KIEP "Global Growth Rate Forecasted at '-2.6%' This Year... Down 5.8 Percentage Points"

KIEP, 2020 World Economic Outlook (Update)

Major Countries Lower Economic Growth Forecasts Across the Board

USA 2.0%→-6.0% · Germany 1.0%→-6.8% · Italy 0.4%→-9.1% · Japan 0.4%→-6.2%

[Sejong=Asia Economy Reporter Ju Sang-don] The Korea Institute for International Economic Policy (KIEP) has lowered its economic growth forecasts for this year worldwide, including the United States.

On the 12th, KIEP announced in its 2020 World Economic Outlook (Update) that the global economy in 2020 is expected to record a growth rate of -2.6%, which is 5.5 percentage points lower than last year. This is 5.8 percentage points lower than the forecast made in November last year before the outbreak of the novel coronavirus disease (COVID-19), which was 3.2%.

An Seong-bae, Director of the International Macroeconomics and Finance Division at KIEP, stated, "Lockdown measures due to the spread of COVID-19 are expected to sharply slow down all components of aggregate demand such as consumption, investment, and exports, and also contract industrial production, delivering a significant shock to the global economy in 2020." He added, "Although bold fiscal stimulus measures are being implemented, concerns about fiscal soundness are being raised in advanced countries, and emerging countries are likely to respond sensitively to external conditions such as the possibility of a second wave of COVID-19 and trends in commodity prices."

In revising the global economic growth forecast, KIEP assumed ▲an average annual oil price (WTI basis) of $26.7 per barrel ▲COVID-19 gradually subsiding with a time lag by country after the first wave ▲the labor supply affected by COVID-19 accounting for 30% of the working-age population ▲a decrease in household consumption considering the size of the service sector relative to GDP in each country ▲and an increase in trade costs due to rising transaction costs in the global supply chain.

First, for advanced countries, lockdown measures due to the spread of COVID-19 are expected to sharply slow growth, while concerns about fiscal soundness arise from bold fiscal and monetary stimulus policies. The U.S. economy is forecast to record a growth rate of -6.0%, down 8.3 percentage points from 2019 (an 8.0 percentage point downward revision from the previous forecast), as the real economy sharply slows due to employment deterioration, reduced private consumption, and contraction in industrial production and corporate investment caused by lockdown measures amid the COVID-19 spread.

Major Eurozone countries and the UK are also expected to record growth rates of -7.3% (UK -6.7%), down more than 8 percentage points from 2019, due to active lockdown measures in response to COVID-19 spread causing ▲sharp consumption contraction ▲slowdown in intra- and extra-regional exports

▲and a decrease in new investments. Germany is forecast at -6.8%, France -7.0%, Italy -9.1%, and Spain -8.3%.

Japan, after postponing the Tokyo Olympics and declaring a nationwide state of emergency, is expected to record a growth rate of -6.2%, down 6.9 percentage points from 2019, due to ▲a contraction in personal consumption ▲investment decline ▲export decrease caused by worsening external conditions ▲and production decline centered on the automobile industry.

Director An said, "In most EU countries, government debt exceeds 60% of GDP, and opinions among member states are conflicting regarding the issuance of joint bonds (corona bonds) to respond to the recession." He added, "Japan is pursuing an accommodative monetary policy and the largest-ever fiscal spending expansion, but about half of the current government bonds are already held by the central bank, limiting monetary policy room, and achieving the originally planned fiscal soundness goal (a primary budget surplus by 2025) has become more difficult."

For emerging countries, while the spread of COVID-19 is calming down, countries such as China, India, and Vietnam are likely to show recovery after the second half of the year, but Russia and Brazil are expected to respond sensitively depending on external conditions such as commodity price trends.

China, which showed a sharp downturn in the first quarter due to restrictions on economic activities caused by the spread of COVID-19, is showing signs of recovery from the second quarter due to expanded infrastructure investment, increased liquidity supply, and implementation of consumption promotion policies. Accordingly, KIEP expects a 'V-shaped' recovery in the second half of the year, recovering to normal levels, with a growth rate of 2.2%, down 3.9 percentage points from 2019 (a 3.8 percentage point downward revision from the previous forecast). However, uncertainties such as the speed of domestic consumption recovery, the possibility of a second wave of COVID-19, and COVID-19 control situations in major countries are expected to act as downside risks.

India, whose growth has been slowing since 2019, is forecast to record a growth rate of 2.0%, down 3.3 percentage points from 2019 (a 4.2 percentage point downward revision from the previous forecast), due to the nationwide lockdown order added to the COVID-19 impact.

The five ASEAN countries?Indonesia, Malaysia, the Philippines, Thailand, and Vietnam?are expected to record a growth rate of -0.3%, down 5.1 percentage points from 2019, due to contraction in domestic demand and exports. However, while Indonesia, where COVID-19 cases are rapidly increasing, and Malaysia, the Philippines, and Thailand, which have high external dependence and a large service sector, are expected to experience economic contraction, Vietnam is assessed to have a low service sector share and solid fundamentals, and is analyzed to recover the fastest.

This year, global trade volume is expected to decrease by more than 10% compared to the previous year due to the COVID-19 pandemic and the recent sharp tightening of the global economy. The International Monetary Fund (IMF) forecasts that total world trade (goods + services) will decrease by 11.0% compared to the previous year, and the World Trade Organization (WTO) has projected that global merchandise trade will decline by at least 12.9% and up to 31.9%. KIEP expressed particular concern that intensified trade conflicts, decreased demand from major economic blocs, increased protectionist measures, financial market instability, investment contraction, and oil price volatility will exacerbate the slowdown in global trade.

In the second half of this year, exchange rates are expected to see limited dollar strength as instability in international financial markets eases somewhat due to active policy responses by major countries. However, if the real economy impact of COVID-19 becomes more visible, a reversal to dollar strength is possible. Regarding the KRW-USD exchange rate, a slight decline is expected due to the calming of COVID-19 spread and relatively moderate economic slowdown. For interest rates, which have become more volatile after COVID-19, the decline is expected to be limited in the second half of this year.

International oil prices are forecast to remain at low levels due to a historic oversupply caused by a decline in global oil demand amid COVID-19. Director An said, "Due to the global spread of COVID-19 in 2020, an unprecedented demand decline is expected, and the recovery of global oil demand will be gradual." He added, "Although oil production will decrease due to production cut agreements among oil-producing countries to stabilize the energy market, it is expected to fall short of the demand reduction."

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