• GB Davis

Fitch Revises Global Outlook - 5/27/20


  • CONTEXT: "The global recession this year will be more than twice as severe as in 2009"

  • RELATIVE DEVELOPED ECONOMY LAGGARDS: "France, Italy and Spain have had some of the most restrictive lockdown policies globally according to the University of Oxford’s Lockdown Stringency Index, and this is borne out in daily mobility data from Google that show a sharper fall in visits to retail and recreation venues than in the US. With the daily activity loss through lockdown in these three European countries looking larger than assumed, we now anticipate a near 9% decline in GDP in 2Q20 in the eurozone"

  • WORST, ABSENT OUTBREAKS OR WAVE II, likely behind us. "Our high-frequency activity trackers point to a 10% yoy decline in GDP in 2Q20. This would be nearly three times the yoy pace of decline in the previous worse quarter since the World War II but is in line with our previous forecast."

  • CHN has in fact started to Rebound. "Our monthly China GDP tracker – which captured the 1Q20 collapse –points to positive yoy GDP growth in 2Q20."

  • STIMULUS WILL MAKE A DIFFERENCE. "We expect global quantitative-easing asset purchases to hit USD6 trillion in 2020, an explosion in central bank liquidity that has paved the way for a recent pick-up in credit growth to the a recent pick-up in credit to the real economy - specifically to firms - in stark contrast, a stark contrast to 2009."

  • No V-Shape Recovery. The path back to pre-crisis levels of activity will be prolonged, however, with job losses and bankruptcies in the lockdown contributing to lasting damage both to demand and supply. Latest weekly claims data point to US unemployment rising further to 20% in May.

  • NEW CONSUMER AND BUSINESS BEHAVIORS. People [remain] cautious, [and] there will be further challenges to consumer spending from voluntary social distancing behaviour and remaining restrictions on travel, retail and recreational activity.

  • 2022 WILL BE LIKELY BETTER THAN 2021 AS WE SIT TODAY. "With firms also remaining extremely cautious about capex, the post-crisis recovery is unlikely to be rapid enough to return GDP in developed economies to pre-virus levels by end-2021. We forecast that US GDP in 4Q21 will remain 0.8% below 4Q19."

  • WAVE II RISKS SHOULD SUCH MATERIALIZE WILL KNOCK THE FITCH AND OTHER FORECASTS INTO DOWNSIDE SCENARIOS. "A resurgence of the virus that necessitated greatly extended or renewed lockdowns later in the year would lead to an even worse outcome. Our downside scenario sees GDP falling by around 12% in 2020 in the US and Europe, with global GDP shrinking by 9%."

  • U3 will remain elevated, but Fitch forecasts single digits again in 2021. In Fitch's baseline case, they estimate Unemployment (U3) in the U.S. to end 2020 at 10.3% and 7.8% in 2021.

  • CHINA IS AN ECONOMIC POWERHOUSE CONTINUING ITS GROWTH ON EVERY CONCEIVABLE FRONT. Notably Fitch estimates CHN growth in 2021 of 7.9%, outstripping its '14-'18 average growth of 7.0% Fitch also expects India and Indonesia to have strong '21 growth, lagged by 1 qtr against an expected statistical boom for CHN in 1Q21.

  • Other noteworthy comments from Fitch on CHN, "We expect the government's plans to push the general government (GG) budget balance to a deficit of 11% of GDP in 2020, up from around 5% in 2019. Fiscal initiatives this year include tax relief and deferrals, infrastructure investment, and support for SMEs. Our forecast is above the government’s headline fiscal deficit target of 3.6% in 2020 (from an outturn of 2.8% in 2019), partly because we include the large amount of fiscal easing that will be channelled through the budgets of local government-managed funds. Our forecast also includes a deficit in China’s social security funds, the first in at least 20 years. The authorities have reiterated their opposition to speculative investment in housing, pointing to a focus on “new infrastructure” that can generate medium-term productivity gains such as 5G networks, the Internet of Things and artificial intelligence. Nevertheless, traditional public works and urbanisation initiatives will also play a significant role " That is a significant difference and will bode well for risk; and not priced in, from our vantage point just yet - especially w/ US-CHN trade war banter.

Also, we note:

  • Trepp reports some positive signs for CRE: "CMBS spreads posted some modest tightening over the course of the week with cash lagging its CMBX counterpart. Cash spreads tightened by less than a basis point up and down the stack. For CMBX 6-13, AAA spreads narrowed by three to six basis points. In the subordinate space, post-crisis CMBX BBB- spreads were anywhere between 30 and 107 basis points tighter, with the exception being CMBX 7 BBB-, which widened by 17 basis points on the week "

Gavin Davis

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