Our view in a nutshell

Japan

• The recovery of real economy will be gradual, although pent-up demand could push up apparent real growth rates above potential.
• We expect core CPI inflation to continue to decelerate and to plunge around -1.0% y-o-y in Q1 2021 led by lower oil prices.
• The cumulative ¥233trn policy package will help keep the economy out of a vicious cycle but have a limited impact on demand.
• The risk is renewed yen appreciation, caused by deepening US-China tensions and further risk averse moves in markets.

Asia

• GDP growth should improve in H2 2020, from Q2 lows, but the pace of recovery will differ among economies.
• We expect Northeast Asia to outperform Southeast Asia and India, due to COVID-19 containment and a resilient tech cycle.
• Emerging Asia (India, Indonesia, the Philippines) remains vulnerable amid rising cases and due to limited policy support.
• Beyond pent-up demand, fragilities remain due to the knock-on effects on the labour market, SMEs and on bank asset quality.
• We expect further rate cuts in China, Malaysia, the Philippines and India, while rates are likely to remain on hold elsewhere.
• China: We expect sequential growth momentum to weaken in H2 and believe Beijing cannot yet afford to stop policy easing.
• Korea: Growth may pick up in Q3 but remain subdued due to weak global demand and growing concern over a second virus wave.
• India: COVID-19 amid a weak financial sector to trigger a contraction in 2020 and easy policies – monetary, fiscal and liquidity.
• Indonesia: Slow COVID-19 containment implies a larger growth shock, higher fiscal risks and more balance-of-payment pressure.
• Australia: We see a shallower cycle, with a less-deep trough but still a long path back towards normal, with little inflation.

United States

• We expect a short, but steep, recession in H1 2020 before a gradual recovery aided by fiscal and monetary accommodation.
• Responding to a significantly weaker outlook, we expect the Fed to remain at the ELB through 2021.
• The Fed will implement credit facilities already announced and ensure that long-term rates do not constrain the recovery.
• We expect an additional $1.5tn in fiscal stimulus from Washington, but failure to extend support is a rising risk.
• The unemployment rate will decline gradually, reaching 10% by end-2020 and 7% by end-2021, as the labor market remains weak.
• Core inflation will likely be weighed down by COVID-19’s impact on service prices and excess labor market slack.
• Notable risks include a second wave of infections as well as corporate credit and financial sector stress.

Europe

• As lockdowns are lifted we expect the euro area economy to recover, but ultimately fall short of a full V-shaped rebound.
• The combination of a protracted demand shock and energy prices below pre-pandemic levels suggest a disinflationary effect.
• The risk to our unchanged ECB view is for a further PEPP expansion if economic conditions do not allow tapering this year.
• At its trough (April/May) UK GDP was down 25% and it looks likely to remain below Q4 2019 levels in the coming two years.
• While pent-up demand and policy stimulus should be supportive, we expect the UK’s recovery to look like a truncated-V.
• Our central view is for no further BoE stimulus. QE should end in December and we argue against negative official rates.
• The risk of a Brexit cliff edge at the end of 2020 has risen, but talks are ongoing and the outcome remains highly uncertain.

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