Global economic prospects remain subdued. GDP growth has slowed, trade and investment growth remains weak, and policy uncertainty has declined but is still elevated and is among the main factors of concern for firms around the world.
In our latest Outlook released in November, we projected global growth to remain below or around 3% for the next two years, the lowest rates since the financial crisis. Since then, manufacturing survey indicators such as export orders have begun to stabilise. The phase 1 trade deal between China and the United States has helped reduce short-term uncertainty but the latest trade indicators remain weak. Global port traffic declined nearly 7% at an annualised rate in the fourth quarter of 2019, its worst performance since the global financial crisis.
Risks remain skewed to the downside
Certain trends in financial markets remain a source of concern, including for instance the build-up of low-quality corporate debt. With USD 2.1 trillion corporate bonds having been issued in 2019 alone, the debt of non-financial companies has increased worldwide to an all-time high of $13.5trn. Over the last three years 52% of all new issues were one level above investment grade. An exogenous shock, such as further trade tensions, could trigger mass downgrades, with negative consequences for growth and ultimately households.
There are also clear signs that emerging economies will not be the hoped-for locomotives to revive growth. Projections for the Indian economy have been revised downwards, while the corona virus outbreak and associated policy reactions have slowed the Chinese economy and will likely have a global impact.
Our main scenario is that of a V-shaped recovery: a short-term dip in the first quarter followed by a sharp bounce-back in China and the world economy in the second and third quarters of 2020. However, should the virus start to spread to other countries, economic activity would weaken substantially from an already very modest pre-virus baseline of around 3%. Here, by agreeing on appropriate containment and policy measures, the G20 can help to restrict the spread of the virus, boost confidence and support economic activity.
The consequences of the virus outbreak are a salient reminder – if we needed one - that we live in an increasingly integrated and interdependent world. There are risks to the global outlook that can only be addressed through international cooperation. Climate change mitigation, poverty and inequality, migration trade, technology and investment related tensions and ensuring that multinational enterprises pay their fair share of taxes, all require global solutions.
Working together, G20 economies can restore predictability in international rules and create an environment where growth can restart and become more sustainable. If G20 economies implement a set of co-ordinated monetary, fiscal and structural actions, the short-term impact on economic growth could be a ¾ per cent GDP increase in the first year and a total of 1 ¼ percent after two years. Monetary policy has also created an exceptional amount of space for governments to collectively make investments in quality infrastructure and other measures to support growth and transition to a low-carbon and inclusive digital economy. Let’s harness the transformative power of G20 collective action.
By Angel Gurría