Key highlights from Vanguard:
- U.S. growth will turn positive in the third quarter, but significant risks to the economy remain.
- Vanguard expects that the U.S. unemployment rate will fall to around 10% by year's end.
- Continuing U.S.-China tensions are likely to accelerate the regionalization of supply chains.
- China's return to growth may happen as soon as the second quarter, with a full-year outlook for growth in a range of 1% to 3%.
- The euro area economy may contract by as much as –20% before the economy begins to recover in the second half of the year.
Economic growth is underway in many parts of the world
Vanguard’ reports that recent readings of high-frequency data, including in the vulnerable face-to-face sectors, in Asia and Australia suggest the next change to our outlook in those regions could be to the upside. We assume that restrictions on economic activity are largely eased by the end of June and that any second waves of infection don’t require national lockdowns.
The United States is likely experiencing the deepest economic contraction on record. But Vanguard economists expect the recession to be short-lived (in fact, the shortest ever), with recovery likely starting in the third quarter. Vanguard's outlook for 2020 includes a U.S. economic contraction in a range of –7% to –9% and for second-quarter contraction as deep as –30% to –40%. But our economists foresee positive growth rates starting in the third quarter and growth potentially reaching double digits in the second half of the year.
Data released by the National Bureau of Statistics of China suggest China's return to growth may occur sooner than we had expected, as soon as the second quarter. ISG hasn't changed the full-year outlook for growth in a range of 1% to 3%, however, as our China economists expect a greater external demand shock for China's export industries in the second half of the year.
The euro area economy contracted by –3.8% in the first quarter, the most ever recorded. Vanguard expects that contraction to be easily surpassed in the second quarter, however, reaching about –20% before the economy begins to recover in the second half of the year.
The International Monetary Fund (IMF) predicts that emerging markets will contract by –1.0% in 2020, with emerging Asia bucking the trend with positive growth of 1.0%.
Central banks will keep monetary policy accommodative for the foreseeable future
As economies face contraction and job losses and as inflation isn't an immediate threat, monetary policy will remain accommodative.
The Federal Reserve expects to keep benchmark interest rates near zero at least through 2022. The Fed updated the Secondary Market Corporate Credit Facility to enable its purchase of individual corporate bonds to support market liquidity and credit for large employers.
The European Central Bank increased the size of its Pandemic Emergency Purchase Program by €600 billion, to a total of €1.35 trillion, and extended the program to June 2021.
We expect the People's Bank of China to make additional cuts to the reserve requirement ratio, and we believe a cut in one-year deposit and lending rates are increasingly likely, considering recent low inflation prints.
Unemployment rate could fall to 10% by year's end
The United States created rather than shed jobs in May, surprising market watchers. In our baseline scenario, Vanguard would expect to see the unemployment rate fall to around 10% by year's end.
What this all means to us at GFP is that we are prepared for a reduction in stock market returns and perhaps even a decline in stock value later this year. We continue to hold cash positions where money is needed in the short term, sufficient bonds to keep the stock allocation from being too risky, and a slightly lower stock allocation to reflect the fact that the stock market highs we have experienced during COVID-19 and the recession may not be sustainable. For longer term portfolios, we maintain stocks for the long run as they are the only market investment that stays ahead of inflation, unlike bonds and cash.