The worst of the global pandemic may now be behind us. Economies across the world continue to re-open, COVID-19 mortality rates have been dropping for months, and fears of healthcare systems being overrun have faded. While there is still cause for concern, the world has a much better understanding of the disease than it did during the frantic months of March and April. In the Q4 Global Outlook: Glass half full, Barclays Research highlights some reasons for optimism, despite an anticipated slowdown in growth in Q4.
Our outlook is generally positive, though investors can still find cause for worry across the macro backdrop. While COVID-19 cases in the US are levelling off, the disease is still a major concern in countries such as India and Brazil, European cases are rising again, and health officials are worried about combating COVID-19 in flu season. Further, equity valuations seem historically elevated, US-China relations are worsening, and the potentially contentious US presidential election is looming. But growth has rebounded strongly. And with the improved prospects of vaccine approval, we remain overweight global equities over fixed income.
Our glass is half full. On the one hand, much of the economic data coming from the US and China are better than expected, while widespread vaccination against COVID-19 seems likely by Q3 21. On the other hand, downside risks – especially the aftermath of the US Election – could mute the recovery. However, we believe the positives will outweigh the negatives.
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 has rebounded more strongly and quickly than anticipated, led by the US and China.
We always expected a quicker recovery than in past slowdowns, given that this was a self-induced recession; but the magnitude of the rebound is surprising, especially in the US jobs market and housing. We now expect a US jobless rate of 7.3% by year-end, a level that seemed aspirational just a quarter ago.
US data are even more impressive, given the sharp rise in COVID-19 cases from mid-June and additional fiscal stimulus still stuck in Congress. In a similar vein, China’s retail sales returned to pre-pandemic levels in August, and the jobless rate dropped well below the government’s end-of-year target. Although the recovery in the euro area and the UK is more subdued, Q3 is shaping up to be a very strong quarter for the global economy.
The prospect of a COVID-19 vaccine provides a positive backdrop for risk assets.
A COVID-19 vaccine now seems a question of when, not if. Phase III results in several high-profile vaccine trials are scheduled for release by early November, and such trials historically have an 85% chance of approval1. Governments the world over have invested in production facilities to mass-produce vaccines upon approval,2 and we believe that the majority of the US, the European Union and the UK should be vaccinated by Q2-Q3 2021. This is a turnaround from just months ago, when hopes for a successful drug were muted.
COVID-19 Vaccines Timeline: Waves 1 & 2
The pace of growth is expected to slow in Q4, but the world should finish 2020 in better shape than seemed likely a quarter ago.
Our Research forecast expects growth to slow in Q4 as the gains from re-opening fade and government furlough schemes and jobless benefits are phased out. A bigger concern is the US presidential election, which will probably be very contentious.
The results may not be known for weeks after November 3, given the likelihood of a close election, a higher-than-usual share of postal voting, the chance of lawsuits during the vote counting process, and the potential unwillingness of either side to accept the result. There is also a risk of civil unrest and questions about a smooth transfer of power. Despite these challenges, we believe the global economy will end 2020 in a better-than-expected position.
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: Glass half full is now available to Investment Bank clients on Barclays Live or on the Barclays Live app.
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.