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Q2 Global Outlook
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Barclays Research expects the global economy to contract over full-year 2020, with a very sharp downturn giving way to a slow recovery, helped by extraordinary monetary and fiscal measures, as described in the Q2 2020 Global Outlook. Head of Macro Research Ajay Rajadhyaksha outlines why our economic outlook, while dire, is not a direct parallel to the aftermath of the 2008 financial crisis.

Many investors attempt to find parallels with other global crises like wars and the 2008 financial crisis, however the global economy has never before had such a long, coordinated period of mandated economic inactivity. Our forecasts now imply that the global economy will contract in 2020.

We forecast a global contraction in 2020, with China, the US and the euro area growing at 1.3%, -0.6% and -5.5%, respectively. Our forecast assumes that widespread lockdowns end by the start of summer across large economies and factor in forceful fiscal support.
Ajay Rajadhyaksha, Head of Macro Research

Our Research team highlights three macroeconomic themes driving markets for the next several months amid the stresses to the global economy caused as a result of the spread of COVID-19:

Policymakers and central banks have expanded balance sheets to prevent a major funding-related blow-up.

Central banks have moved aggressively, setting up an array of programs with extraordinary speed to backstop various markets. Our analysts believe that banks have the will and the ability to prevent a major financial accident in the months ahead. However, unlimited liquidity support will not be enough.

Much of the economic hit is falling on small and medium businesses, many of which cannot be helped through financial markets. Fortunately, policymakers recognize this and in major economies in the euro area, as well as the US, are planning stimulus of anywhere between 10-15% of GDP, including massive loan guarantees. The scale of the downturn and eventual recovery could depend on how effective governments are in supporting small and medium businesses in particular.

Markets will need some certainty that the spread of COVID-19 has been curbed in large economies before risk assets can mount a sustained rally.

Investors will need to see clear signs that large economies, including the US, have turned the corner on controlling the spread of the coronavirus before mounting a sustained rally. Risk assets will eventually look past the economic hit from the COVID-19 pandemic, but likely not in the near term.

It’s too early for investors to turn positive on risk assets, but fixed income provides opportunities.

Despite the battering risk assets have taken, our analysts believe it is too early to turn positive on risk assets. The Global Outlook is overweight high quality fixed income over global equities even after the 30-40% drawdown in stocks, taking advantage of attractive entry points in high-quality fixed income, including US municipal debt and agency MBS, very high credit-quality corporates in the US and Europe, and certain areas in EM dollar fixed income.

Once the danger posed by COVID-19 fades, the aftermath of the virus is likely to have an effect on US politics and policy. Any progress made by Congress in creating a massive fiscal stimulus package could open the door to bi-partisan efforts on infrastructure spending, as well as change the politics regarding US healthcare. Separately, the fallout from COVID-19 is likely to be a negative for US-China relations for the next several quarters.

Read the full report

Global Outlook, published quarterly, provides an assessment of all major economies and markets and outlines recommendations for investors. Batten down the hatches is now available to Investment Bank clients on Barclays Live or on the Barclays Live app.

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About the expert

Ajay Rajadhyaksha is Head of Macro Research at Barclays, based in New York. He oversees the global research and strategy efforts of the economics, rates, FX, commodities, emerging markets, securitised, and asset allocation teams. Since joining Barclays in 2005, Ajay has held various positions, including Co-Head of FICC Research and before that, Head of US Fixed Income Research and US and European Securitised Research.

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