Our view in a nutshell

Japan

• The real economy’s recovery will be gradual, though pent-up demand may push up apparent real growth rates above potential.
• We expect core CPI inflation to continue to decelerate and to plunge below -1.0% y-o-y through Q1 2021 led by lower oil prices.
• We do not expect the Suga cabinet to make any significant change in economic policy and in the BOJ’s monetary policy.
• 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 has shifted to a “wait and see” policy approach.
• 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 bumpy path ahead, with more fiscal and monetary accommodation likely.

United States

• Base effects will drive Q3 2020 real GDP higher but monthly data suggest the recovery has entered a slower phase.
• As COVID-19 weighs on activity, we expect a more gradual recovery through H1 2021 before an acceleration in H2.
• The Fed will likely stay at the ELB through 2022, ensure access to credit and maintain a steady pace of asset purchases.
• The adoption of flexible average inflation targeting (AIT) should reinforce the Fed’s “lower for longer” outlook.
• The unemployment rate will decline gradually, reaching 6% by end-2021 and 5% by end-2022, 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 another surge in new COVID-19 cases, US-China tensions and partisan disputes over fiscal policy.

Europe

• The euro area recovery is ongoing, but we think it will fall short of a “full-V” especially with renewed lockdowns.
• The combination of a protracted demand shock and energy prices below pre-pandemic levels suggest a disinflationary effect.
• We have recently changed our view to an expansion of the PEPP (by between €250bn and €500bn) in March 2021.
• In April UK GDP had fallen 25%. July was still 12.5% below peak , and a full recovery takes until beyond our 2022 horizon.
• While pent-up demand and policy stimulus should be supportive, we expect the UK’s recovery to look like a truncated-V.
• We now expect more QE (£100bn) from the BoE in November. We do not expect negative rates but the risks have risen.
• The risk of a Brexit cliff edge at the end of 2020 has risen, which could mean lower growth, higher inflation and looser policy.

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