The latest revisions to our moderate scenario illustrate the stark divergence in economic performance among the major advanced economies during 2020. A few economies, notably Norway and Ireland, have had a relatively modest downturns thus far, buoyed by the relatively limited outbreaks of the virus within both countries, by government stimulus efforts, and (particularlyin Ireland) by international activity.
The initial rationale behind DBRS Morningstar’s macroeconomic scenarios was to provide a clear and transparent anchor for DBRS Morningstar ratings amid a highly uncertain environment. As predicted in our April commentary, forecasts did ultimately overshoot on the downside in a number of countries – and even a few of our initial moderate scenarios were possibly a bit too negative. In other instances the April IMF forecasts and our initial adverse scenarios were too optimistic – but some of the updated October IMF forecasts may yet prove overly pessimistic.
Nordic Downturn Modest
Overall economic performance masks somewhat the overall impact on domestic demand in these countries, which has been materially worse. Nonetheless, these economies have proven relatively resilient thus far, and the economic downturns in the other Nordics, Australia, Japan and the United States have also been relatively modest. At the other extreme, Spain and the UK are likely to end the year with double digit declines in output.
Latin-Europe Weak
Spain’s performance was particularly surprising, turning one of Europe’s better performing economies in the period preceding the pandemic into the worst performer of this group. France and Italy are also expected to be among the weaker growth performers during 2020. The diverging economic fortunes of individual countries can be partially explained by pandemic intensity, reliance on affected service sectors, and other factors. Among European countries, the weakest growth performers (Spain, UK, France and Italy) generally consist of the countries that have had the worst experience with the virus and (as a result) imposed some of the harshest restrictions on activity. However, on a per capita basis,
Higher Death Rates
Belgium and the United States have had a higher number of confirmed cases, and Belgium has a higher number of deaths per capita as well. Structural features, such as the share of employment related to tourism and hospitality, have likely played some role. One additional source of variation in growth performance may be a higher prioritization of economic activity in some countries, even at the expense of increased virus transmission along with a higher degree of tolerance for hospital saturation. Fiscal policy responses have also varied significantly. Although budgetary support has clearly played a role in preventing a larger decline consumer spending and keeping firms viable, countries with larger increases in deficits have not necessarily performed better on growth thus far. Recoveries are nonetheless likely to be more robust in cases where government fiscal support is augmented through 2021.
Structural Changes Expected
in general, a reversion to trend during 2021 should imply higher growth rates in the economies that experienced the largest downturns in 2020. However, the depth of the downturn may in some cases reflect accelerated structural changes, and some economies may struggle to adjust and to increase employment opportunities for displaced workers. As a result, we see some risk of permanent damage to productivity or to labor force utilization within individual economies. For example, the pandemic has accelerated the closure of some retail spaces, which may leave higher rates of unemployment among less skilled workers. It remains unclear how quickly leisure and hospitality will recover, particularly in relation to business travel or live indoor entertainment. In many cases, the labor market effects have been masked due to people dropping out of the labor force or being kept on payroll via government support. While we have lowered the projected average unemployment rates in both our moderate and adverse scenarios, we expect unemployment to remain elevated throughout 2021, and also expect headline unemployment numbers will continue to understate the true impact of the pandemic on the labor market. It is unclear whether the impact of the pandemic on education, particularly in countries that have closed schools for extended periods or struggled with the remote learning model, will have any lasting implications for labor productivity growth in the future, writes Morningstar/DBRS in its Macroscenario in desember 2020.
Source: DBRS Morningstar. The next generation of credit ratings.
