Eurozone

The recent flow of economic data supports the view that Q1 will have seen stronger quarterly GDP growth than Q4's 0.4% gain. Indeed, given the composite PMI's healthy end to Q1, the strength seen in Q1 may continue next quarter. As a result, we have upgraded our forecast for GDP growth in Q2 and now pencil in a second consecutive quarterly gain of 0.5%.     

Japan

Growth continues to struggle against an uncertain external outlook and weak domestic demand. While GDP in most of 2019 was supported by a pick-up in consumption spending ahead of last October's consumption tax hike, weak October and November data highlighted the possibility of a larger than expected fall in growth in Q4 2019. We expect GDP growth to slow to 0.3% in 2020 (after an estimated 1.0% in 2019), held back by a higher consumption tax, weak wage growth, and sluggish trade. That said, the 2020 Tokyo Olympics should provide modest support to spending and tourism. In 2021, we expect GDP to grow 0.8%.     

Forecast Overview

Q2's national accounts reaffirmed the ONS's previous estimate that GDP fell by 0.2% in Q2, as the economy suffered both payback from Brexit‐related stockpiling in the first quarter of this year and a drag on manufacturing output from some car makers bringing their annual summer shutdowns forward to April. But growth in both Q4 2018 and Q1 2019 was revised up by 0.1ppt to 0.3% and 0.6% respectively.     

Eurozone

All the signs are that Q2 will see Eurozone GDP growth exceed Q1's well above‐trend rise of 0.6%. In addition to the business surveys continuing to rise, quarterly industrial production and retail sales growth also probably accelerated in Q2, closing the previous gap between the surveys and hard data. This points to a robust rise in GDP of 0.7% to 0.8% in Q2     

Japan

Monthly data suggest that GDP growth remained solid in Q3. Industrial production increased 2.1% on the month in August, more than reversing the 0.8% decline in July. Goods export volumes also rose strongly, growing nearly 9% y/y in July‐August combined, while the latest Tankan survey showed a rise in capital spending intentions. And although the BoJ's real consumption activity index suggests that growth in household spending moderated in Q3, this followed a very robust outturn in the previous quarter.     

Eurozone

The Eurozone economy probably reached its peak velocity in Q2, when GDP rose 0.6% q/q. The figures available for Q3 provide something of a diverging picture between soft and hard data. The composite PMI – which has been the best predictor for quarterly GDP growth – averaged 56.0 in Q3, only slightly below the 56.6 seen in Q2. And the EC's Economic Sentiment Indicator was actually stronger in Q3 after reaching a new multi‐year high in September. But some of the hard data suggest that growth may be softer than indicated by the strong surveys. In particular, retail sales have been surprisingly weak despite high consumer confidence and strong employment growth, although we suspect weatherrelated factors have been at play.     

Japan

Data from Q3 have been quite mixed, but on balance suggest that the fallout from April's sales tax hike has been worse than initially expected. The composite PMI reached a six‐month high of 52.8 in September, but the Cabinet Office's index of coincident indicators has continued to fall through Q3. On balance, we estimate that GDP was virtually flat in Q3. We thus now expect growth for 2014 as a whole to come in at 0.7%, down from 1.1% three months ago…     

Eurozone

Following a 0.2% q/q rise in GDP in Q2, it looks as though the eurozone economy remained very weak in Q3. High‐frequency indicators remained dismal, with the composite PMI falling to its lowest in six years in September. The EU's Economic Sentiment Indicator also fell in September and was below the Q2 average. And available hard data offers no relief, with both industrial production and retail sales contracting in July.     

Why has the UK's export performance been so poor?

The UK's export performance since 2008 has been disappointing, especially when sterling's depreciation in 2008–09 is taken into account. This reflects a deterioration in relative wage costs, particularly relative to the US and Germany. In the four years from Q2 2009, export volumes grew by 17%. In contrast, Germany's exports grew by 34% over the same period. The poor performance of exports is one of the key reasons for lacklustre growth in the UK, with GDP still below pre‐crisis levels…     

Forecast Overview

GDP fell by 19.8% q/q in Q2, leaving output nearly 22% lower than Q4 2019. This was a larger decline in output than any other major economy except Spain. However, different methodologies for measuring public sector output exaggerated the scale of the UK decline relative to most other countries. The ONS is one of the few statistical agencies to attempt to construct genuine volume measures of public sector output and government consumption. Real government consumption rose between Q4 2019 and Q2 2020 in Germany and Spain but fell by 18% in the UK.     

Structural breaks in public finances in Central and Eastern European countries

This article studies the evolution of quarterly government Total Deficit (TD) to Gross Domestic Product (GDP) and debt to GDP ratios of seven Central and Eastern European member states (CEEC-7) of the European Union over the period 2000 Q1 to 2011 Q2. Alternative unit root tests are applied to identify the number and date(s) of structural break(s) in the fiscal ratios. The breakpoint date(s) are estimated endogenously. The best performing unit root test is determined by the adjusted R-squared metric. The level and trend of fiscal ratios are estimated by using breaking trend regression models. Unit root tests performed for the period 2000 Q1 to 2007 Q4 identify the number and date(s) of structural break(s) in fiscal variables before the global economic crisis. Unit root tests and breaking trend regressions are estimated for total Eurozone TD to GDP and debt to GDP to compare the evolution of total Eurozone fiscal ratios with those of each CEEC-7.     

World Economic Prospects Monthly

Overview: Coronavirus to cut global growth to new lows

• ▀ The rapid spread of coronavirus will weaken China's GDP growth sharply in the short term, causing disruption for the rest of the world. We now expect global GDP growth to slow to just 1.9% y/y in Q1 this year and have lowered our forecast for 2020 as a whole from 2.5% to 2.3%, down from 2.6% in 2019.
• ▀ Prior to the coronavirus outbreak, there had been signs that the worst was over for both world trade and the manufacturing sector. However, this tentative optimism has been dashed by the current disruption.
• ▀ While the near-term impact of the virus is uncertain, the disruption to China will clearly be significant in Q1 – we expect Chinese GDP growth to plunge to just 3.8% y/y. Even though growth there will rebound in Q2 and Q3, it will take time for the loss in activity to be fully recovered and we now expect GDP growth of just 5.4% for 2020 as a whole, a downward revision of 0.6pp from last month.
• ▀ Weaker Chinese imports and tourism and disruption to global supply chains will take a toll on the rest of the world, particularly in the Asia-Pacific region. And the shock will exacerbate the ongoing slowdown in the US and may result in the eurozone barely expanding for a second quarter running in Q1.
• ▀ Weaker oil demand in the short term has prompted us to lower our Brent oil price forecast. We have cut our projection for growth in crude demand in 2020 by 0.2m b/d to 0.9 mb/d and now forecast Brent crude will average $62.4pb in 2020, down from about $65pb in our January forecast.
• ▀ Quarterly global growth is likely to strengthen a little in H2 this year as the disruption fades and firms make up for the lost output earlier in the year and the effect of China's policy response starts to feed through. But for 2020 overall, global growth is now likely to be just 2.3%, 0.2pp weaker than previously assumed as a result of the epidemic.

     

Europe

The Eurozone's resilience was tested again with another episode of political turmoil in Italy and financial market tensions related to the US government shutdown. But the region withstood the shock with only brief and very limited movements in financial markets. This stability suggests that the economic recovery is well established, albeit slow. We forecast 0.1% quarter‐on‐quarter in Q3 and with only a small improvement in Q4, 2013 as a whole should see Eurozone GDP contract by 0.3%.…     

Europe

The Eurozone economy gathered pace through Q1, with the composite Purchasing Managers' Index (PMI) rising to a 32‐month high in February, which was followed by a similar reading in March. However, the improvement in a number of forward‐looking indicators has eased. The EC's business survey showing firms' expectations for orders growth plateaued during Q1. And while firms are no longer shedding workers, there seems little appetite to create jobs, constraining prospects for household spending. We expect the pace of GDP growth to remain around 0.3% per quarter for the remainder of the year…     

Japan

GDP grew by a solid 1.7% in 2017, supported by strongly expanding global trade. For this year, we expect growth to ease to 1.2%, dampened by slowing external momentum and weak domestic demand in Q1. Although GDP dropped 0.2% q/q in Q1, we expect this setback to be temporary and look for reasonable, broad‐based growth during the rest of 2018. Monthly indicators of consumption and trade look positive and suggest a recovery in Q2. The outlook for investment also remains broadly positive, although sentiment has moderated somewhat since the start of the year. Protectionism, particularly the threat of US tariffs on Japanese cars, remains a key downside risk for our forecast.     

UK Forecast Overview

We have nudged down our forecast for GDP growth in 2015 from 3% in January to 2.8% now, reflecting the likelihood of a soft initial reading for Q1 growth. But the outlook remains favourable, with a period of low inflation underpinning strong growth. March's Budget did little to alter the outlook, with fiscal policy in a holding pattern until after May's General Election…     

World Economic Prospects Monthly

Overview: World GDP now seen falling 2.8% in 2020

• ▀ With much of the global economy now in some form of lockdown due to the coronavirus pandemic, we expect world GDP to contract by about 7% in H1 2020. Activity is expected to rebound sharply in H2, but even so the severity of the shock is likely to lead to a permanent GDP loss for the global economy.
• ▀ While Chinese activity picked up in late-Q1 as lockdown restrictions were unwound, we expect Q1 GDP to have fallen 12% q/q before rebounding sharply in Q2. But this Q2 boost looks set to be swamped by the collapse in activity caused by the rest of the world going into lockdown.
• ▀ Although shutdown restrictions elsewhere are less severe than those imposed in China, business survey and labour market data still point to sharp falls in activity in most countries in Q2. Quarterly GDP declines of 8% or more in the US and eurozone seem likely. Overall, world GDP could fall by about 7% in H1, roughly double the size of the contraction during start of the global financial crisis in 2009.
• ▀ In those economies subject to some form of lockdown, we expect restrictions to begin to be lifted during Q2. As a result, growth should resume in Q3 as sectors that have been forced to shut down see some pick-up. But despite this rebound, world GDP is now seen shrinking 2.8% in 2020 overall — in 2009, the global GDP fall was 1.1%.
• ▀ The H2 pick-up, followed by a return to more normal conditions next year, will result in world GDP growth rising to almost 6% in 2021, helped also by the recent collapse in oil prices to about $30pb. But the scale of the disruption means that we expect a permanent loss of output from the shock. We expect global GDP in the medium term to be some 1.5% below the level we had anticipated before the coronavirus outbreak.
• ▀ The risks around this forecast are large and broadly balanced. But were stringent lockdowns or widespread disruption, perhaps due to renewed outbreaks of the virus, to extend into Q3, global GDP could fall by as much as 8% this year.

     

UK Overview

We have revised down our forecasts of GDP growth for this year and next, from 2.4% and 2.5% respectively three months ago, to 2.1% and 2.3% now. The downgrades reflect the heightened uncertainty caused by the recent financial market turbulence and the upcoming referendum on the UK's membership of the EU, as well as evidence of softer global growth. We expect the first interest rate hike to come in Q2 2017, with the risks skewed towards a later move.     

Forecast Overview

The ONS has made substantial revisions to the historical national accounts data which have brought it closer to the story told by the labour market and business survey data. GDP is now estimated to have been 2.7% above the early‐2008 peak in Q2 2014, up from the previous estimate of just 0.2%; this means that the UK's performance was similar to that of the Eurozone, though it remains well short of the recovery enjoyed by the US. We have long argued that the recovery was stronger than the ONS had initially reported and in producing our forecasts we had allowed for the likelihood that the data would be revised up substantially. As such, these revisions have little impact on our forecasts for future periods and we expect GDP to grow by 3.1% in 2014 and 2.7% in 2015…     

Europe

On balance, the available data for Q3 appear to point to a broadly similar pace of growth as in the preceding quarter. Although the September composite PMI fell to its lowest level since the announcement of the ECB's QE policy, the index still points to quarterly GDP growth of about 0.3%. And other survey indicators have risen – the EC's Economic Indicator is at its highest since January.