Our view in a nutshell

Japan

• With COVID-19 spreading, we expect real GDP to keep declining for three quarters through Q2, followed by a gradual recovery.
• We expect core CPI inflation to continue to decelerate and to plunge below 0% y-o-y in Q4 led by lower oil prices.
• The ¥108trn stimulus package will help keep the economy from falling into a vicious cycle but have a limited impact on demand.
• The risk is renewed yen appreciation, caused by a full-blown global recession and further risk averse moves in markets.

Asia

• COVID-19 to derail Asia’s GDP growth to -0.5% y-o-y in 2020, from 5.3% in 2019. 8 out of 10 economies will contract in 2020.
• After China spillovers in Q1, we expect a sharper growth slump in Q2 due to domestic lockdowns and weaker external demand.
• A sequential recovery is likely in H2, but at a gradual pace due to spillovers from unemployment and weak corporate profits.
• Despite the supply-side disruptions, we expect disinflationary pressures due to lower oil prices and weak aggregate demand.
• Monetary and fiscal policy easing have already been stepped up, but be prepared for even more easing ahead.
• China: We expect GDP growth to remain negative at -0.5% in Q2 and Beijing to roll out a large stimulus package soon.
• Korea: Growth will likely contract more sharply in Q2 on slumping external demand; we expect the BOK to cut in Q2.
• India: COVID-19 amid a weak financial sector to trigger a growth contraction in 2020 and easy policies – monetary, fiscal and liquidity.
• Indonesia: Despite a sharp growth downturn, the chance of a policy rate hike is rising due to balance of payments fragility.
• Australia: We now see a sharp recession in H1, with unemployment rising from 5.1% to almost 9% by year-end.

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 additional fiscal stimulus from Washington, but it may be less effective due to social distancing.
• The unemployment rate will rise sharply, peaking around 15-20% in Q2, as labor market conditions deteriorate due to COVID-19.
• Core inflation will likely be weighed down by COVID-19’s impact on service prices and excess labor market slack.
• Notable risks include the failure of social distancing policies as well as corporate credit and financial sector stress.

Europe

• As COVID-19 spreads across Europe, we expect the euro area economy to fall into an even deeper recession in 2020.
• Lower oil prices and a demand shock caused by COVID-19, should push euro area inflation lower.
• The ECB announced an additional €750bn of QE, and we think the next ECB move will be a 20bp rate cut in April.
• We have axed again our UK GDP forecasts and see a recession in H1 – with output falling by more than 15% vs Q4 2019.
• GDP recovers from H2 though takes time to get back to its pre-virus peak. Loose monetary and fiscal policy remain supportive.
• The BoE has cut rates to 0.10% and announced €200bn of QE. We do not see any further easing in our base case.
• The tail risk of a Brexit cliff edge at end-2020 has risen, but the outcome is uncertain with COVID-19 disruption.

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