Key Forecast Trends

• The coronavirus outbreak has been the key development over the last month. While this is unlikely to have a lasting impact on the global economy, it has tilted the near-term risks more clearly to the downside.
• There is no obvious case study to use as a playbook for the new virus. SARS is the logical starting point, but China is a more critical part of the global supply chain than it was in 2003 and the cyclical backdrop is currently more fragile.
• Much will depend upon the policy response. While efforts to contain the spread of the virus are likely to depress near-term activity, the subsequent policy easing could provide a springboard for recovery later in the year.
• At this stage, we aren’t making any major changes to our 2020 global growth forecast, which remains at 2.4%. That’s mainly because it was already a cautious forecast, reflecting our view that several key headwinds (chiefly from populism and geopolitics) would continue to weigh on the outlook.
• But the shape of growth during the year is likely to look quite different, especially in China, with weakness early in the year giving way to a stronger second half. That’s likely to complicate interpretation of the data—for markets and policymakers alike.
• It also affects the balance of risks. Last month our base case was that global growth would remain soft and that a downside surprise (recession) was more likely than an upside surprise (reflation). The coronavirus has only strengthened this conviction.

Outlook

• We have upgraded our 2020 global growth forecast to 2.4% from 2.2% to reflect more encouraging news on the trade front, easier financial conditions and signs that manufacturing may be starting to stabilize.
• Compared with consensus, we are still a touch more pessimistic on Japan (0.0% vs. +0.3), the euro area (+0.8% vs. +1.0%) and the US (+1.7% vs. +1.8%) but are now marginally more optimistic on China (+6.0% vs. +5.9%).
• The secular backdrop continues to point to higher inflation. Cyclical developments are less supportive, but unemployment rates remain very low in many countries so that inflation could respond quickly should growth surprise even mildly on the upside.
• The improved global outlook has reduced the need for urgent monetary stimulus. Nonetheless, risks are still skewed in that direction, and the Fed and ECB are still more likely to ease policy in the year ahead than to tighten.