THE NEW YORK FOREIGN PRESS CENTER, NEW YORK, NY
MODERATOR: Well, seeing that it’s 2:03, I think we’re going to get started. Welcome, everyone. My name is Daphne Stavropoulos and I’m today’s moderator. Welcome to the Foreign Press Center’s briefing with J.P. Morgan on the Global Economic Outlook.
Please keep your microphone muted until you are called on to ask a question. If you have technical problems during the briefing, you can use the chat feature and we will try to assist you. As a reminder of today’s ground rules, this briefing is on the record.
I would like to take the opportunity to introduce our briefer, Mr. Bruce Kasman. He is a managing director and chief economist at J.P. Morgan. This briefing is an opportunity to hear Mr. Kasman’s analysis and insights on the global economy and prospects for global recovery post-COVID-19. He will discuss foreign governments’ and central banks’ efforts to offer unprecedented stimulus in order to stimulate economies and markets. And as a reminder, our briefer’s opinions are his own and don’t represent those of the U.S. Government.
Mr. Kasman will make some opening remarks and then I will open our meeting for questions and answers. And with that, Mr. Kasman, please go ahead and welcome.
MR KASMAN: Okay, thank you. And thank you, Daphne, and thank you to all participating. I guess what I’d like to do is give you a sense of how we’re putting the world together, try to keep my comments to some key points that give you a sense of how we’re thinking the key moving and building blocks of the world are, and then allow for the conversation to go in whatever direction is most important to you.
In terms of the way we’re putting the story together – and by the way, there is a chartbook which was sent around. I might refer to that for a couple of exhibits, but certainly you don’t need that to get to what I’m going to be saying here.
And as I start, I want to just make three basic points about how we put the outlook together. The first and most obvious one – because I think we’re seeing it already – is that we’re in the midst of a historic move down in activity as a result of the COVID-19 shock. It is, in our mind, going to be the deepest move down in activity that we have seen, at least since World War II globally, and it’s pretty similar in terms of the view as we look at it across countries.
For those of you who have the chartbook in front of you, you can see the chart on page 6, I believe, of the chartbook – 5, excuse me – which shows you the annual growth in 2020 in a historical perspective, and you can see again, as I said a minute ago, deeper than anything we’ve seen since World War II, one of the three or four deepest events in terms of the decline in activity that’s taken place over the last century.
At the same time that it’s going to be deep, we also believe it’s going to be very short lived, and we’re looking for growth rates in the second half of the year, which are also unprecedented in terms of the lifting coming out of a recovery. Globally, we’ve had growth rates running between 15 and 20 percent annualized that comes after similar-sized declines in terms of growth rate during the first half of the year.
I want to talk in a minute about why we’re going to get that lift, but I want to get the third point out also, which is that the extent of the recovery is going to be partial, and what we are looking for is a deep downturn, a quick and very strong recovery, but a partial recovery that leaves us with a lot of damage in the global economy that’s lasting. To put a number on that to start, if those of you who have the chartbook want to look at it on page 9, the key reference point we’re using is where the level of GDP is versus the path we had predicted before the virus came on the scene. For the global economy, that’s a loss of about 5 percent of GDP at the end of this year. It only declines to something a touch below 4 percent at the end of next year. And therefore, we are in the midst of an event which in terms of unemployment, in terms of income loss, in terms of the levels of GDP, continues to linger here for some time.
Now, what I want to do beyond the obvious, which is that this event in terms of the disruptions that came from containment measures has produced a big downturn, is argue why we can get a big bounce and then also why the bounce is likely to be partial and not bring us all the way back.
On the reasons for getting the big bounce, one of which I think we can see already, which is that containment measures have been successful, and they are now producing a relaxation in activity. We saw it already well underway in China. And in China, you can see in the March and April activity readings some fairly strong results. The openings have begun in Western Europe, in the Americas, and we think the recovery broad base will be underway globally before the middle part of this year.
What the China data is telling you, and I think it’s important, is that from very depressed starting points in activity, small changes in terms of the containment measures can give you big initial rebounds in growth. We also think that you’re getting this rebound because of the fact that the Fed, other central banks, and policymakers more broadly have done a very good job limiting the magnification of the damage to financial markets. Credit markets continue to function. Credit is actually growing at a rapid pace in the U.S. and Western Europe. Emerging market economies are seeing capital continue to flow in. These are things which could have turned out far worse if policy hadn’t stepped in and done quite a good job of limiting these magnification effects.
The third reason to expect rebound is because we’ve gotten the stimulus that we have. It’s our estimate that the fiscal stimulus we’re getting globally for this year is going to be exceeding 3 percent of GDP. To put that in context, the stimulus we got after the global financial crisis in 2009 is, by our estimates, about a percentage point less, and that’s a huge stimulus. There’s been success in containing the crisis to not hit financial markets, and we’ve succeeded in putting ourselves in a place for starting to relax.
Those are the catalysts. That’s the recipe for getting this big initial lift. What is the reason why the lift doesn’t take us all the way back? Well, again, I want to emphasize three things here. The first is that the virus is contained, the virus is going to start to gradually move out of the frame, but it’s not going to go away. We don’t have a vaccine. Certainly we might get one, but that’s not built into our baseline forecast. We’re also not building in a big second wave outbreak, but we do look at the world as having to deal with the virus in terms of some containment measures, in terms of consumer fears, that’s lasting for some time. So activity behavior not going back completely to normal.
The second issue here – and I think it’s the biggest one – is that there are big income losses that are taking place right now. Even though the event is short-lived, the income losses in terms of people losing their job, in terms of corporate profits going down, these are very big. They’re going to create damage to balance sheets. They’re going to create damage not only on the private sector balance sheet but also on the public sector side to support those. And those impacts are going to have a lasting effect on behavior.
One point we try to make in our research is how different it’s going to be for the household sector as opposed to the corporate sector. We do believe a lot of the supports that you’re getting from governments are coming in the form of enhanced unemployment benefits or wage subsidies or checks, as we’re doing in the United States. These are things which are giving the household sector a lot of income cushion through the bad time here. That is going to be quite positive in terms of sparking the initial leg of the recovery; but both because of the caution I described a few minutes ago from behavior, as well as what we believe is going to be ongoing concern on the household sector side, particularly in places like the U.S. where labor markets have gotten hit so hard about job insecurity, we don’t think the multiplier of those income supports are going to be all that great. That’s why we think the household savings rate in the United States, which we’re expecting to get up on Friday, and the April income report towards 25 percent, is not going to come fully back down to the about 7 percent level it was at the start of this year.
In addition, and perhaps even more importantly, while the household sector is being supported by income transfers, the corporate sector, firms more generally, are being supported by credit. What you’re seeing in terms of the way that governments are helping corporates is through some combination of government guarantee loans or easier access to lending through a whole host of different schemes. And that’s really important for bridging the cashflow gap that takes place here through the bad times, but the loss of income is not being reversed, the rise in credit is not going away on corporate balance sheets. And as we go into this expansion, we will have saved a wave of bankruptcies during the crisis, but we will leave the corporate sector in less strong position to drive a recovery. And that is, in our mind, going to be an ongoing and somewhat lingering drag.
The third point here is, I think, policy fatigue. Fatigue may not be the right word, but there’s enormous amount of stimulus that’s being put in place right now. It’s being designed to handle an emergency. The stimulus is not designed to last beyond this year in almost every case. And in order to not have a very large fiscal drag in 2021, you’re going to need to see activate policies to extend these. Some of that will happen. We do expect more stimulus to come in the United States. In fact, we’re looking for another trillion dollars of stimulus through packages that are still being debated in Washington. We expect more stimulus to come elsewhere as well, but not enough to prevent through 2021 fiscal policy to be fading in its supports and fading in its supports in a way that does provide a drag on growth.
The interesting difference, I think, between the U.S. and Western Europe is worth noting in this regard. Where Europe is providing its supports through stimulus to the labor market by helping people stay in jobs, the U.S. is allowing for the traditional flexibilities of the labor market to operate. That’s why we will have another very ugly employment report with millions of people losing their job when the May reading comes out a week from Friday, and probably an unemployment rate that goes up closer to 20 percent.
But at the same time, those things create different dynamics going forward. The U.S. tends to have more dynamism in terms of the lifting out of recessions. Because of that the Europeans tend to have weaker lifts, partly because corporates are still holding all that labor cost on their books and we’re having the balance sheet dynamic that we talked about a minute ago. So it’s an interesting contrast of systems. From our point of view, the U.S. gets hurt more initially in labor markets, comes back quicker. Right now, we’re not distinguishing in a significant way the amount of damage being done to the two economies when looked at over an 18-month period, but it’s an important test. It’s something worth watching.
The last couple things I want to talk about are, first, inflation, where there is both demand and supply dynamics which are at work here. There is disruptions to supply chain; there are cost increases that are going to be required across a number of sectors to deal with the health care problems that are going to be ongoing. That’s going to feed some price increases. But in our mind, the bigger effect here on inflation is going to be the ongoing weakness in demand, the loss in output that we talked about earlier. Output gaps are going to be pretty similar to those GDP losses we talked about. We have an output gap of a little over 3 percent for the global economy at the end of next year. That’s a huge amount of slack that’s going to weigh on pricing, and particularly in our mind in the services industries, which generally don’t see pricing move but are being specifically affected by this event.
The final thing I want to just emphasize is that any time you go through a crisis it has repercussions through the political process. It is, I think, something that an economist like myself would probably be careful to be humble in terms of our ability to forecast what happens on the political side. I would note that after the global financial crisis there were a combination of political dynamics which helped – which hindered the recovery and helped contribute to what was a very subpar decade. How politics responds to this crisis I think is a big factor for what we’re going to see in terms of the ongoing and longer-term effects to this.
I would note in that regard that it’s encouraging to – the announcements last week by Merkel and Macron to talk about a European recovery fund, which starts to deal with some of the issues around burden sharing in the region, which certainly is going to build pressure here, and also starts to deal with some of the institutional problems you have in Europe, where you don’t have a common fiscal authority to deal with shocks of this nature. At the same time, I think there are other things to be concerned about, U.S.-China relations being one, the Brexit negotiations being another. And there are a whole host of things we can talk about related to the lack of coordination going on on a global level.
So with that I will stop here and see if we can get a conversation going. Happy to take your questions or also hear your comments, if you want to express any.
MODERATOR: Well, thank you very much. I really appreciate your opening remarks. And let’s open the rest of the hour to questions and answers. I’m going to call on those who are participating via Zoom online, and then I will turn to those who called in.
For those joining online, please click the raise hand button at the bottom of the participant list or indicate you have a question via the chat feature at the bottom of your screen, and I will call on you. And as a courtesy to our briefer, please provide your full name and your outlet before stating your question.
Let’s go to Pearl. Go ahead, Pearl.
QUESTION: Bruce, thank you very much. This is Pearl, Open Parliament, covering SADC region. Bruce, obviously, as the managing director for J.P. Morgan Chase, you have a pretty good outlook on the whole world, right? So my concern is, for instance, I believe today Exxon Mobil and Eni are announcing that they are pulling out, out of the projects there right off the coast of Mozambique, and maybe South Africa is concerned about the downgrading.
How do you see that whole SADC region, the Southern African region? And I mention specifically in South Africa, Mozambique, Zambia, Botswana, some of the fragile economies like Zimbabwe. Do you have any concerns about countries printing money, whereas other advanced economies are able to pull up these stimulus packages? And specifically these countries because they’re interconnected; you’ve got some that are landlocked that have freight routes, for instance, that South Africa relies on. How do you see that part of the world panning out the rest of the year and into 2021?
MR KASMAN: So let me say first off that in terms of the coverage and my focus, we cover South Africa but we don’t have extensive coverage through the rest of the region. So I can talk a little bit about the region but not with a great degree of expertise, and I can point you to our regional coverage for some more detail if you want on that.
I think that there is a sort of a common factor playing out here and some that’s common to most of EM in much of the rest of the world, and then there’s some specific things about South Africa that we have to consider. I think the common factor is the pressure that’s being put on governments here to react and the fact that they are reacting. SARB is easing; we’re getting some fiscal stimulus. We are seeing the virus begin to get contained, although to different degrees in different places, and we think it does offer the opportunity for growth to come back in the second half of the year.
But one of the factors that’s definitely the case in Southern Africa, South Africa specifically, and is true of other emerging market economies is they don’t have the capacity to deal with these shocks, not only the shock of having to deal with the crisis directly, but also the indirect loss in terms of economic factors such as income and profits on the part of companies. And that’s a specific issue that I think has created some stress in markets, as you noted, has created a risk of downgrades. And I don’t think it’s easy to get away from the fact that some of the lingering drags that we talked about before, even if we get past the crisis, are going to be difficult and specific for that part of the world. So for a South Africa, for example, we have a larger cumulative output loss than that 3.5 to 4 percent number that I mentioned to you globally.
What we do feel is actually an encouraging thing that’s happening here is the fact that not only are central banks in emerging market economies, even those that have some stress in their financial stability issues, they are continuing to ease. And also they are going on the route of supporting government finances by helping to fund them through purchases of government securities, either directly or indirectly. We’ve been believing that that’s an important step that needs to take place here.
I think on the broader point – and I’m not going to speak to this specifically because we haven’t, I think, articulated views on there – there is a burden-sharing issue here that requires coordination among the G20, among the IMF, and the countries which have been hit hardest here, because otherwise I think on an ongoing basis some of these lingering drags could turn into more severe financial stress points.
MODERATOR: Great. Well, thank you so much. Let’s next go to Paolo. Paolo, can you introduce yourself and your outlet? Paolo, do you have a question that you’d like to ask Mr. Kasman?
Okay. We’ll go on to John. John Biers, please.
QUESTION: Thank you. Hi. I’m – can you hear me?
QUESTION: Great, great. Thank you. John Biers with Agence France-Presse. My question is we’ve obviously seen a lot of job cuts in the United States already with these – each week the weekly jobless claims are really high and disturbing. There’s a certain number of sectors that have already sort of talked about cutting – signaling that they’re probably going to cut jobs in a matter of months as well, like in the airline sector as well as in I think retailers as well, because there’ve been all these bankruptcies that have come in the last few weeks even. What kind of – where do you see the jobless claims and the – like, how do you see employment and unemployment trending over the next months in the United States? I mean, do you think we’re going to just see like one or two million jobless claims for months and months, or do you think – obviously some people will get rehired at a certain point, but how do you see that? Can you just talk about the rest of the year, how you see unemployment and the unemployment picture in the United States?
MR KASMAN: So we don’t have an explicit forecast for jobless claims going forward, but we do have explicit forecasts for GDP, for employment, and the unemployment rate. So let me just make sure. I’m going to pull this up in front of me so I don’t misstate anything. So, for example, we have the U.S. unemployment rate getting up to a peak sometime next week. We haven’t formalized a forecast for next week, but I’ll just say somewhere closer to 20 percent to where we were with the 14.5 percent or so level we had in April. So another significant move up here with another very significant loss of jobs. I would think somewhere more than 5 million jobs get lost in the month of May.
But as I was saying earlier, we do see a very quick turnaround in the economy, and we are looking for – in a world in which we will have lost something in the range of 25 million jobs or so over the course of March, April, May, we look to see roughly six or seven million jobs created in the third quarter of the year as people come back to work. As you can do the math on that, that’s not a complete reversal. It’s not one which brings the unemployment rate back down. We have the unemployment rate in the United States still standing at the end of this year at about 11 percent. But the move from 20 or so to 11 is a huge move down. And that’s the nature of the beast here. We think there’s a lot that you can get through the relaxations in terms of turning things around here.
But for the reasons I discussed earlier, we don’t think you’re going to have a full recovery and to sit here at the end of this year with a 10 percent unemployment rate is going to be a serious problem for the U.S., particularly as we continue to see only a gradual recovery into 2021. The labor market is not the only part of this story, as you referenced. There will be bankruptcies. We’ve saved a lot of bankruptcies through policy supports immediately, but we’ve done so at the expense of leaving corporate balance sheets in a more vulnerable position. And the work out of that is going to take place over time and is going to be a significant drag on growth. So things I think come back very quickly from very depressed levels but not completely, and I think that’s going to be the nature of what we are experiencing in the second half of the year in the United States, and pretty much across the globe if we’re right.
MODERATOR: Well, thank you very much. That next question goes to Niki. Niki, please go ahead.
QUESTION: Hi, Mr. Kasman. This is Nikhila Natarajan or Niki from Indo-Asian News Service. I just wanted your outlook on India. Thank you.
MR KASMAN: Well, again, I’m going to be at the – sort of the tension between my lack of expertise as an Indian specialist and our common features that we have to the general outlook as we look at the global economy. We’re of the mind that India is going to be going through a very difficult first half of the year. We have GDP down in the second quarter at 35 percent annualized pace, but we have a very strong rebound in the second half of the year, but one that still doesn’t get you back to where you were. We are worried significantly about the deterioration in public finances. We think the RBI is now almost done but not completely done with the easing that it is going to be doing here. We have a bottom in the policy rate forecast very close to where we are now at 375.
And I think the issues in terms of the stresses on public finances, the stress of having had huge social disruptions through this event, are going to be difficult ones to forecast and think about how they’re going to linger. As I said for South Africa, I think it’s also true for India that there’s going to be needed support from the central bank in helping to fund what we expect to be pretty large ongoing budget deficits here, and I think the hope is that you can get through this without having to suffer more severe financial stress. But the path ahead is ongoing problems on public finance, incomplete recoveries on growth, limits on how far policy can go even though they’re doing more than you might have thought looking back a few months ago, but an economy that’s able to make its way back here at least partially with some pretty strong growth as you look ahead for the next two or three quarters.
MODERATOR: Thank you. Let’s try to go back to Paolo. Paolo, do you – are you connected?
QUESTION: Yes. Thank you very much. So you were talking about the situation in Europe and what Merkel and Macron are discussing. Of course, Italy is one of the countries in – most difficulties at this point. There is also a discussion whether these funds that Merkel and Macron are talking about should be grants or loan. Do you think are sufficient and do you think Italy should accept that no matter what, whether they are grants or loans?
MR KASMAN: I think there’s two different pieces to this. One is the opportunity to take advantage of the ESM, which is clearly going to be a loan, and we are expecting Italy to take that up roughly at a size – I don’t know the number in euros, but it’s about 2 percent of Italian GDP. And we are looking to see, with obviously a lot of uncertainty about the details, this recovery fund get launched over the next year or two and provide grants that will be available to Italy. I’m not sure of the size because the 500 billion euro plan will almost certainly be whittled down somewhat in the negotiations.
That leaves Italy struggling here as it was already with a higher burden. I don’t think this is the end of the story in terms of how Europe deals with its burden-sharing, but I do think we’re seeing enough supports both with lending and with these grants that are going to come through. And of course, we don’t want to ignore the ECB’s continued willingness through the PEPP program, which is on our mind going to be doubled probably at the next ECB meeting, to make it through without a more significant source of stress unless Italian politics turns more seriously disrupted, which is not our forecast.
But there’s – one of the points I think that’s coming across with these questions is we do believe we are getting enough cushions, enough supports to deal with the immediate issue, to not only allow countries to avoid a crisis in terms of financial stress over the next few months, but to be able to start getting on a recovery path in the second half of the year. But there are unanswered questions here about more medium-term ability to fund, ability to grow, and what kind of stresses show up in financial markets. And some of that is the nature of this shock in terms of how big an income loss it is, and some of it is the unanswered questions about how institutions, regional and global, are going to deal with the uneven burden – and there is an uneven burden on Italy within the European Monetary Union; there’s an uneven burden around poorer countries around the world, countries which haven’t been as capable in terms of putting in place the cushions to deal with this, and you could point to South Africa and India in those cases – and we don’t have a good answer to the question of how do these forces play themselves out over a horizon of one, two, three years, other than to make the point that it contributes to our concerns about the difficulty of getting back to what we thought was normal in terms of economic performance before this crisis hit.
QUESTION: Thank you.
MODERATOR: Thank you. Next question is going to go to Weier.
QUESTION: Yes. Thank you, Mr. Kasman. I have two questions. One is: What is the consequence if Federal Reserve and federal government are lavish in their power to support the economy? Like, does the current market rally – is a result of all the liquidation put out to the market? Also your viewpoint on the negative interest rate.
And then a second question is your expectation or observation for the recovery of China’s economy. Thank you.
MODERATOR: Weier, please just give your media outlet and your name.
QUESTION: This is Weier with China Business Network. Thank you.
MR KASMAN: So let me deal with the Fed question first. We do believe, as I said earlier, that the actions that the Fed has taken and other central banks as well have been critical in preventing the COVID-19 shock, which has been enormous, from magnifying on itself by creating an environment where markets stop functioning, where credit markets seized up. That would have made this much more damaging and much longer-lasting, and we think that the steps the Fed has taken, the multiple programs it’s implemented to support credit, to support dollar funding globally, and has been backed up by the Treasury in some cases, have been quite important and quite amazing in terms of how broadly it has expanded its operations.
And we can see this in terms of the Fed balance sheet, which we think will, by the end of the process, if you’re using these facilities, will have been roughly double where it was when the crisis started. It will, in our mind, get up to something in the range of close to 8.5 trillion U.S. dollars. That, I think, is really important, but it does have consequences which, going forward, raise some issues for the economy, including the fact that many of these programs are temporary in nature and they will unwind. That’s the fatigue factor we talked about earlier. In addition, the consequences of Fed taking a more active role in credit allocation in the economy is unclear in terms of what that’s going to mean going forward.
And of course, the big issue which is starting to be thought about from both the Fed and other central banks is how do you deal with the demand weakness that we expect to persist, holding back inflation, in terms of trying to achieve your macroeconomic goals when you are already at a zero interest rate policy. As you asked in your question about negative interest rates, the Fed has effectively ruled that out anytime soon, and we do not think that, at least over the next 18 months, that’s likely to be the Fed’s choice to deal with the more medium-term challenges it’s going to face. We think it’s more likely that the Fed will use fairly aggressive forward guidance to signal its commitment to trying to get inflation back up. It might further expand its QE programs and it could – although it’s not our current forecast as a baseline – it could go to something like the Japanese yield control targets, although if Fed does that we think they’ll stay much shorter on the curve.
With the Chinese economy question, we do believe that China was very aggressive and successful in containing the crisis. It has, in that sense, done a good job in putting itself in a position for being the first out in terms of generating recovery, and it does look to us that it’s been impressive here so far how well they have gotten that initial step towards stronger activity. The labor market I think is a key ongoing concern here, getting people back to work, but the numbers there are starting to turn as well. And we think the government, as you saw last week, with the NPC having delivered another leg of fiscal stimulus, there’s more on the way.
I think China’s issues here going forward beyond the control of the virus is going to be that it’s going to face a very significant external drag from the rest of the world, both being weak in the second quarter and not having a full recovery beyond that. And it faces the challenges of a different environment in terms of how supply chains are evolving here and how the political process is evolving in terms of Chinese companies’ operations around the world. We do have a partial recovery in China as we do everywhere else. And we do have unanswered questions about how balance sheets have been affected in China, perhaps the public sector one being one of the more interesting parts of that equation, where we have the consolidated fiscal position, in our estimate, having a deficit this year of something between 13 and 14 percent of GDP.
QUESTION: Yes. In terms of the market rally, is this – do you think it is also a result of the federal government’s or the Federal Reserve’s other liquidations?
MR KASMAN: Yeah, so I’m not a market strategist, so the last thing I’m going to comment on is valuations in markets, but I don’t think there’s any doubt that the success in containing market-structuring pressures – the ability of the Fed and other central banks to keep credit markets opening, to keep credit flowing to emerging markets – is a huge part of the reason why equity markets have done as well as they have.
I think there is a separate issue here relative to past recessions that, while the move down here has been dramatic and it has been unprecedented, it’s also a very different type of an event than in 2008-2009, or past recessions, where the manmade nature of this event that we have shut things off and we can’t turn things on, I think, has given markets greater confidence in seeing the recovery ahead, at least its initial stages as we’ve described. And that optimism combined with the supports from policymakers has held the weakness in markets at bay to some degree, relative to what we’ve seen at a similar point in past global recessions.
QUESTION: Thank you.
MODERATOR: Thank you. The next question goes to Martin. Martin, please, go ahead.
QUESTION: Yes. Hi, my name is Martin Burcharth. I work for a newspaper in Denmark. I’m the American correspondent. The name is Information. Mr. Kasman, two questions, the first one about federal debt and federal deficit as a drag on economic growth, and the second one on the V-shaped versus the U-shaped recovery.
The first question is: Carmen Reinhart and Ken Rogoff, in I think 2014-15, wrote this essay about federal debt, when it reaches about 80 or 90 percent of GDP, starts being a drag on growth. And it was – it was pointed out by a student at UMass Amherst at that time there was a calculation error, but the dispute has never really been resolved, and we’re going to end up, I think, by the end of this year, with a debt that’s close to 140, 150 percent of GDP, so that’s like higher than the Italian one is at the moment, before going into this pandemic. So I wonder whether you share that view that Rogoff and Reinhart put forth at that time.
The second question is: Your V-shaped recovery forecast, like all forecasts, especially on pandemics and death rates, it depends on the presumptions you put into your mathematical model, and I wonder whether not putting a second wave in there is a realistic scenario.
And secondly, I wonder whether you thought of what might be the economic policy of a Biden administration. That has an impact on your 2021 forecast. The Biden administration would – could possibly try to raise wages, minimum wage. They would do probably a number of other things that might be seen by both Wall Street and the business world as being a drag on economic growth. That’s it. Sorry for being too long.
MR KASMAN: No. So on the first point, there’s no doubt we’re getting fairly significant increases in public sector debt across the world. And I think there’s no doubt that this is necessary as part of the process of containing the immediate crisis and making sure that the economic losses that are being created by the containment measures themselves don’t spill over into much deeper and broader economic disruptions. I do believe there are nonlinearities in the macroeconomic world, and policy’s job is partly to prevent those nonlinearities from taking hold and putting us into much worse situations. And I think this is the circumstances we’re in now, and if we’re right, we will get significant dividends from that in terms of the initial boost to growth that comes from the relaxation of these measures. And I think we’re starting to see that.
I think we have seen for a couple months now the initial phases in China moving in that direction, and I’m pretty hopeful that we will see that in Western Europe and in the Americas start to take place over the next couple months. The business surveys we’ve seen for May, including PMIs, including the Ifo in Germany, are certainly pointing in that direction, and I’m comfortable with that.
I do believe, as you’re noting, that there are consequences to building up public sector debt. I don’t believe there’s any magic number, and certainly not a number which points to crisis on the side of having higher public sector debt. I think countries like the United States, countries like Denmark, countries like Germany, most of the advanced economies have a huge capacity to fund and finance debt and deficit, and in a world in which global interest rates, risk-free interest rates are so low, there’s very little pressure on that that I think we need to worry about in the near term.
Now, that doesn’t mean that this isn’t a cost, because I think what we’re doing here is we are taking those degrees of fiscal flexibility that was hoped to be used for investments – perhaps for climate change, perhaps for education and infrastructure – now we’re using it to fight the virus, and that is going to I think cause tradeoffs down the road which are going to lead to less being done on these other fronts. In addition, I think there will be a point at which slack gets eaten up in the world and risk-free interest rates go up and borrowing costs go up. And there will be at that point a very important choice central banks will have to make, which is part of the broader public policy choice, which is to what degree do they play an active and ongoing role in terms of funding government deficits. I think they are doing so now in a world in which they’re not constrained because inflation is low and they’re trying to support growth, but at some point here, the choices won’t be as easy.
But I’m not worried over a horizon of two years about the costs and those tradeoffs other than what I see having been given up as we think about what could have been done on the public finance side and what will be a cost somewhat down the road. These are not costless investments; they’re necessary investments. But they’re not investments which I think, at least in the advanced economies, are going to cause the stress points over the next couple years, notwithstanding the issues we talked about earlier with regard to the absence of burden-sharing in Europe and some of the weaker countries like Italy and in EM, where I think there are more potential immediate pressure points coming from the fiscal side.
Then you asked me about policy and Joe Biden and the future, and I’ll say this —
QUESTION: The V-shape (inaudible).
MR KASMAN: Oh, V-shape. Well, in our forecast – and I think I said this already – we have V-shape in terms of growth and we have something more akin to U-shape in terms of levels of GDP. And I think it’s very careful when you talk about these things that they both matter, but probably the more important one over a longer period of time is the levels. If you go down 50 percent and then you grow 50 percent afterwards, you’re not at the same place. In fact, you’re quite a bit a ways different. So when you draw that chart and you just look at growth rates, it looks like a V, but it’s not a V in terms of the level of activity.
So I tend to shy away from using letters because I think it can be very misleading, but if we have to tie it down, I think we have a path in our forecast which has a V-shape in growth rates and a U-shape in levels of GDP. And as I said, I think the levels matter an awful lot more than the growth rate numbers, even though when you’re living through it, you tend to be very tied to the growth rate, partly because you’re thinking that what your growth rate is now might be able to be extrapolated.
So going on to policy, I don’t think there’s any doubt – and I think there’s an underpinning of everything that I’m saying that depends on this – the path of the virus, it depends on the path of policy. And you’re 100 percent right. We live in the world as we need to in expressing modal views, and there’s a huge range of both inputs to that that could be playing out differently as well as alternative scenarios that could be driven. But our modal view that builds in a partial recovery is not being very confident or specific about paths ahead, either from the point of view of the virus or from the point of view of policy.
But what I said up front, I think, is important. There’s two things that are being built into the forecast explicitly. One is that the virus isn’t going away. So while I’m not building in a second wave, I’m also not building in a complete removal of the virus from our day-to-day lives. So it is a force that drags and we may be underestimating that. There may be a second wave. But we’re not going to the point of thinking that it’s gone from the scene. And that is embedded to different degrees and different – one of the things about forecasting is I have 32 economists working for me. They’re not all using exactly the same assumptions on these things even though we try to work in a common framework.
And similarly, on the political side, there’s not a explicit forecast for who’s going to win the U.S. election, and the last thing I would want to do is try to predict that. There’s not a specific forecast by whether the winner is going to control the two houses of Congress, which is hugely important for getting an agenda passed, and there’s certainly not a specific forecast for the policies themselves that may come. But what is built into our forecast is that the extraordinary stimulus that’s in place now – and this is a forecast which is true not just for the U.S. – does have the backside of fatigue and fading, which actually turns into a drag on growth sometime in 2021. And if you want to magnify that through active policies as opposed to just the passive allowing of things to unwind, you could get more negative scenarios.
But basically, what’s built in is the virus continues to be something of a drag, and perhaps as much on cautious behavior as it is in terms of specifics around the outbreak, and that there is a drag that comes from government policies turning less supportive and in fact allowing things to unwind. And I’m comfortable with those things without, again, trying to get too precise, and recognizing, as you’re noting, that there are alternatives that could drive these things far, far further in a negative direction than we even have in our baseline forecast.
QUESTION: Excellent. Thank you very much.
MODERATOR: Thank you. So we have a number of questions remaining, and our time is limited, so I’d ask everyone I call on to limit themselves to one question. With that, we’ll go ahead to Momoe. Please introduce yourself and your outlet.
QUESTION: Hi, Mr. Kasman. My name is Momoe Ban. I’m with Nikkei newspaper, Japanese business newspaper. And thank you very much for this great presentation. My question is about state and local government financial situation. National Governors Association, led by Governor Cuomo, is now demanding more federal financial assistance. And House passed the additional stimulus plan, including this assistance to local and – state and local government. But I was wondering, how do you expect those financial difficulties of state and local government will impact overall economy and financial markets?
MR KASMAN: So I think one of the recurring themes to this conversation is burden sharing. And we’ve talked about it with regard to Italy, we’ve talked about it with regard to the need for supports for EM economies, and now we’re talking about it within the United States, where there’s undue pressure being placed on certain states and more generally state and local finances. And that is a problem that we’re going to have to deal with going forward.
Embedded in our forecast for the United States is an additional $1 trillion of stimulus that has not yet been legislated. We don’t have a specific timetable in our forecast, and we don’t even have a very articulate mix of where the money will go to. But some of it will go to state and local governments; some of it will go to increasing the lending programs or extending the lending programs, and some of it will go to benefits for the household sector being extended, particularly the unemployment benefits.
That will alleviate some of the pressure, but not all of the pressure. There is, I think, part of the story on the U.S. next year is that state and local governments come under some pressure and become a part of that fiscal tightening that we talked about earlier, and therefore part of the incomplete recovery story. The risk, of course, is that you get less from policy and Washington, and you have more pressure, and ultimately there is a risk which we’re not building into our forecast in any clear way that there could be states or localities that come under severe enough pressure that they have to restructure or do something of that like.
But that is a pressure point. Directionally, it’s built into our forecast. We need more, I think, fiscal action from Washington to just validate our baseline forecast. But the bias is that over time state and local authorities come under pressure on our drag on U.S. growth.
QUESTION: Thank you.
MODERATOR: Elena, you’re up next.
QUESTION: Hello. Thank you so much for this briefing. I had a couple questions about Brazil. I am from the Portuguese News Agency, by the way. So in the chart of the global economic outlook summary that you’ve provided – and I thank you for that – Brazil has one of the highest drops in real GDP in the second quarter of this year, but 67 percent growth in the third quarter. So why? Why is that? And also, the foreign investment in Brazil has dropped to numbers that are the lowest in 25 years. How would you explain that?
MR KASMAN: Well, I think part of the Brazil story, if I’m going to articulate it here, is that they moved somewhat later. They’re having a more serious trouble dealing with containing the crisis. And that, combined with some of the domestic political stress points, is putting pressure on financial markets in Brazil, which is reinforcing that. So all of that together, even with the central bank easing, is creating more downward pressure. And if I – and I want to just open the table myself to see that. I think in addition what you’re getting is a less complete bounce from Brazil, if I got my numbers right – and I have to go to a spreadsheet here to see it.
I think the kinds of recovery we have in Brazil is generally, yeah, it’s definitely among the worst performers in terms of the recovery. Our forecast has Brazil sitting relative to an overall global forecast where we’re close to 4 percent below the pre-crisis level of GDP; at the end of next year we’re closer to 7 percent in Brazil. So that’s a significant underperformance. And I think, again, it’s a reflection of the inability to quickly bring the virus under control, combined with the stresses we see playing out in terms of tightening financial conditions in the economy.
QUESTION: Oh, okay. Thank you so much.
MODERATOR: Great. The next question goes to Ozzy. Ozzy, please go ahead.
QUESTION: Hi. I’m Ozzy. I’m from Taiwan Central News Agency. My question is about Taiwan. The outlook – the outbreak itself has not made an impact on Taiwan so far, but it’s export-driven economy looks to be suffering due to muted external demand compared to pre-crisis level. And JP Morgan predicts there will be nearly no growth for Taiwan’s economy this year. And what’s your take on that?
MR KASMAN: Well, our take is that Taiwan is doing pretty darn good relatively. That’s the message. Obviously, as you say, we have no growth, but if you look at Taiwan versus the rest of the world, we are basically seeing a much smaller decline in activity, and a recovery that brings you much closer back to normal than just about any place in the world. And I think that both speaks to the success in containing the virus quickly, but it also speaks to Taiwan’s, I think, position here benefitting in the tech sector from what is a very significant rotation in demand to completing 5G networks, to putting in place more work-at-home electronics.
And you’re seeing that in the data. As you noted, Taiwan is experiencing weakness in its exports overall, but not severe weakness, and that’s because while the non-tech sector is getting hurt really badly, the tech sector is actually doing quite well here. Also, some of that has to do with the benefits it has received as the supply chain dynamics in China got disrupted earlier this year. So yes, Taiwan is getting hurt; yes, Taiwan is experiencing drags that are going to continue here from the rest of the world. But in a relative sense, I can’t think of a country that we are forecasting which is doing better through this event than Taiwan.
MODERATOR: Great. So we have one question that’s come in through the chat feature and depending on how much time we have left, this may be the last question. But hold on for those journalists who’ve had their hands up. Let’s see. The question comes from Manik Mehta. He’s a syndicated journalist in Southeast Asia. His question is: Will Asia record the impressive growth rates of the last decade, considering the impact firstly of the U.S.-China trade and now coronavirus? Where do you see rays of hope in Asia, including China, Japan, India, South Korea, and the ASEAN region? Thank you.
MR KASMAN: So I mean, again, we get into this kind of complicated issue, that over the next two or three quarters I think Asia’s going to experience very strong growth from the levels that were depressed as the virus damaged first half performance. But if I smooth out from that and I look at Asia over the course over the next couple of years, I think we have to recognize that Asia is getting hurt by this event. It is following the path broadly of the world, which is you get hit hard, you recover strongly, but your recoveries are incomplete, and that the challenges of high budget deficits, the challenges of dealing with slack, labor markets that are not completely utilized, and the broader issues around demographics that Asia was dealing with anyway are still in place.
I think the other point to make there is that Asia is a very diverse region. And I think as I said earlier, Taiwan both because of its success in dealing with the virus and also because of its product mix looks well positioned here. I think India has more severe challenges because of these heavy burdens and the lack of ability for governments to handle that, combined with the social and political pressures that get exacerbated by that. China has got its specific issues, which have to do with the ongoing changes going on as a result of the conflict between U.S.-China trade. That is morphing in different directions this year, plus I think more general tensions that are being created both politically and economically with the rest of the world.
The ASEAN region is in an interesting position since it’s a tech-oriented economy in its exports, but it’s not generally getting the same benefits from the type of tech activity which is booming. Korea and Taiwan tend to be beneficiaries of that. And I can go on on Japan and Korea as having their own separate issues as well. But I would recognize the common factors that generally if I had to talk about Asia as a region it’s, in our mind, likely to do better in a relative sense than the rest of the world but with a lot of diversity and without losing sight of the fact that better in this world still means that you’re doing worse than you were before this crisis hit.
MODERATOR: Mr. Kasman, I know we’re almost out of time. Do you have time for one more question?
MR KASMAN: Okay. Just one more will be fine.
MODERATOR: Okay. Go ahead, Alex.
QUESTION: Yeah. Thank you, Daphne. Bruce, perhaps we can little bit focus on oil-rich countries. How has the crisis affected ordinary people in those countries, such as Azerbaijan and Russia? Have the governments’ economic policy responses been appropriate and how will Russia and those other economies recover? Thank you very much.
MODERATOR: Alex, please introduce yourself and your outlet.
QUESTION: Yes, Alex Raufoglu from Turan News Agency of Azerbaijan.
MR KASMAN: So I think – and I have to say, I don’t really follow Azerbaijan, so I’m not going to speak about that specifically. But I think we have to distinguish at this point between the effect of what’s been happening in global oil markets and the effect of the virus. And I think if you look at the Russian economy right now, primarily what we’re seeing in terms of the lockdowns, in terms of the losses and activities, at this point we’re seeing primarily the effects of the virus. And I don’t think – whether you look at the Gulf states, whether you look at Russia, whether you look at other oil-producing countries, including the United States – that the oil dynamic has been the central force.
But that I think is not to lessen the important role that oil will play in these economies going forward, in terms of the tradeoffs that are being faced in the United States, the very significant credit stresses that are going to come in the oil-producing industries, and more generally what those sectors, revenues mean for overall economic growth. So the big call here is where do oil prices go. Our own view is that you are seeing now the dynamic of supply starting to respond slowly. That is going to start to put some upper pressure on oil prices, but not bring them back in a full-bodied way. Our own forecasts have oil ending this year, Brent at something I believe a little bit below $40 a barrel, which is not far from where we are right now. And if that’s the case, pressure on budgets in places like Russia and the Gulf States is going to squeeze. I don’t think it has been the factor that’s driven performance up till now, but it will be a factor that leaves these countries in a more difficult position, all else equal, in terms of how the virus dynamic plays itself out.
QUESTION: Terrific. Thanks so much.
MODERATOR: Well, I think that concludes today’s briefing. I really appreciate your time, Mr. Kasman, and to all the journalists who joined us today. This briefing was on the record, and I will provide a transcript as soon as its available. Immediately following the briefing, I will post the video link and reshare the chartbook that Mr. Kasman forward to us earlier today. And with that, I just want to say thank you again for your time, Mr. Kasman, and that concludes today’s briefing.
MR KASMAN: Thank you.