his second term
edged a little toward containment and deployed a wider range of
policy instruments, including an expansion of the U.S. military in

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 21

Asia
Japan’s Dreary Future:
A 4.2% Slide in the Economy
By YUKI MASUJIMA
JAPAN IS HEADED FOR A DEEP contraction in 2020. An ­unprecedented
spending blitz, backed by a central bank that’s thrown the shack-
les off its government bond purchases, will only do so much to
offset the blow from the pandemic. The ­potential for a second
wave of Covid-19 infections points to a scarring recession and
higher unemployment.
Our base-case forecast is for GDP to shrink 4.2% this year
before rebounding to 2.8% growth in 2021. This assumes the gov-
ernment brings the novel coronavirus under control in the second
­quarter, lifts all containment measures in the third quarter, and
sustains, but doesn’t increase, fiscal and monetary support. In an
upside scenario, where a second outbreak is avoided and overseas
economies rebound rapidly, GDP is expected to contract 2.7% this
year and expand 3.5% in 2021. In a downside scenario, where a
second wave of infections hits Japan and countries overseas, we
forecast GDP will contract 6.6% this year and 0.8% in 2021.
The economy’s path has largely been determined by how strin-
gent the measures to control the virus have been. Unlike many other
countries, Japan hasn’t imposed a strict lockdown—the law doesn’t
Virus Shocks: Three Tough Scenarios
Japan GDP, quarter-over-quarter change, seasonally adjusted annual rate
Actual Baseline case Pessimistic case Optimistic case
Bloomberg Economics forecasts
Q1 2018 Q1 2022
Sources: Cabinet Office, Bloomberg Economics
22 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS
permit it. Instead, the government declared a state of emergency
and urged people to stay home and higher-risk businesses to curtail
operations, making heavy use of moral suasion to limit movement
and interactions. The emergency was imposed nationwide on April 16
and lifted on May 25, though some activity remains restrained.
External demand is also critical. Even in our base case,
­declining net exports of goods and services will reduce GDP growth
by 0.3 percentage point in 2020. In our downside scenario, the
drag would be as heavy as 1.3 percentage points.
Lockdown Severity and Business Sentiment
Jibun Bank Japan purchasing managers index
Services Manufacturing
50
27.8
40
0 Japan stringency index, 30
a measure of the strictness
of its lockdown
12/31/19 6/30/20 20
Sources: University of Oxford, IHS Markit
10%
A Forceful Fiscal Response
The sheer scale and quick succession of Japan’s fiscal support
0 measures underline the government’s determination to prevent
the crisis from snowballing into something much worse.
Two economic packages, one unveiled on April 7 and the
-10
other on May 27, have a total value of 234 trillion yen ($2.1 trillion),
or 42% of GDP. New spending in the two packages totals 57.6 trillion
-20 yen (10.4% of GDP). The measures range from 100,000-yen pay-
checks for all residents of Japan to deferrals on tax and social
­security payments. Support for hardest-hit industries such as tour-
ism includes financial aid, emergency loans, and credit guarantees.

Japan’s Fiscal Stimulus and Long-Term Yield
Value of Japan’s fiscal support
Supplementary budget Rest of economic policy package
¥120t
Japan 10-year government bond yield
Bank of Japan
1.284% introduces yield
curve control 60
0.011%
Q1 2008 Q2 2020 0 momentum, with core inflation turning negative in April for the
Sources: Cabinet Office, Ministry of Finance, Bloomberg Economics
The direct impact of the stimulus may add only 1.3 percent-
age points to GDP growth. This reflects Japan’s small fiscal
­multiplier (about 0.2) and 10 trillion yen that will be kept in reserve
to cover potential costs from a second wave of Covid-19 cases.
Even so, if all goes well, the economy should be in better shape to
bounce back when the pandemic abates.
The forceful response brought fiscal consolidation to an
abrupt halt. Financing the packages will require as much as 57.6 tril-
lion yen in fresh government bond issuance, pushing this year’s
total to more than 200 trillion yen. Debt is on track to soar to 262%
of GDP in 2020, from 237% in 2019.
The BOJ Takes Center Stage
The Bank of Japan is playing a central role. Governor Haruhiko
Kuroda has pledged to buy as much government debt as needed
to anchor the 10-year Japanese Government Bond (JGB) yield
around 0% under its yield curve control policy. This blank check
has given the government free rein to increase spending without
an associated rise in borrowing costs.
The central bank’s efforts go further: It doubled the pace of
its purchases of exchange-traded funds and REITs to tamp down
risk premiums, and more than tripled the upper limits on its ­holdings
SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS
Asia
of corporate bonds and commercial paper to support fundraising
efforts. It also introduced a 25 trillion-yen special f­ und-­supplying
facility, under which it provides interest-free, ­one-year loans, and
a 30 trillion-yen fund-provisioning program to further support small
and midsize companies. It later ­expanded the combined total to
90 trillion yen, without disclosing the breakdown.
The BOJ’s support is gaining traction. Outstanding bank loans
rose 44.8 trillion yen, or 5.1%, in May from a year earlier, after i­ncreases
of 3.1% in April and 2.2% in March. We expect the central bank to stay
on hold for the rest of the year, though an unexpected shock could
prompt it to boost support for companies and households.
Multiple Risks to the Economy
The threats to the economy are still substantial. Reflation has lost
first time since 2016 and staying there in May. The 2.2% contrac-
tion in first-quarter GDP (quarter-on-quarter, annualized) is fore-
Shadow Unemployment Could Be Much Higher
Japan jobless rate
Actual Adjusted rate 1 Adjusted rate 2
14%
7
1/2012 4/2020 0
Sources: Ministry of Internal Affairs and Communications, Bloomberg Economics
cast to give way to a drop as deep as 17.5% in the second quarter
before the economy starts to regain its footing in the third quarter.
The job market is a source of downside risk. The unemploy-
ment rate rose to 2.6% in April, when the nationwide emergency
23
Asia

was declared, from 2.5% in March. The number of people who
were employed but not working rocketed by about 4 million, to
about 6 million. If those idle workers are eventually let go, the
jobless rate would soar to 11.6% (adjusted jobless rate 1 in the
chart above). Another factor could lift the unemployment rate
further: In April, 1 million jobs vanished, with most of the people
who lost their jobs (mainly female part-timers) opting not to look
for the summer of 2021, are canceled. Another extra budget could
lift the debt-to-GDP ratio higher than our baseline projections of
262% in 2020 and 257% in 2021.
In our upside scenario, a deep contraction in 2020 (–2.7%)
is followed by a strong rebound in 2021 (+3.5%), with GDP return-
ing to the pre-pandemic level by the third quarter of 2021.
Consumption and exports post rapid recoveries and the Olympics
­

for new positions. But if they reenter the workforce, the rate could reignite a tourism boom. The debt-to-GDP ratio would fall to 255%
reach 12.9% (adjusted jobless rate 2). in 2021 after jumping to 260% in 2020.
Policy support has prevented the downturn from leading to
an increase in corporate failures. The number of bankruptcies fell
54.8% in May from a year earlier, reversing a 15.2% rise in April. We
doubt the worst is over: The drop could partly reflect a limited
capacity of the courts to accept cases during the state of emer-
gency. If so, the number should rise when the backlog is processed.
What’s more, pressure on businesses, particularly small ones, is
intense. Companies on life support from emergency loans and
credit guarantees are unlikely to be engines of a recovery.

Worst- and Best-Case Outlooks

In our downside scenario, GDP continues to contract in 2021
(–0.8%) after a plunge in 2020 (–6.6%). Policy support fails to
avert a surge in the unemployment rate above the record 5.5%
reached in 2009; measures to contain the virus slow economic
activity; and the Tokyo Olympics, which have been rescheduled

Japan Forecast

Indicator Q4 ’19 Q1 ’20 Q2 ’20 Q3 ’20 Q4 ’20 Q1 ’21 Q2 ’21 Q3 ’21 Q4 ’21 2019 2020 2021
GDP (Percent QoQ SAAR)
Baseline case -7.2 -2.2 -17.5 7.5 4.9 4.3 3.0 3.5 2.3 0.7 -4.2 2.8
Upside case -7.2 -2.2 -13.1 11.2 6.3 4.3 2.5 1.8 1.1 0.7 -2.7 3.5
Downside case -7.2 -2.2 -21.6 -3.8 0.7 1.8 1.9 2.1 1.5 0.7 -6.6 -0.8
Unemployment rate 2.3 2.4 2.8 3.3 3.3 3.3 3.2 3.0 3.0 2.4 3.0 3.1
CPI (Percent YoY) 0.5 0.5 -0.1 0.1 -0.3 -0.1 0.0 0.2 0.5 0.6 0.0 0.2
Bank of Japan policy rate -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1

Forecasts as of June 9, 2020

Source: Bloomberg Economics

24 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS


Economic Forecasts
2020 GDP growth forecast
Above 1%
-1% to 1%
-1% to -3%
-3% to -5%
-5% to -7%
Below -7%
2 India
GDP growth: -10.6%
Central bank rate at yearend: 3.00%
India’s stringent lockdown, still-
rising Covid-19 cases, inadequate
fiscal support, and limited space for
monetary easing mean a deep economic
contraction in fiscal 2021 is inevitable.
Our baseline forecast is for an extended
U-shaped recession, barring a surprise
ramp-up in deficit spending financed by
the central bank.
3 Thailand
GDP growth: -6.5%
Central bank rate at yearend: 0.25%
Even with the virus under control, looser
restrictions on movement, and potential
travel bubbles, income losses may see
Thailand continue to contract in the
second half. We don’t expect its key
tourism sector to recover to pre-virus
levels before 2021.
4 Malaysia
GDP growth: -5.5%
Central bank rate at yearend: 1.50%
Damage to incomes at home and abroad
suggests the easing of restrictions in
the second half won’t restore Malaysia’s
demand to pre-virus levels. Political
tensions may also limit the government’s
ability to provide fiscal support.
5 Singapore
GDP growth: -5.8%
Central bank rate at yearend: NA
Singapore’s “circuit breaker”—aimed at
containing outbreaks among migrant
workers—likely meant a double-digit
contraction in Q2. Even with reopening
in Q3 and ample government support,
economic activity in this transport hub will
struggle until travel normalizes.
1 China
GDP growth: 2.1%
Central bank rate at yearend: 3.45%
China’s economy is in better shape than
it was earlier this year, with production
bouncing back and policy support
broadening to buttress companies and
employment. Still, weakness in private
demand means the recovery is uneven.
The key risks are a second Covid-19 wave
and reescalation of the trade war.
1 weakness in exports points to significant
2
3 9
6 South Korea
GDP growth: -0.1%
Central bank rate at yearend: 0.50%
South Korea has so far remained relatively
resilient in the face of the pandemic—
with an aggressive public health response
and sizable stimulus helping avert a
collapse in economic activity. Weak global
demand poses a key challenge for the
trade-oriented economy, but a nascent
recovery in the electronics sector could
help offset the slump.
7 Indonesia
GDP growth: 0%
Central bank rate at yearend: 3.75%
Indonesia’s domestic demand was
already evaporating before more
disruptive social distancing measures
were put in place. With Covid-19
infections and deaths again picking up in
June, a continued contraction in Q3 can’t
be ruled out.
SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS
6 downside risks.
8
4 relatively slow to roll out, early and
5 should help blunt the economic blow.
7
10
10 Australia
GDP growth: -2%
Central bank rate at yearend: 0.25%
The better-than-expected containment
of Australia’s domestic outbreak
has enabled a gradual resumption
of economic activity. As a result, the
downturn has been shallower, and
the recovery is beginning sooner, than
anticipated. Despite this, the economy is
expected to need fiscal support to pivot
from hibernation to full recovery.
Asia
8 Japan
GDP growth: -4.2%
Central bank rate at yearend: -0.10%
Japan’s record spending blitz, backed by
a central bank that’s thrown the shackles
off its government bond purchases, won’t
prevent a sharp contraction this year. The
potential for a second wave of infections,
a surge in job losses, and extended
9 Philippines
GDP growth: -3.1%
Central bank rate at yearend: 2.25%
The Philippines is poised for its steepest
slump since the 1980s. The government’s
pandemic-induced lockdown, among
the world’s longest, has walloped the
domestic demand-driven economy.
Although the fiscal response has been
aggressive easing from the central bank
11
11 New Zealand
GDP growth: -3.1%
Central bank rate at yearend: 0.25%
New Zealand has been declared “­­ virus-
free” and removed internal restrictions,
enabling the domestic economy to
resume normal activity. Travel restrictions
remain in place, though, significantly
dampening tourism exports. Fiscal
policy has been stepped up to support
the recovery. This may necessitate
an expansion of the central bank’s
bond purchases.
25
Europe
 Europe

What a Post-Covid Euro Zone

Will Look Like
By JAMIE RUSH, MAEVA COUSIN, and DAVID POWELL

EUROPE’S CORONAVIRUS OUTBREAK will be the biggest peacetime
economic shock on record—that much is clear. Less certain is how
quick the rebound will be and how far social distancing will let it
run. The rapid easing of lockdowns, abundant fiscal support, and
encouraging signs from real-time indicators point to a big improve-
ment in the third quarter. Smaller gains are likely to follow as
demand weakness drags on.
We have long expected a rapid bounce back in Germany and
France, but we’ve been slightly disappointed by the speed of recovery
in Italy and Spain. Overall, the latest developments in activity have
led to only modest changes in our near-term projections when com-
pared with our mid-April outlook—our last major forecast update.
We now see the euro-area economy shrinking 15.8% in the
second quarter, compared with the 13.7% seen in April. The

The Immediate Outlook

The virus has run a different course across euro-area economies, Demand and the Ceiling for Activity
with varying implications for near-term growth. By getting on top
of the virus early and initiating widespread testing, Germany
Direct impact of coronavirus containment measures on economic activity estimate
avoided the most draconian containment measures. As a result,
Germany Spain
we estimate the hit to output has been less than half the size of
Economic activity estimate
that in Spain, where activity may have been down more than 40%
during the most intense phase of lockdowns. 0%
How economies emerge from the crisis will depend partly
on public perceptions of risk, which, according to a Mannheim
University survey, have fallen in Germany as the infection rate has
dropped. Together with abundant income support, feeling safe -20
must be part of the reason German activity indicators including
road haulage, restaurant bookings, and retail traffic point to a sharp
pickup in recent weeks.
Forecast
The infection rate in Spain is now very low, but compared 12/30/19 12/21/20 - 40
with the size of the shock, the fiscal response has fallen short.
That’s raised the chances of bankruptcies and job losses that will
Estimates for the direct impact of containment measures and activity are relative to pre-crisis
be hard to reverse. We therefore expect that after an initial surge, norms and informed by the stringency of measures in place, the actual hit to output recorded
demand will only slowly rise as restrictions are lifted. The different in the first quarter, and real-time activity trackers, up to the week starting on June 8.
Source: Bloomberg Economics estimates
trajectories we’ve assumed for Germany and Spain are illustrated
in the following chart.

27
Europe

third-quarter forecast was only slightly changed, with expectations
for a rebound of 14.4%, down from the April outlook for 14.9%.
Where Will the Recovery Stop?
Further ahead, the critical question is what impact social distancing
rules and caution among businesses and households will have on
activity. On that, Sweden’s experience is of particular interest.
With no formal lockdowns, consumer behavior explains more of
the economic weakness there. Survey data from France also tell
us which sectors see output staying subdued well into next year.
No surprise: Services businesses with a high intensity of
contact between workers and customers are those that will strug-
gle the most. We estimate that the last 5% of activity lost to con-
tainment measures will prove difficult to make up. In our forecast,
this acts as a temporary ceiling to the recovery until mid-2021,
when we assume a vaccine is available.
Policy Response Is Proportionate
Governments are generally filling the hole in incomes created by
the crisis. With the euro area’s budget deficit at about 10% of
gross domestic product this year, debt issuance is rocketing. By
hoovering it all up, the ECB is providing substantial fiscal space,
and the European Union’s plan to socialize some of the costs of
fighting the virus is also taking pressure off sovereign yields.
Overall, we think enough is being done to stave off the biggest
threats to financial stability, though more monetary stimulus may
be needed to help inflation recover once the crisis has passed.
Scenario Analysis
The biggest near-term threat to the economy is a second outbreak.
Restrictions have been lifted quickly across Europe. In Germany,
for example, state-level easing looks to have become competitive,

Long-Term Consequences
Recessions leave scars—the level of output rarely leaps back to
trend after a major shock. Even so, we expect that for a large part
of the euro-area economy this time will be different. This recession
was caused by a true external shock, not the consequence of a
yearslong buildup of imbalances. And while there’ll be changes to
the way Europeans work and shop, old habits die hard.
Forecast Revision: A Mix of Demand and Supply
Euro-area GDP forecast, Q4 ’19 = 100
Pre-pandemic forecast June 2020 forecast
Direct impact of containment measures on supply and demand
Persistent demand weakness Long-run supply impacts

We therefore don’t expect scarring to be anywhere near as

pronounced as implied by the 40%-plus hit to economic activity
recorded in some countries during the lockdowns. We’ve factored
in some long-term damage to the economy via slower growth in 100
productivity and the capital stock, but it’s quite modest. What
we’ve not yet assumed is higher structural unemployment, which
is a real danger.
The following chart places these assumptions in the context 90
of the wider revision to our forecast since the virus struck. We
see the bulk of the hit to the economy as reflecting a simultaneous
fall in demand and supply, as lockdowns went into effect. As restric-
tions continue to be lifted, capacity is rising, but demand isn’t Q4 ’19 Q4 ’22 80
moving up in lockstep. We expect some weakness to linger well
Source: Bloomberg Economics estimates
into 2022. In our forecast, the Covid-19 crisis is disinflationary and
justifies a sizable monetary policy response.

28 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS

 Europe

with a race to the bottom the result. Travel restrictions have also
been substantially lifted, raising the possibility of the virus spread-
ing to areas previously less affected.
To illustrate the risks, we’ve assumed a return to tighter
restrictions across the third and fourth quarters. With widespread
testing, the new measures are likely to be more targeted than the
earlier lockdowns and have a smaller economic impact. Even so,
the 2020 contraction is 12%, compared with 8.8% in the base case.
Debt-to-GDP leaps to 107% at the euro-area level, rather
than 100% in the central scenario, and would likely require
increased efforts from the ECB and EU to stabilize financial
markets—either more socialization of the costs via the EU budget
or a bigger emergency asset-purchase program.
Our central forecast assumes that demand is an important
factor limiting the recovery: It takes time for spending to rise as
social restrictions are lifted. The speed with which some economies
appear to be bouncing back suggests there are now some upside
risks to this view.
If we assume that output leaps to the higher ceiling for activ-
ity as containment measures are lifted, and that damage to long-run
supply potential is avoided, the hit to activity this year will be
smaller and the bounce back bigger. By the end of 2021, the level
of activity in this scenario is almost 3% higher than in the base
case and debt 5% lower relative to the size of the economy.

Euro-Area Forecast

Indicator Q4 ’19 Q1 ’20 Q2 ’20 Q3 ’20 Q4 ’20 Q1 ’21 Q2 ’21 Q3 ’21 Q4 ’21 2019 2020 2021
GDP (Percent QoQ)
Central forecast 0.1 -3.6 -15.8 14.4 0.8 0.4 0.9 3.2 1.7 1.2 -8.8 6.1
No scarring 0.1 -3.6 -15.5 16.4 1.3 0.3 2.5 2.5 0.9 1.2 -7.6 8.1
Second outbreak 0.1 -3.6 -15.9 7.1 -0.4 2.7 3.9 5.3 2.1 1.2 -12.0 7.6
Unemployment rate 7.4 7.2 8.5 10.0 9.7 9.8 9.4 8.1 7.6 7.6 8.9 8.7
CPI (Percent YoY) 1.0 1.1 0.2 0.2 0.2 0.1 0.6 0.6 0.7 1.2 0.4 0.5

Forecasts as of June 11
Source: Bloomberg Economics

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 29

Europe

Tracing the U.K.’s Path Back

To Potential
By DAN HANSON

AS BRITAIN SLOWLY EMERGES FROM lockdown, the damage inflicted
on the economy by the long battle to contain the coronavirus is
coming into view. Elevated uncertainty about the outlook and the
lingering threat from the pandemic will mean recovery from the
25% drop in gross domestic product is slow. We don’t expect
output to pass its pre-virus peak until the end of 2022, while some
longer-term scarring is inevitable.
• We now expect the economy to contract 9.5% in 2020,
down from our previous forecast of a 7% slump. We also see a
more modest rebound in activity in 2021 with the economy growing
6.5%. That compares with our earlier estimate of 9%.
• By the end of 2024 the economy will be 3% smaller than
in our pre-virus forecast. That reflects a combination of lower
potential output and some lingering demand weakness.
• As the government tries to get the economy moving again,
the risk is it lifts restrictions too quickly, leading to a second out-
break. If that happens, we would expect the economy to shrink
14.2% in 2020 and expand a modest 4.4% in 2021.
• But there’s also a world in which spending ramps up more
quickly than we expect. In that case, we forecast the economy
will contract 8.9% this year and grow 9% in 2021.
The lockdown imposed by the government on March 23 had
a devastating impact on the U.K. economy. GDP dropped 5.8% in
March and plunged an unprecedented 20.4% in April, leaving output
at a level last seen in 2002. Timely indicators suggest activity began
to pick up in May as the government started easing the lockdown.
The speed at which containment measures are lifted will
determine the economy’s supply capacity in the near term. We
have assumed the lockdown is relaxed further over the summer,
but social distancing policies are kept in place until mid-2021,
when we assume a vaccine is found. These measures keep output
5% below its normal level.
On the demand side, the government has done a significant
amount to plug the gap in income created by the shuttering of the
economy. But it won’t count for much if there’s little confidence
in the outlook or the government’s strategy to keep the virus
under control.
We have become more downbeat about the likely size of
the rebound in the third quarter. Survey indicators point to house-
holds remaining gloomy about the outlook, and it seems unlikely
consumers will return to their old habits—particularly in relation
to social consumption—until the risk of infection has subsided

Three Scenarios for the U.K. Economy Demand Will Act as Activity Ceiling

U.K. real GDP, Q4 ’19 = 100 Percent deviation in activity from normal level
Actual Pre-pandemic forecast Baseline forecast Path of output Direct impact of lockdown measures
Upside (spending rebound, no scarring) Downside (second outbreak)
Forecast

110 0%

100 -10

90 -20

Q1 2018 Q4 2022 80 12/30/19 12/6/21 -30

Sources: Office for National Statistics, Bloomberg Economics Source: Bloomberg Economics

30 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS

 Europe

further. Since household spending accounts for two-thirds of GDP, of 2022. The sluggishness of the recovery in the medium term
it’s impossible for the economy to post a meaningful rebound mainly reflects the time needed for an adjustment in the labor
unless consumers open their wallets. market to a new reality—some jobs will be lost and new ones
With the near-term recovery slower than we previously created as a result of the virus.
forecast, we also expect unemployment to take a different path. History shows recession leaves economies with lasting scars.
Instead of peaking in the second quarter, we forecast the jobless Still, the scale of the policy response and the fact this recession
rate will rise further later in the year, as the government gradually
unwinds its furlough program and subdued activity prompts firms
to lay off some workers. We expect the unemployment rate to Scarring Is Hard to Avoid
peak at 8.5% at the end of the year.
Moving into 2021, we forecast growth will slow. That partly Percent deviation in U.K. GDP from pre-recession trend
reflects firms having to deal with the new trading relationship with 1956 1961 1973 1975 1980 1990 2008
the European Union. We expect a trade deal to be agreed by
yearend, but it will still mean an increased burden on companies
trading with the bloc. 0%
Demand gets a boost in the second half of 2021, when we
expect a vaccine to be found and social distancing measures to
be removed. But we don’t anticipate the economy moving above
its pre-virus peak in output (fourth quarter of 2019) until the end
-7

Decomposing the Forecast

U.K. real GDP, Q4 ’19 = 100

Pre-pandemic forecast June 2020 forecast 0 quarters since the start of the recession 20 -14
Direct impact of containment measures on supply and demand
Demand weakness Supply weakness
Source: Bloomberg Economics

100 wasn’t created by a buildup of imbalances give reason for optimism.

By the end of our five-year forecast period, output will be 3% below
our pre-virus projection. One-third of this stems from persistent
demand weakness, with the remainder reflecting permanent
90 damage to the economy.

BOE to Ease Again

On the policy front, the Bank of England is likely to unveil another
Q4 ’19 Q4 ’22 80 £100 billion ($124 billion) of quantitative easing in November, taking
the stock of assets on its balance sheet to £845 billion. This should
Sources: Office for National Statistics, Bloomberg Economics
be enough to soak up all the extra bond issuance this year, including
any fiscal measures by the government to support the recovery.

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 31

Europe

Scenario: A Second Outbreak

With pressure increasing to get the economy moving again, it’s
possible the lockdown is eased too quickly, resulting in a second
spike of cases in the second half of the year.
If this happens and it forces the government to impose tar-
geted containment measures, the economy would fail to bounce
in the third quarter and stagnate in the fourth quarter. That would
leave it about 12% smaller by the end of 2020, compared with our
baseline forecast. Under this scenario and at the end of our five-
year forecast period, we anticipate the economy would be 4%
smaller compared with our pre-virus forecast.

Scenario: Consumers Throw Caution to the Wind

Equally, it’s possible that exiting from lockdown goes smoothly
and consumers show little desire to hold precautionary savings.
In that world, spending would ramp up more quickly than we have
projected in our baseline forecast. We have also assumed limited
scarring from the downturn. That means growth picks up more
quickly in the second half of this year and the economy returns to
its pre-­crisis trend by the end of 2024.

U.K. Forecast

Indicator Q4 ’19 Q1 ’20 Q2 ’20 Q3 ’20 Q4 ’20 Q1 ’21 Q2 ’21 Q3 ’21 Q4 ’21 2019 2020 2021
GDP (Percent QoQ)
Baseline forecast 0.0 -2.0 -19.2 13.3 4.8 0.7 0.6 1.4 1.4 1.4 -9.5 6.5
Upside 0.0 -2.0 -19.2 14.4 6.1 1.5 0.9 1.5 1.2 1.4 -8.9 9.0
Downside 0.0 -2.0 -19.2 4.2 0.0 2.1 4.0 3.9 3.2 1.4 -14.2 4.4
Unemployment rate 3.8 3.9 6.0 7.5 8.5 7.9 7.3 6.8 6.4 3.8 6.5 7.1
CPI (Percent YoY) 1.4 1.7 0.6 0.2 0.4 0.4 1.1 1.4 1.5 1.8 0.7 1.1
Central bank rate 0.75 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.75 0.10 0.10

Forecasts as of June 18, 2020. GDP, CPI, and unemployment annual forecasts are full-year averages. Bank rate is Q4 average.
Source: Bloomberg Economics

32 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS

 Europe

What Sweden Tells Us

About a Post-Lockdown World
By JAMIE RUSH, MAEVA COUSIN, AND JOHANNA JEANSSON

WHEN GOVERNMENTS PREVENT all but essential workers from going

to offices and factories, huge swaths of the economy grind to a In France, Closer Contact and Longer Recovery
halt. That’s now clear. As lockdowns are lifted, the critical question
is what impact social distancing rules and caution among busi-
Share of surveyed
nesses and consumers will have on activity. Data from France, businesses expecting a
Sweden’s experiment with voluntary constraints, and statistics persistent hit to activity
on population density provide clues to the answer.
Social distancing rules will still prevent some businesses Hotels and restaurants
50%
from operating at full capacity. And as long as the risk of infection
persists, demand is likely to be down as customers stay home. Wholesale
Transport and
This means there will likely be a ceiling on economic activity until and retail
warehousing
Information and trade
a vaccine is available. Evidence on the impact of lockdowns as Finance and
communication Other services
countries entered the crisis points to a roughly 5% drag on the insurance 25
Business services
economy once milder containment measures become the norm.
Taking industrial structure into account, some countries are Real estate
likely to see activity plateau at a lower level when social distancing
is standard. We expect tourism-focused economies such as Spain 50 65 0
and Portugal to suffer heavier losses, while Belgium and Germany Contact intensity index
should be less affected.
Sources: French Ministry of Labor, Federal Reserve Bank of St. Louis, Bloomberg Economics
Isolating the Impact of Social Distancing
During the most intense phase of lockdowns, stay-at-home orders
hit activity across a wide range of businesses. As restrictions are
lifted, the impact of remaining containment measures will be We didn’t find evidence of the same relationship among
concentrated on a narrower subset. A survey by Dares, a depart- ­ anufacturers—for them, social distancing appears to be a smaller
m
ment of the French labor ministry, shows which businesses are problem. These findings have helped us calibrate our assumptions
expecting a long-term hit to activity. Contact intensity in the work- about which sectors are likely to be affected and by how much.
place appears to explain some of that variation.
We used data for the U.S., from O*Net, on workplace contact Evidence From Sweden
and combined that with a mapping of those jobs to categories of Consumer caution is likely to be an additional constraint on a­ ctivity.
economic activity. Our own remapping of that to the European For a look at how big an impact such caution can have, consider
Union’s categories has allowed us to assess contact intensity by Sweden. The Nordic nation has run the gantlet for its light-touch
industry in EU countries. approach toward containing the virus. More than others, the
In France, early business survey responses suggested there’s country of 10 million has relied on voluntary measures, such as
some relationship between contact intensity and the proportion asking people to stay home if they experience even the mildest
of service-sector businesses expecting a lasting hit to activity. viral symptoms.
Those expecting the biggest impact are hotels and restaurants, In April, it’s likely a big constraint on services activity was a lack
transportation and warehousing, wholesale and retail trade, and of willingness to leave the house, though worker absences and some
other services, which include recreation and cultural activities as social distancing rules for restaurants, stores, and travel probably
well as personal services such as hairdressing. All record much-­ mattered, too. Looking at activity in the services sector, we again see
higher-than-average contact intensity. the most contact-intensive activities are among those badly affected.

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 33

Europe

Don’t Be Dense
A Hit to Services Activity in Sweden Social distancing will impact countries more if people are living
closer together. But population ­density at the country level is a
misleading guide to the distribution in places where people actually
Decline in activity from live. Austria, Greece, Denmark, and France have relatively low
February to April overall population density, but a large portion of the population is
concentrated in extremely small areas.
Hotels and restaurants 40% The U.K. and Belgium have high average density and also
some of the most concentrated urban settlements in Europe. But
this is less true of Germany and the Netherlands, where population
Professional,
Motor vehicle sales and repair is more uniformly distributed. Sweden looks sparsely populated
scientific, and
technical services Arts, entertainment, whatever way you cut it, suggesting the impact of social distancing
recreation, and 20
Wholesale trade Transport might be smaller there than elsewhere.
other services

Retail trade How Low Is the Ceiling?

Real estate
50 Information and communication
Contact intensity index
Sources: Statistics Sweden, Eurostat, Federal Reserve Bank of St. Louis, Bloomberg Economics
The industries recording the most damage were air travel
and accommodation and food services, probably dropping about
85% and 40%, respectively, from February to April. Where we have
far less visibility is in manufacturing. With Sweden deeply embed-
ded in European value chains, lockdowns elsewhere represent a
huge source of disruption, muddying the picture.
If we assume manufacturing was stable, our estimates based
on private production data for two-thirds of output show activity
would’ve dropped 5% in April, compared with February. That’s an
economic blow similar in size to the one delivered by the 2008
global financial crisis. But with total output down by a third or more
in some countries, knowing a rebound to that level of activity is
possible should be a source of reassurance.
The Swedish example may even overestimate the economic
impact of social distancing. A relatively high infection rate may have
moderated consumer behavior by more than would be the case in
countries where the virus is under control. And there have been
restrictive advisories on travel that are just being lifted.
Generally, we expect activity to hit a ceiling 3%-6% below its
65 0 pre-pandemic normal, but with plenty of variation within that
range. Spain and Portugal are likely to be among the most a­ ffected;
Belgium and Germany among the least.
Breaking through that ceiling could be easier if the labor
market adjusts swiftly to the new normal, but that looks unlikely
in many parts of Europe. Extensive support via furloughing schemes
has provided much-needed aid, but that could slow the adjustment
in those sectors that will ultimately need to restructure. If infection
rates creep up again, it could be demand that acts as the binding
constraint, with hesitant consumers dragging the near-term ceiling
for activity lower.
It’s clear the overall impact could be bigger or smaller than
we estimate—there’s limited information to go on at this stage,
and the future course of the virus is highly uncertain. Even so, the
variation in our estimates across countries reflects genuine
­differences in the structure of each European economy.

34 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS


Economic Forecasts
2020 GDP growth forecast
Above -5%
-5% to -8%
-8% to -11%
Below -11%
Euro area
GDP growth: -8.8%
Central bank rate at yearend: 0.00%
Europe’s coronavirus outbreak will be the
biggest peacetime economic shock on
record—that much is clear. Less certain
is how quickly the economy will rebound
and how far social distancing will let
it run. The rapid easing of lockdowns,
abundant fiscal support, and encouraging
signs from real-time data indicate a
big improvement in the third quarter.
Progress thereafter will be slower.
1 U.K.
GDP growth: -9.5%
Central bank rate at yearend: 0.10%
The U.K. is facing a slow recovery from
the unprecedented hit to GDP inflicted
by the lockdown. We don’t expect output
to reach its pre-virus peak until the end
of 2022. The Bank of England is likely to
respond to the economic weakness with
more quantitative easing later in the year.
2 5
France
GDP growth: -10.3%
Central bank rate at yearend: 0.00%
Activity in France is poised for a huge
contraction in 2020, and GDP may fail
to recover its pre-virus level until early
2022. This will push unemployment to a
record high, creating a major headache
for President Emmanuel Macron ahead of
that year’s election.
3 Spain
GDP growth: -13.9%
Central bank rate at yearend: 0.00%
After six years of stellar growth, Spain
is set to experience an even deeper
contraction than its euro-area peers in
2020, as external demand for tourism
plunges and unemployment soars.
Activity should rebound sharply in the
following years once concerns about the
virus recede.
1
5
2 Russia
3 6
4 Sweden
GDP growth: -4.9%
Central bank rate at yearend: 0.00%
A light-touch approach toward containing
the virus has lessened the initial
economic blow, but it won’t prevent a
sharp contraction in 2020. The Riksbank
has expanded its asset purchases, and
the government will take advantage of low
indebtedness to increase spending in the
export-oriented Nordic economy.
Germany
GDP growth: -6.1%
Central bank rate at yearend: 0.00%
By getting on top of the virus early and
initiating widespread testing, Germany
avoided the most draconian containment
measures. And by supporting incomes
and providing loans, the government has
positioned the economy for recovery.
Even so, we expect some demand
weakness to linger in the second half.
6 Italy
GDP growth: -11.2%
Central bank rate at yearend: 0.00%
Early and stringent lockdowns caused
the Italian economy to contract sharply
in the first half, and the bounce back in
the second half will be partial. With a
wide output gap persisting this year and
next, the country could be on the brink
of deflation. That’s the last thing a highly
indebted nation needs.
SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS
7
9
7 Turkey
GDP growth: -4.4%
Central bank rate at yearend: 7.50%
Turkey’s expansionary fiscal policy,
interest-rate cuts, and attempts to
jump-start the economy through the
unleashing of credit won’t prevent a sharp
contraction this year. Lifting curbs on
people’s movement threatens a second
outbreak of the virus, and a run on the
currency is a lingering risk.
10
Europe
8
GDP growth: -6.1%
Central bank rate at yearend: 4.00%
Russia’s Covid-19 shock looks shallower
than feared, but the prospect of a swift
recovery is fading. A partial rebound in oil
and the ruble allow for more aggressive
public spending and monetary easing. Yet
infection rates remain high, and the policy
response has probably been too cautious
to avoid scarring.
9
Saudi Arabia
GDP growth: -4.7%
Central bank rate at yearend: 1.00%
Saudi Arabia’s strict lockdown, spending
cuts, tax hikes, and oil output reduction
will result in its deepest recession since
the 1980s. Monetary policy is constrained
by the peg to the dollar, which is set to
remain in place. An exodus of foreign
workers will turn the temporary slump
into a prolonged slowdown.
10 South Africa
GDP growth: -9%
Central bank rate at yearend: 3.25%
The economy was already in recession
going into the crisis. Stringent
containment measures have prompted a
plunge in output. Fiscal support has been
insufficient and slow to arrive, diminishing
prospects for a strong recovery. Easing
restrictions risks a protracted outbreak,
slowing the recovery even further.
35
Emerging
Markets
 Emerging Markets

Return-Free Risk: Why the Pandemic

Could Spell Emerging Markets’ End
By ZIAD DAOUD

FOR EMERGING MARKETS, THE VIRUS recession starts with a ­pandemic
most are ill-equipped to deal with, then layers on the worst ele-
ments of the 2008 global demand shock, the 2014 collapse in
commodity prices, and the 2018 capital flight episode. A deep
slump in the second quarter is already evident. Looking forward,
even in an optimistic scenario, the recovery will be shallow.
In our base case, we expect major emerging markets to
contract 3.1% on aggregate this year, down from a forecast for
Revisions to 2020 Emerging-Market Growth Forecasts
GDP, year-over-year change
Previous forecast (April) Latest forecast (June)
-12% -8 -4
China
4.7% expansion at the start of the year. Most economies are
­projected to shrink; China is set to grow at the slowest rate in
decades. The lost output in 2021 relative to the pre-virus outlook
will almost match the size of Russia’s economy.
Downside risks are material, ranging from the epidemiological
(a second virus wave) to the economic (mass layoffs, bankruptcies,
more capital flight, a further decline in commodity prices, and finan-
cial crises). If those risks crystallize, emerging markets could contract
as much as 5.3% this year—an output loss double the size of Mexico.
For an upside scenario to come into view, a number of things
would have to go right: the virus receding; a recovery in advanced
economies boosting exports, financial flows, and commodity demand;
and sizable emerging-market stimulus. There’s still an output loss
compared with pre-virus forecasts—the size of Turkey, in this case.
Stepping back from the detail, the EM growth story is becom-
ing less convincing. The virus is reinforcing the stagnation that
0 4
was already in place before the pandemic. Instead of risky returns,
emerging markets are merely offering return-free risks.

Indonesia
Base Case: Losing a Russia
Philippines The virus outbreak is kicking emerging markets when they’re down,
compounding existing problems and adding some significant new
Turkey
ones. Many countries have imposed stringent restrictions to
Saudi Arabia contain the spread of the virus. The economic bill is hefty: Output
is expected to contract 10%-20% in the second quarter.
Malaysia
The shape of the subsequent recovery will depend on
Colombia whether governments are able to replace lost income for busi-
nesses (to keep them afloat) and workers (to keep them employed).
Russia
For most emerging markets, the fiscal response has fallen short.
Brazil EMs have limited fiscal firepower. Slumping tax revenue, the
collapse in commodity income, and soaring health costs have
Thailand
reduced the space for action. Some countries (e.g., Argentina,
Chile Lebanon) were on the verge of default even before the pandemic.
Central banks have had to pick up the slack, embarking on
Peru
a record wave of rate cuts and introducing quantitative easing.
Mexico But monetary policy is unlikely to be as effective as direct public
spending; lenders will be reluctant to extend credit given
South Africa
elevated uncertainty.
Argentina
Downward Revisions
India*
Compared with April forecasts, we’ve downgraded economic
projections for many emerging markets.
*Fiscal year ending March 31, 2021 China stands out for its effective containment of the virus,
Source: Bloomberg Economics
relatively abundant space for fiscal stimulus, and immunity from
risks related to weak commodity prices and capital outflows.

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 37

Emerging Markets

In Saudi Arabia, we’ve revised our projection to –4.7%, from

In Most Emerging Markets, Fiscal Stimulus Isn’t Enough –2.9% previously. Factors include further spending cuts, the tripling
of the v­ alue-added tax rate to 15%, and the extension of the oil
Value as a share of 2020 GDP forecast production cuts. The kingdom stands out by embarking on austerity
Fiscal stimulus Income gap* in the middle of one of the deepest downturns on record.
In South Africa, we’re revising our 2020 projection to –9%,
from –5.6% previously. Incoming data suggest the economy was
0 8 16%
weaker than believed going into the crisis; the lockdown has been
China more stringent than expected and led to large-scale job losses
Peru and business closures; and fiscal stimulus has been slow
Chile and insufficient.
Indonesia
Malaysia The Downside: Losing Two Mexicos
Thailand Downside risks are material. In shifting intensities and combina-
Brazil tions, three stand out.
Russia 1. Capital flight. EM currencies have pared some of their
Philippines losses recently, but this may be a temporary respite. An abrupt
South Africa reversal of investment inflows has been a recurrent theme—­
Colombia occurring in 2013, 2015, 2018, and again this year.
India†
Turkey
A Premature Easing of Lockdowns?
Mexico
Argentina
Saudi Arabia Covid-19 cases confirmed in emerging markets, log scale

*Income gap figures as a share of pre-pandemic forecast. †Fiscal year ending March 31, 2021.
Source: Bloomberg Economics 1m

73

Even so, we expect growth for the year to limp in at 2.1%, the lowest
of the reform era. 1k
We expect India to shrink 10.6% in the fiscal year ending
Emerging markets stringency index,
March 31, 2021, compared with our previous projection of –4.5%.
a measure of the strictness of lockdowns
A longer-than-expected lockdown, still-rising virus cases, inade- 0
quate fiscal support, and limited space for further monetary easing 1/2/20 6/14/20 1
are behind the revision.
Russia will probably shrink about 6% this year, similar to our
Sources: IMF, Johns Hopkins University, University of Oxford, Bloomberg Economics
April projection, but the recovery in 2021 (4%) won’t be nearly as
swift as previously anticipated (8%). Extended cuts to oil output
will exert an additional drag, while the deficient fiscal response
has probably resulted in more scarring than we initially assumed. 2. A further collapse in commodity prices leading to
We expect Brazil to shrink 6.4% this year, a deeper contrac- public spending cuts among exporters. Oil prices have partially
tion than our previous expectation of –3.2%. Operational issues recovered after the OPEC+ group of countries agreed to end the
are limiting the effect of fiscal measures, and policy uncertainty ­market-share war. Prices also rose amid signs of a demand pickup,
is weighing on asset prices, confidence, and business decisions. but the rise has been limited and temporary.

38 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS

 Emerging Markets

3. An inability to contain the virus, or a second wave. The The Upside: Losing a Turkey
risk is real. Emerging markets have started loosening their social For growth to outperform our base case, a lot needs to go right:
­distancing restrictions, even as the number of cases has continued successful containment of the virus; an absence of extreme social
to rise. Given the hefty costs, a second outbreak may not trigger distancing policies; and a recovery in advanced economies without
lockdowns as stringent as in April, but they’d still drag on activity. stimulus being suddenly withdrawn.
The downside scenario sees deep recessions for most Even under the optimistic scenario, in 2021 the
­countries, with a range of 5%-17% contraction this year and not ­emerging-market income gap from the virus outbreak, compared
much of a pickup next year. with the pre-pandemic path, will be close to $1 trillion, larger than
the economy of Turkey.
Pre-Pandemic Stagnation
Return-Free Risk
Emerging markets went into the crisis while not in the best shape.
Average annual growth rate Growth in the last five years has significantly lagged the previous 10.
2003-13 2015-19 In some places (Saudi Arabia, Russia, South Africa), the
expansion has fallen behind advanced economies—these countries
Average rate for advanced economies, 2015-19
have been offering a return-free risk to investors. Argentina and
0 5% 10% Brazil have completely stagnated, with output contracting.
Excluding China and India, the share of emerging markets we track
India in the global economy (using market exchange rates) peaked at
15% in 2013, before falling to 12% last year.
China
A number of factors explain this stagnation:
Philippines • The decline in commodity prices reduced the income of
exporters. Russia, Brazil, Mexico, and Colombia have seen their
Indonesia
economies shrink in nominal terms when compared with 2014.
Malaysia • China’s continued slowdown and the escalation of trade wars
have contributed to the slowdown in commodity demand and hurt
Turkey
export-dependent economies, such as those in Southeast Asia.
Thailand • Repeated sudden stops in capital flows have bruised cur-
rencies dependent on foreign funding. Turkey and Argentina are
Peru
smaller in nominal dollar terms than six years ago.
Colombia • Slower population growth has lowered economic expansion
in a number of Latin American countries, including Chile and Peru.
Chile
The virus outbreak is compounding these forces, and the
Mexico post-pandemic world promises to be an even more hostile place.
Isolationism, protectionism, localized supply chains, reduced tourism,
Saudi Arabia
and lower remittances mean the route to prosperity will be a lot more
South Africa rugged. Many emerging economies may fail to emerge at all.
Russia

Argentina

Brazil

Sources: IMF, Bloomberg Economics

SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 39

Emerging Markets

How the Virus Plus Debt Could Derail

Africa’s Development
By BOINGOTLO GASEALAHWE

SOUTH AFRICA, NIGERIA, ANGOLA, Ghana, Kenya, and Senegal need

$52 billion to fund their post-pandemic recoveries. Combining
domestic and international funds, only $20 billion looks likely to
be spent. As a consequence, the stimulus response to the C ­ ovid-19
crisis is set to come up short. Cut off from cheap finance, some
of Africa’s biggest economies risk a protracted slump that could
curtail development for decades.
• We estimate these six African economies—which have a
substantial presence in global debt markets—will see gross domes-
tic product contract an average of 4.5% this year, because of efforts
to contain the coronavirus outbreak.
• Plugging the income gap is the best way Africa’s govern-
ments can position households and businesses to return to work
as the impact from the pandemic eases.
• External support is essential for delivering stimulus in an
environment constrained by varying combinations of high indebt-
edness and weak institutions. Funding from the International
Monetary Fund has fallen short, while a Group of Seven proposal
to extend additional loans was blocked by the U.S.
• Senegal is the only country of the six offering the fiscal
support needed to fill the income gap created by the Covid-19
lockdown. South Africa has committed 3% of GDP, while for Angola,
Ghana, Kenya, and Nigeria the rate averages just 0.5%.
• To illustrate the dangers of stimulus falling short, we’ve con-
structed a scenario in which African economies fail to recover as
the lockdowns are lifted. In this scenario, higher debt and borrowing
costs squeeze out much-needed social spending. If that happens,
Africa’s development grinds to a halt.
The Scale of the Problem and the Fiscal Response
To estimate the income lost to the pandemic, we’ve compared
the IMF’s most recent GDP forecasts from the April 2020 World
Economic Outlook to those from October 2019, before the outbreak
began. For South Africa, we used our own estimates. We then
compared these with the size of loans offered by the IMF and the
fiscal policy response in each country.
We took the discretionary measures directly from the IMF’s
policy tracker and complemented this with detail from government
reports and our own analysis. We obtained the size of IMF loans
from the organization’s lending tracker.
In assessing the fiscal response, we’ve tried to disentangle
discretionary and automatic spending. Because social safety nets
are thin in much of Africa, we’ve used the tax share of GDP as a
proxy for how much borrowing will rise in response to the economic
downturn. For South Africa, we used a cyclical adjustment
­coefficient from the IMF.
Available Funds Not Enough to Cover Income Gap
Value of income gap and responses as a share of GDP
Income shortfall
Automatic fiscal support Discretionary fiscal support IMF support
0 5 10%
South Africa
Nigeria
Kenya
Ghana
Senegal
Angola
Sources: IMF, Bloomberg Economics
IMF support comes nowhere near close to filling the income
gap created by the viral outbreak. Combined with a reluctance to
or difficulty in raising finance in capital markets, the result is a fiscal
response that’s vastly inadequate in four of the six countries.
With fiscal support at over 7% of GDP, Senegal has more
than plugged the income gap created by the viral outbreak. This
has been possible because, unlike in the other countries, Dakar
entered the crisis with a more sustainable debt load, thanks to an
adherence to its planned fiscal consolidation path, an acceleration
of reforms, and prudent borrowing. South Africa has plugged
around half the gap, but support has come late and deployment
has been slow.
The average fiscal response across the other four countries
we assessed is just 0.5% of GDP, which is enough to cover only
about 14% of the income shortfall. Nigeria and Angola look most
vulnerable. As oil exporters they have the twin fiscal shock of
Covid-19 and plunging crude prices to deal with, limiting the room
to maneuver. Low oil prices beyond 2020 will continue to depress
revenue and growth. This is particularly bad news for Angola, which
is already experiencing a multiyear recession. The country is still

40 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS


reeling from the 2014-16 price crash and will contract for a fifth
straight year in 2020.
IMF Support—Why Not More?
The IMF has two emergency funding instruments the countries can
access to reduce their special drawing rights (SDRs): a Rapid
Financing Instrument (RFI), available to all member countries, and
a Rapid Credit Facility (RCF), available to low-income countries only.
The RCF is interest-free, and the RFI is disbursed at a still-
cheap 1% rate. Nigeria and South Africa can access the RFI only;
they’re considered middle-income countries.
Every country has a quota allocated under each instrument
it’s eligible for. Under normal circumstances, a country can access
only 50% of its quota per annum, but this has been temporarily
increased to 100% in response to rising financial needs related to
Covid-19. Still, this is not enough.
Despite the six countries covered taking their full allocation,
the loans haven’t been able to meaningfully close the income gaps
they face. In recognition of this, the IMF tried to increase member
SDRs so they could access more funding. The support required
to pass this motion, however, has been lacking.
External Public and Guaranteed Debt in 2018
Value of debt, by type
Multilateral Private
0 40 $80b
South Africa
Angola
Kenya
Nigeria
Ghana
Senegal
Source: World Bank
SPECIA L R EPO RT • B LO O M B ERG ECO N O M ICS
Emerging Markets
The IMF and the Group of 20 have provided relief to
l­ ow-­income countries by freezing loan and interest payments until
the end of the year. Because of their assumed ability to access
private capital to supplement income shortfalls, most of the six
economies we assess have been excluded from that scheme.
Private creditors (including China) have been even less forth-
coming. They’ve dismissed calls for blanket debt relief to low-­
income countries, preferring instead to consider debt restructuring
or delayed payments. This will be done on a case-by-case basis.
The exclusion of these bigger economies is based on a flawed
premise. Investor pullback from emerging-market assets and
ratings downgrades have dramatically pushed up the cost of
­borrowing, making debt a costly and potentially risky option for
some countries.
Borrowing Costs Have Spiked
Midyield to maturity of government bond, weekly
Angola Ghana Kenya Nigeria Senegal South Africa
30%
20
10
8/30/19 6/19/20 0
Source: Bloomberg
The Danger of Doing Too Little
As a result of inadequate stimulus, many African economies are
positioned for an extended slump, not a rapid recovery. We illus-
trate the potential costs with a scenario in which economies don’t
recover and African governments are forced to borrow at expensive
rates to maintain public services provision and address shortfalls
in revenue.
For each country, we assume the fiscal response falls short
and the economy, having taken a deeper hit, is profoundly scarred
by the crisis, failing to recover in the second half. As a result, the
41
Emerging Markets

impact on 2020 GDP growth from the Covid-19 crisis is doubled to push debt, which was rising before the crisis struck, above 70%
and governments are forced to borrow more, even at a high cost, of GDP. The pandemic is threatening to return the burden to levels
to maintain public services provision. last seen decades ago, before the forgiveness of the 2000s.
Although borrowing costs have moderated somewhat in With low borrowing costs and easy market access, many
recent weeks, we assume rates return to crisis peaks as recoveries advanced economies can sustain a debt burden in excess of 100%.
fade from view. In Angola, for example, this will see borrowing In Africa, that isn’t possible. The increasing reliance on commercial
costs on new debt increase by more than 2,000 basis points com- bonds over the past decade has not only increased debt service
pared with levels seen before the crisis. For the others, costs will costs but also raised the risk profile of debt, reducing the threshold
increase as much as 300 basis points. The following chart plots for debt distress in the region. In 2015, Ghana hit a wall when its
the evolution of debt in this scenario. debt reached 70% of GDP, forcing the country to enter an extended
IMF program to restore debt sustainability. Angola and Senegal
are already on IMF programs. More borrowing will increase already
Debt Approaching 2000s Forgiveness Levels elevated vulnerabilities.
Even though Nigeria’s debt-to-GDP ratio is the lowest of the
group, debt service costs will continue to take up more than 60% of
Debt as a share of GDP*
government revenue, the highest of the six countries. This, too, poses
Angola Ghana Kenya Nigeria Senegal South Africa
sustainability risks, especially if oil prices (which account for over
50% of tax revenue and 90% of export receipts) remain depressed.
Bloomberg
Economics Because all six countries are rated junk (mostly
forecasts ­speculative-grade), investor sentiment will remain an important
150% determinant of debt sustainability. As developments over the
course of the pandemic have shown, investors can make it too
costly to service or raise debt if borrowing costs rise, or outright
100 impossible if credit completely dries up.

Long-Term Consequences
50
For most countries, rising debt service costs will continue to
account for a disproportionate share of their budgets, squeezing
2000 2024 0 room for social development spending. Most countries already
spend more on servicing their debt than on critical areas such as
*2019 figures are estimates. health and infrastructure.
Source: Bloomberg
With the exception of South Africa, total social development
spending averages 3% of GDP. This is far below both the average
of 21% for member countries of the Organization for Economic
Angola faces the biggest problem: The collapse in oil prices, Cooperation and Development and the roughly 10% for other
a protracted recession, dramatic increases in borrowing costs, emerging and frontier markets. Higher debt servicing costs will
and kwanza depreciation will see debt rising to 139% of GDP this only squeeze that spending further. This will weigh on growth and
year, from 110% in 2019. South Africa also faces an inexorable rise possibly reverse the development progress of recent years, espe-
in debt. Covid-19 will combine with already structurally weak cially on poverty alleviation.
growth, slow fiscal consolidation, and the continued bailout of
state-owned enterprises to result in debt rising to 76% of GDP
this year, from 60% in 2019. Under current policies, this ratio is
projected to reach 99% of GDP by the end of 2024.
Ghana, Kenya, Nigeria, and Senegal don’t face quite the same
severity. Their debt-to-GDP ratio rises only 7 percentage points
on average. Still, with the exception of Nigeria, this will be enough

42 SPECIAL REPO RT • B LO O M B ERG ECO N O M ICS

 Forecasts

Gross Domestic Product (% YoY)1 Central Bank Rate (%)2

Actual Forecast Actual Forecast
2019 2020 2021 2019 2020 2021
North America
U.S. 2.2 -6.2 3.6 1.75 0.25 0.25
Canada 1.6 -7.3 4.4 1.75 0.25 0.25
Europe
Euro area 1.2 -8.8 6.1 0.003 0.003 0.003
France 1.3 -10.3 7.8 — — —
Germany 0.6 -6.1 3.0 — — —
Italy 0.3 -11.2 8.3 — — —
Russia 1.3 -6.1 4.2 6.25 4.00 4.50
Spain 2.0 -13.9 10.9 — — —
Sweden 1.2 -4.9 3.0 0.00 0.00 0.00
Turkey 0.9 -4.4 3.6 12.004 7.504 7.504
U.K. 1.4 -9.5 6.5 0.75 0.10 0.10
Asia
Australia 1.8 -2.0 1.9 0.75 0.25 0.25
China 6.1 2.1 8.2 4.155 3.455 3.355
India6 4.2 -10.6 12.7 5.157 3.007 3.007
Indonesia 5.0 0.0 4.6 5.00 3.75 3.50
Japan 0.7 -4.2 2.8 -0.10 -0.10 -0.10
Malaysia 4.3 -5.5 5.5 3.00 1.50 1.50
New Zealand 2.2 -3.1 3.8 1.00 0.25 0.25
Philippines 5.9 -3.1 8.1 4.00 2.25 2.25
South Korea 2.0 -0.1 3.3 1.25 0.50 0.50
Singapore 0.7 -5.8 4.2 — — —
Thailand 2.4 -6.5 5.6 1.25 0.25 0.25
Latin America
Argentina -2.2 -9.5 3.3 55.00 36.00 29.00
Brazil 1.1 -6.4 2.0 4.50 2.25 2.25
Chile 1.1 -6.5 4.4 1.75 0.50 0.50
Colombia 3.2 -5.7 4.2 4.25 1.50 1.50
Mexico -0.3 -7.7 3.5 7.25 3.00 3.00
Peru 2.2 -6.8 6.8 2.25 0.25 0.25
Middle East & Africa
Saudi Arabia 0.3 -4.7 2.1 2.257 1.007 1.007
South Africa 0.2 -9.0 2.4 6.50 3.25 2.75

As of June 12, 2020

Footnotes

1. Full-year growth
2. End-of-year forecast
3. Deposit rate
4. One-week repo rate
5. One-year loan prime rate
6. Fiscal year forecast (April to March)
7. Repo rate

S PECIA L R EPO RT • B LO O M B ERG ECO N O M ICS 43

Contact Us

Stephanie Flanders Tom Orlik

Head of Bloomberg Chief Economist
Economics torlik4@bloomberg.net
flanders@bloomberg.net +1 202 807 2185
+44 20 3525 2581

Global Richard Marquit Europe Geoff King

Project Manager/Editor Editor
Björn van Roye rmarquit@bloomberg.net Jamie Rush gking56@bloomberg.net
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David Powell
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ahusby1@bloomberg.net Niraj Shah +91 22 6120 3735
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bbaris1@bloomberg.net Scott Johnson fhernandez35@bloomberg.net
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Editor sjohnson166@bloomberg.net
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Editor +81 3 4565 8371
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