RaboResearch - Economic Research

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Global Economic Outlook: light at the end of the tunnel?

Economic Quarterly Report

  • We expect the global economy to contract by 3.8% in 2020 and recover by 4.5% in 2021
  • China is the only major economy expected to grow this year
  • There is positive news on the arrival of effective vaccines, although availability and distribution will vary across countries
  • Biden’s policy plans are positive for US economic growth and global trade, but will also result in higher US public debt
  • US-China relations will deteriorate further under the Biden administration
  • The RCEP trade deal is the largest global trade deal to date, but is expected to yield only mild positive effects
  • We expect a ‘skinny’ Brexit deal before the year is out
  • ‘Zombie firms’ and corporate debt overhang will weigh on future growth

Economic forecasts

We have revised our economic forecasts upwards and expect the global economy to contract by 3.8% this year (up from -4.4%) and grow by 4.5% in 2021 (up from 4%) and 4% in 2022 (Table 1). We expect all major economies to shrink in 2020, with the exception of China, where we expect a positive print in 2020 (Figure 1). For the coming years we expect a normalization of global economic activity from the second half of 2021 onwards, although a recovery to pre-COVID levels of economic activity will only be reached in 2022 in many countries. For European countries that have experienced a second (partial) lockdown (e.g. Germany, France, Spain), we have toned down the magnitude of the rebound in 2021.

Table 1: Economic outlook for major economies
Table 1: Economic outlook for major economiesSource: RaboResearch
Figure 1: China is the only major country expected to grow this year
Figure 1: China is the only major country expected to grow this yearSource: RaboResearch, IMF, Macrobond

Third quarter better than expected

The upward revision of our forecasts is, above all, the result of a much better than expected rebound in economic activity in the third quarter of 2020. Both private consumption and trade showed a sharp rebound in Q3. The strong rise in consumption can be partially explained by people having idle cash on hand (see Figure 3),the hard  in Q2 that under normal circumstances would have been spent on leisure activities (Figure A.1 in Appendix). In Q3 these savings were partly reallocated towards other goods, such as home improvements and new furniture (see Figures A.2 to A.5 in Appendix).  Nevertheless, consumption in Q3 did not fully recover to pre-COVID-levels.

Figure 2: COVID-19 keeping economies partially locked down
Figure 2: COVID-19 keeping economies partially locked downSource: Oxford University, Macrobond, RaboResearch
Figure 3: Saving rate has skyrocketed in the first half of the year
Figure 3: Saving rate has skyrocketed in the first half of the yearSource: Eurostat, U.S. Bureau of Economic Analysis, Macrobond

China: a sneak peek into the future?

Figure 4: Material differences in recovery between sectors
Figure 4: Material differences in recovery between sectorsSource: RaboResearch, Macrobond, NBS

China was the first country to experience the substantial economic fallout due to COVID-19. In a recently published report, we show that China is experiencing an unbalanced recovery, with large differences between sectors that are hit by the containment measures (recreational) and sectors that benefit from the increase in working-from-home practices, such as software and IT (Figure 4).

Moreover, headline GDP growth figures mask material differences between regions within countries. Such developments have the potential to increase inequality within countries. Even in a country as small as the Netherlands regional differences are substantial.

Positive news in the fight against COVID-19

In the fight against the corona virus, there is positive news on the arrival of an effective vaccine. Several pharmaceutical companies claim that their vaccine is 95% effective. Expectations are that an international rollout could be started early next year. The United Kingdom has already provided the first jabs in December.

But a vaccination program is no easy task

Figure 5: Severe spread of infections during second wave…
Figure 5: Severe spread of infections during second wave…Source: European Centre for Disease Prevention & Control, RaboResearch, Macrobond

But even when a vaccine becomes available, the question remains: will this be soon enough, as cases have been on the rise again in many countries, such as Brazil (Figure 5). Delhi is also struggling with a third wave, which is directly related to the dangerously high air pollution levels in the capital, which is said to act as a super spreader. There is a chance that Brazil and India might go down the same route as Europe and the US, where a second wave forced policymakers to resort to partial lockdown measures again.

The impact of Biden’s policy plans

President-elect Joe Biden will (almost certainly) become the 46th president of the United States in January. In contrast to Trump’s policy of huge tax cuts and low public spending, Biden aims to raise taxes for the richest Americans and prop up public spending and investment in, among other things, sustainable infrastructure, R&D and education. We have calculated (see this report) that Biden’s spending plans would result in higher economic growth of the US economy compared to our baseline scenario, thanks to higher productivity growth via innovation, and investment in human capital. The flip side of Biden’s policy is that public debt is expected to rise to somewhere between 164% and 170% of GDP, substantially higher than the 147% projected in our baseline scenario.

The extent to which Biden is able to execute his policy agenda depends on whether the Democrats are able to secure the Senate, which will be decided by the run-off elections on 5 January in Georgia. Without a Democratic majority in the Senate, Biden’s more ambitious policy plans will likely be blocked by the Republicans.

Global trade and geopolitics

Higher US growth would also stimulate global trade, which would end up over 1% higher in the medium to longer term. In addition, we expect Biden, who takes a more favorable stance towards multilateral institutions than Trump (see also this report), to at least consider a revitalization of the World Trade Organization.[1] This could be a further positive for global trade (Figure 6).

Figure 6: Will global trade experience a boost under Biden?
Figure 6: Will global trade experience a boost under Biden?Source: CPB Netherlands Bureau for Economic Policy Analysis, Macrobond, RaboResearch

US-China trade will continue to be in a tough spot

On trade with China, however, the Biden administration is expected to adopt the same hardened stance as the Trump administration. Like Trump, Biden has said that he will push back on  unfair trade practices by China, such as intellectual property theft, large-scale subsidies to state-owned enterprises and forced transfer of technology. Consequently, Biden says he will not roll back any tariffs on Chinese goods that were imposed by the Trump administration.

He has also said that he will not immediately terminate the Phase One deal that was signed at the beginning of 2020 between the US and China. Beijing has already signaled that it wants to renegotiate that deal when Biden is installed as president, as the import targets in the deal are perceived as being unrealistic and China is miles away from reaching these goals (Figure 7). In fact, we expect this to be reason for Trump to launch a final protectionist push on China in the last weeks of his presidency and take additional measures.

Figure 7: China is miles away from achieving the trade target in the Phase One deal
Figure 7: China is miles away from achieving the trade target in the Phase One dealSource: U.S. Census, Macrobond, RaboResearch

Trump has already initiated this push by, for instance, banning investment in 89 Chinese companies and imposing travel visa restrictions for Chinese Communist Party (CCP) members from 10 years to one month and single entry. We can expect more action by the Trump administration until Biden is inaugurated on 20 January.

RCEP will not be a major game changer

In contrast to the souring trade relationship between the two largest economies across the globe, in November 2020 15 Asian-Pacific countries signed the Regional Economic Comprehensive Partnership (RCEP), which will probably become effective by mid-2021.[2] Covering roughly 30% of global population and GDP, it is easily the largest free-trade agreement (FTA) in the world.

However, we think the economic impact of RCEP will be limited. Firstly, it replaces many bilateral trade agreements between participating countries that were already in place (Figure 8). Second, the deal does not address non-tariff barriers ranging from administrative burdens to outright quantitative restrictions. Third and last, RCEP is a trade block of mostly net exporters, focused more externally than internally. The only way for it to become something different would be if one of its larger members decided to become a major net importer, which we deem highly unlikely.

Nevertheless, the deal has more significance on the geopolitical front. While the US is increasingly resorting to protectionism, China can showcase this deal as proof of it being the global leader fostering multilateral, rules-based world trade. In that sense the signing of the deal increases China’s influence in Asia and would make it harder for the US and the Biden administration to succeed in their agenda to strengthen US-Asian alliances.

Figure 8: Many RCEP member already have trade agreements in place with each other
Figure 8: Many RCEP member already have trade agreements in place with each otherSource: WTO


Figure 9: A Brexit without a trade agreement would cost the UK GBP 250bn
Figure 9: A Brexit without a trade agreement would cost the UK GBP 250bnSource: ONS, Macrobond, RaboResearch

We are quickly approaching the 1st of January, which is the deadline for a trade deal between the UK and the EU. In contrast to earlier deadlines, that proved rather flexible, this particular deadline will be impossible to stretch. Our view remains that a ‘skinny’ deal, which is primarily focused on the trade in goods, will be concluded eventually. It would be a highly risky strategy to pursue a Brexit without an EU-UK trade agreement whilst facing a second wave of corona that is already slashing into the economic recovery. However, the decision is Johnson’s to make, and given the relatively limited scope of the envisaged trade deal, he might see the required concessions as too much of an ask. Having said that, our calculations show that a Brexit without an EU-UK trade agreement would be a major impediment to the UK’s recovery potential from COVID-19 (Figure 9).

Recovery uncertainty

The positive news on the arrival of a vaccine and the better than expected third quarter give some light at the end of the tunnel. But there’s still a way to go. Firms are currently heavily supported by enormous government and central bank stimulus packages. As a consequence, bankruptcies still stand at historic lows and employment is holding up pretty well. The question is what happens once that support is phased out. In both the US and Europe, internal political struggles are preventing the launch of fresh stimulus for the economy.

Meanwhile, emerging markets’ financing constraints inhibit them from pro-actively stimulating their economies in the same fashion as developed economies. Rising public debt levels (Figure 10) ­ sometimes by more than 10ppts since the start of the pandemic ­ provide additional challenges in financing EM’s fiscal needs.

Figure 10: Bankruptcies have not budged on the back of substantial support
Figure 10: Bankruptcies have not budged on the back of substantial supportSource: Statistics Netherlands, The American Bankruptcy Institute, Macrobond
Figure 11: Surge in public debt levels in EMs
Figure 11: Surge in public debt levels in EMsSource: IIF global debt monitor.
Note: * = Q2 2020


Another problem that the global economy will have to deal with in the aftermath of the COVID-19 crisis is the huge rise of so-called zombie firms, i.e. firms that are not able to cover their interest expenses. Recent research by Bloomberg based on financial data of 3,000 listed US companies shows that 20% of the examined companies are zombie firms. The share of zombie firms among SMEs is likely even higher.

By providing credit and capital to firms hit hard by the corona crisis, governments might have averted pain in the short term; however, the downside is that this credit and capital is not being allocated towards more productive parts of the economy. As the BIS has showed in several studies, this weighs on the growth of employment and productivity in the medium to longer term.

What’s more, the US zombie firms examined by Bloomberg have been ramping up on debt by USD 1,000bn. A recent study by the Fed shows that heavily leveraged firms experienced less favorable patterns in employment, assets and investment in the aftermath of the global financial crisis compared to firms with lower debt levels. Given these results, the authors conclude that the surge in debt as a result of the COVID-19 crisis might result in a 10% decrease in growth for firms in industries hit hardest by the pandemic.

Conclusion: one swallow doesn’t make a summer

Good news came in bunches over the last months. The global economy appears to be more resilient than expected, an effective vaccine is available and is being rolled out globally, and 2021 will see a Biden administration that is expected to bring more stability on the geopolitical front. This allows room for cautious optimism. We have to keep in mind, though, that there are still some substantial risks out there, such as the rising share of zombie firms and the increasing debt overhang. And ultimately these risks might result in a much more bumpier road to recovery than currently anticipated.


[1] The Trump administration left the World Trade Organization (WTO) in limbo by refusing to appoint judges to its higher dispute settlement body, the Appellate Body (see this report). The result is that trade has become a game of power play, something that connects seamlessly with the trade strategy of the Trump regime.

[2] These countries are all the Association of Southeast Asian Nations (ASEAN) countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam), Australia, China, Japan, New Zealand and South Korea.

Appendix: Shift in consumption patterns in the Netherlands

Figure A.1: Services sales have not recovered yet
Figure A.1: Services sales have not recovered yetSource: Statistics Netherlands, Macrobond, RaboResearch

COVID-19 caused a shift in consumption patterns

Figure A.2: Consumer electronics
Figure A.2: Consumer electronicsSource: Statistics Netherlands, Macrobond, RaboResearch
Figure A.3: Home refurbishing
Figure A.3: Home refurbishingSource: Statistics Netherlands, Macrobond, RaboResearch
Figure A.4: Supermarkets
Figure A.4: SupermarketsSource: Statistics Netherlands, Macrobond, RaboResearch
Figure A.5: Do-it-yourself articles
Figure A.5: Do-it-yourself articlesSource: Statistics Netherlands, Macrobond, RaboResearch
Hugo Erken
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2223 1650
Wouter van Eijkelenburg
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 1034 4147

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