Analysis
of September 2020 OECD Economic Report: Living with Uncertainty
By the Curmudgeon
OECD Report Summary:
The coronavirus pandemic along with geopolitical uncertainty and aging
economic expansions have caused global economic growth to contract sharply in
the 2nd Quarter 2020. All G20
countries with the exception of China (you cant trust their economic numbers)
will have suffered recession in 2020.
The Organization for Economic Cooperation and Development (OECD) latest
forecast is for global GDP to fall by 4.5% this year, before growing
by 5% in 2021. In its June 2020 Economic
Outlook report, the OECD expected the global economy would contract by 6% this
year and grow 5.2% next year.
Although OECD forecasts a fragile recovery next year, in many countries
output at the end of 2021 will still be below levels at the end of 2019, and
well below what was projected prior to the pandemic. India, Mexico, and South
Africa will experience an even larger recession than the OECD anticipated three
months ago.
Uncertainty remains high and the strength of the recovery varies markedly
between countries and between business sectors. Prospects for an inclusive,
resilient and sustainable economic growth will depend on a range of factors
including the likelihood of new outbreaks of the virus, how well individuals
observe health measures and restrictions, consumer and business confidence, and
the extent to which government support to maintain jobs and help businesses
succeeds in boosting demand.
How successfully a country manages coronavirus cases will determine whether
it permits its economy to reopen or remain in a semi-locked down state. If a government can keep COVID-19 infection rates
at a bare minimum, occasional outbreaks are much easier to deal with. This is
reflected in the two countries leading the OECD latest gross domestic product
projections through 2021: China and South Korea economies are
expected to grow 8% and 3.1%, respectively in 2021. Conversely, Japan was already
careening into a recession before the coronavirus outbreak, which was
relatively mild in that country.
The OECD economic projections (see graph below) also make clear that
COVID-19 isnt the only factor involved. The U.S. has not managed the pandemic
very well, but its economy is still expected to bounce back better than most
nations. China and Europe are also
expected to perform better than expected.
In its September 2020 Economic Outlook report OECD says:
Prospects for economic growth
will depend on various factors, including the likelihood of new virus
outbreaks, the impact on consumer and business confidence, and the extent to
which government aid for jobs and businesses can boost demand. The
unprecedented policy support by governments needs to continue but become more
targeted and be flexible enough to adapt to changing conditions. Policymakers
need to convince people that they are working to improve their lives and
creating opportunities for all.
Output picked up swiftly
following the easing of confinement measures and the initial re-opening of
businesses, but the pace of the global recovery has lost some momentum over the
summer months.
"In most economies, the
level of output at the end of 2021 is projected to remain below that at the end
of 2019, and considerably weaker than projected prior to the pandemic, highlighting
the risk of long-lasting costs from the pandemic.
Image Credit: Geopolitical Futures
Key Messages from the OECD Report:
·
Policymakers have reacted and managed to buffer the
initial shock well.
·
Activity rebounded as confinement measures started to
ease, but momentum appears to be plateauing and confidence remains weak.
·
Policy still matters to boost confidence: improve health
care, maintain fiscal and monetary support, assist people and firms with
ongoing changes.
·
Recovery plans are a once in a lifetime opportunity to
encourage sustainable, inclusive, and green growth.
Comment and Analysis:
The OECDs forecasts seem to be Pollyanna-like optimistic, predicting
massive V-shaped recoveries in most of the worlds leading economies. For 2021, the OECD sees positive real GDP in
EVERY country it tracks with a 5.7% average for all 37 OECD countries. Yet most economists expect GDP in almost all
countries to decline well into 2021.
That was detailed in last weeks post titled Global
Economies Rebound, but Wont Reach Pre-Coronavirus Levels Till 2022.
Some of the country OECD estimates are contingent on policy assumptions
that may not materialize.
For example, OECD expects the U.S. Congress to approve another stimulus
package worth up to $1.5 trillion this fall. That despite the fact that negotiations have
reached an impasse. Reaching an agreement may be more difficult as the November
election approaches. ShadowStats John
Williams continues to forecast a L type of economic recovery for the U.S.
The OECD assumes that the United Kingdom (UK) will reach a "basic"
free trade agreement for goods with the European Union (EU). But
talks could be crushed by a controversial bill introduced by Prime Minister
Boris Johnson's government, which would break the terms of a previously
negotiated divorce agreement.
But what if the above agreements dont materialize? Or if COVID-19 vaccines prove less effective
than hoped? Or if the damage being wrought by the virus and the extreme rescue
measures being deployed in response lead to structural changes (e.g. travel
restrictions) that inhibit economic growth?
Closing Quotes:
"The world is facing an acute health crisis and the most dramatic
economic slowdown since the second World War. The end is not yet in
sight," Laurence Boone, OECD chief economist.
For the last five years, much of corporate cash flows were deployed into
share buybacks, not capital spending or productivity improvements. We're
probably in a more diminished state because of the financial engineering in the
past decade than we were prior to the previous financial crisis. We're in a bad
situation, Robert L Rodriquez, former managing
partner at FPA (who says Were in a Rolling Depression.)
.
Good health, good luck and till next time
.
The Curmudgeon
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Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
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Sperandeo is a historian, economist and financial innovator who
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