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Ajay Rajadhyaksha Blerina Uruçi

Barclays Research

Ajay Rajadhyaksha in conversation with Blerina Uruçi

Q3 2020 Global Outlook: Turning the corner

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The economic decline caused by the COVID-19 pandemic is much deeper than after the 2008 global financial crisis. But there are signs that growth has bottomed, thanks in part to the unprecedented size and speed of monetary and fiscal stimulus. In the Q3 Global Outlook: Turning the corner, Barclays Research forecasts a faster recovery path than in previous contractions. Head of Macro Research Ajay Rajadhyaksha outlines why the world is turning the corner, despite a number of near- and medium-term challenges.

Our Research forecast assumes that even if virus cases rise again, authorities in most economies will not impose a second round of lockdowns on the scale of the first. This is partly because healthcare systems are better prepared than in March, but also because the economic effects of widespread lockdowns have been harsh. Rising geopolitical tensions between China and Western economies pose a downside risk to our forecast, while a faster-than-expected vaccine is the most prominent upside risk to the outlook.

While tens of millions of new jobs will be created between now and year-end, a jobs recovery does not mean a V. We expect the global economy to contract 3.6% in 2020, with a 6.7% hit to advanced economies. But after a few months of precipitous decline, the world should finally start to grow again.
Ajay Rajadhyaksha, Head of Macro Research

Our Research team highlights three macroeconomic themes driving markets for the next several months as the global economy recovers:

The global economy leapt off a cliff in March, but global policy makers crafted a safety net below in remarkably quick time.

The initial drop in global economic activity since March as a result of COVID-related lockdowns was much deeper than in the aftermath of the 2008 financial crisis. However, global policy makers’ unprecedented monetary and fiscal stimulus efforts succeeded in reducing second-order effects by preventing liquidity-driven financial contagion, replacing income lost due to layoffs and keeping corporate and household balance sheets liquid. Policy makers tried to freeze the world in amber until it re-opened and early signs of success have begun to emerge, especially in financial markets. Corporates and sovereigns have issued trillions of dollars of new debt at low yields, financial markets have stabilized, loan forgiveness programs have helped limit job losses and front-loaded fiscal stimulus has supported household balance sheets. The surprise US jobs report in May and better data in China are early signs that the world is turning the corner.

Because the contraction was self-induced, the recovery should be quicker than in past recessions, especially in labour markets.

The US, euro area and UK are set to contract 40-50% in Q2 2020 (q/q saar). But because this recession was self-induced and because policy efforts have helped cushion the blow, the path to recovery is likely to be faster than in previous contractions, especially on the jobs front. The process of re-opening should lead to the creation of tens of millions of jobs and a near-term rebound. But this is not a V-shaped recovery. There will be some medium-term damage and some sectors will come back slowly, given the continued risks of the virus. While growth should rebound next year, we do not expect advanced economies to surpass pre-COVID GDP levels in 2021.

Despite high valuations, the current risk rally should stay supported by effective policy support, coupled with a lack of fixed income alternatives.

While equity valuations appear elevated after the risk rally, our Research analysts favour equities over core fixed income. Sector selection will be paramount, and financials, industrials and technology may be resilient even in a pullback. With central banks stuck at or below zero for years to come, very unappetizing returns in core fixed income and signs that the global economy has bottomed, risk assets are likely to be supported by a lack of alternatives as investors look past 2020.

Read the full report

Barclays’ Global Outlook, published quarterly, provides an assessment of all major economies and markets and outlines recommendations for investors. Global Outlook: Turning the corner 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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