What is the global economy

World economy

The global economy fell into an unprecedented recession in the wake of the corona pandemic. After temporary lockdown measures, a strong recovery set in in the second half of the year, the success of which depends largely on the further infection process.

After the historic slump in the second quarter of 2020, the global economy is on a steep recovery path. However, both global industrial production and world trade in goods have recently been overshadowed by the pandemic. Against the background of the supply and demand shocks due to the outbreak of the corona virus and the necessary lockdown measures, there were significant restrictions in economic activity in all regions of the world in the first half of the year. Overall, global economic output in US dollars contracted by 7.8% in price and seasonally adjusted terms compared to the previous quarter in the second quarter of 2020. Such a slump did not even take place during the financial crisis, when global gross domestic product (GDP) fell by a total of 4.1% between the third quarter of 2008 and the first quarter of 2009. The massive decline in the second quarter of 2020 was mainly due to the negative developments in large economic areas such as the euro area (-11.8%), the USA (-9.0%), Japan (-8.2%), India (- 23.9%), Brazil (-9.7%) and Russia (-3.2%).

In the third quarter of 2020 there was a strong recovery in the global economy. With a growth rate of 7.4% compared to the second quarter, the recovery in global economic output was similar to the previous slump. Since the individual countries are affected by the spread of the corona virus at different times and degrees, there are different phases of the recovery process. As the region of origin of the pandemic at the end of last year, China reported lower case numbers again in the second quarter, accompanied by a strong recovery in the economy (+ 11.7% compared to the previous quarter). In the third quarter, GDP increased more moderately by 2.7%. In other parts of the world, the catching-up process could only begin later with the loosening of lockdown measures. This applies to the euro zone and the USA, among others, which accordingly posted GDP growth of 12.6% and 7.4% respectively for the third quarter. Survey data and other leading indicators are already sending positive signals for the final quarter. Despite this good news, the recovery is still threatened by the increased infection rate. Both industrialized and emerging countries are affected. This distinction is therefore not currently used to illustrate the economic prospects. Instead, the further economic development worldwide depends largely on the respective regional pandemic courses.

The race to catch up is losing momentum

Global economic indicators are all pointing upwards, but have not yet reached their respective pre-crisis levels. Although global industrial production was increased by 1.0% in September compared to August, it is still 3.0% below the level of the previous year. In addition, the increase in production lost considerable momentum (July: + 3.3%). Global trade in goods was also unable to maintain the pace of its catch-up race in August (+ 2.5%; July: + 5.0%). Compared to August 2019, world trade was down 4.4%. However, the forward-looking sentiment indicators signal increasing confidence in the economy. The composite purchasing managers' index from J. P. Morgan / IHS Markit recorded significant growth in October and, at 53.3 points, was well above its growth threshold of 50.0 points. The sub-indices for industry (53.0 points) and the service sector (52.9 points) were at almost the same level. During the lockdown months in March and April, the value for the service sector fell more sharply than the value for the industrial sector.

Unless the epidemic trend worsens dramatically globally, an economic recovery and a corresponding recovery in the global economy can also be expected in the final quarter of 2020. In its October report, the International Monetary Fund (IMF) assumes that global economic output will decline by 4.4% adjusted for price and purchasing power in 2020 as a whole, but will increase by 5.2% in the following year. According to this forecast, the pre-crisis level of global GDP will be reached again in the course of 2021. For the developed economies, however, the IMF sees a longer recovery process. Recovery process until the end of 2021.

USA: recovery in the third quarter of 7.4% compared to the previous quarter

In the third quarter of 2020, economic output in the USA rose by 7.4% after adjustment for price and seasonally compared to the previous quarter. In the second quarter of 2020, GDP fell by 9.0%. Most recently, the in- and recovered
Exports, which increased by 12.4% and 17.6%, respectively, as world trade picked up. After the lockdown was lifted, some of the domestic economic losses were offset. Private consumption increased by 8.9% and investments increased by 6.5%. Only government consumer spending was lower (-1.1%).

The indicators are sending cautiously positive signals for the rest of the year. Incoming orders rose in September for the fifth month in a row (+1.1% compared to August) and thus already reached 96% of the previous year's level. The trend in industrial production has been increasing since May, but was reduced somewhat in September (-0.6%). Here, more than 7% are still missing compared to September 2019. Nevertheless, the survey data from IHS Markit speak for a significantly increased confidence in the USA. The composite purchasing managers index climbed to 56.3 points in October. However, the uncontrolled spread of the corona virus remains a major risk for the further recovery of the US economy. The USA recently recorded by far the most cases of corona worldwide with more than 100,000 new infections per day. The situation on the labor market also remains tense: with fewer and fewer inflows, the number of people in employment in October is still 6% below the previous year's level.

In its updated October projection, the IMF anticipates a GDP decline of 4.3% in 2020 and a not nearly as strong recovery of 3.1% in 2021. In addition to the infection, there is another risk of an escalation of the disputes with China and the EU. It remains to be seen what impetus the results of the Senate and Presidential elections will have on this.

Japan: Corona has exacerbated the recession

Japanese economic output recorded a historic slump in GDP in the second quarter of 2020 with a price and seasonally adjusted decline of 8.2% compared to the first quarter. With negative rates of change in the two previous quarters (-0.6% and -1.8%), the Japanese economy was already in a technical recession before the hard lockdown. The development in the second quarter was characterized in particular by a decline in private consumption (-8.1%). The reduction in investment activity (-1.6%), government consumption (-0.6%) and the export balance were less significant.

In the third quarter, however, as in many other parts of the world, there was a significant economic recovery in Japan. With an increase of 5.0% compared to the previous quarter, growth in Japan was also stronger than expected in many places. As a countermovement to the development in the second quarter, the main driver of the recovery was private consumption, which rose by 4.7%. Government spending also had a supportive effect, increasing 2.2%.

Overall, however, the indicators continue to paint a bleak picture of the Japanese economy for the current year. Despite noticeable increases and a strong upturn in September (+ 4.0% compared to August), industrial production is still a good 10% below the previous year's level. In contrast, incoming orders fell in September (-4.4% compared to August), but are only 4% below their previous year's level. The Japanese central bank's Tankan index, which is used to measure business sentiment, hit historic lows in the third quarter. The composite purchasing managers' index from IHS Markit increased slightly in October, but at 48.0 points it remains well below the growth threshold of 50 points.

The IMF expects Japan's GDP to decline by 5.3% in 2020. A comparatively weak recovery of 2.3% is expected for 2021.

Euro zone: recovery in the third quarter of 12.7% compared to the previous quarter

The general relaxation of lockdown measures in the individual member states was accompanied by a strong recovery in economic output for the euro area. In the third quarter, GDP rose by 12.7% after adjusting for prices and seasonality, after having plummeted by 11.8% in the previous quarter. There was particularly strong catching-up processes in France (+ 18.2%), Spain (+ 16.7%), Italy (+ 16.1%), Austria (+ 11.1%) and Germany (+ 8.2%) observe.

The leading indicators on the current edge signal a slowdown in the recovery in the euro area. After four consecutive increases, industrial production fell by 0.4% in September compared to the previous month and was thus still around 7% below the previous year's level. In contrast, incoming orders in the manufacturing sector recently picked up again significantly (+ 4.6%), but also only climbed to around 93% in August 2019. The European Commission's Economic Business Climate Indicator improved to its highest value in October since March 2020, but was still in negative territory (-0.74 points). Meanwhile, the composite purchasing managers' index from IHS Markit slipped exactly to the level of its growth threshold with a value of 50.0 points. Confidence in the manufacturing sector (54.8 points) offset the pessimism in the service sector (46.9 points). Meanwhile, unemployment remained at a slightly higher level in September at 8.3%.

In its autumn forecast, the IMF expects GDP in the euro area to decline by 8.3% in 2020. An increase of 5.2% is again expected for 2021.

China: Above pre-crisis levels again

China as the starting point and first epicenter of the corona pandemic was also the first of the major economies to lift the lockdown. As a result, the Chinese economy was the only major economy to report growth in the second quarter of 2020 (+ 11.7%). In the third quarter, Chinese GDP rose by a more moderate 2.7% on the previous quarter and by 4.9% on the previous year, adjusted for price and seasonality.

The indicators are sending optimistic signals for the final quarter of 2020. Industrial production gained momentum over the summer and grew by 1.2% in September. The composite purchasing managers' index from IHS Markit rose further in October and, at 55.7 points, was well above its growth threshold. With a value of 53.6, the sub-index for industry even reached its highest level in over nine years (service sector: 56.8 points). The Li-Keqiang index, which records lending, electricity consumption and rail freight traffic in the People's Republic, also settled above the pre-crisis level in October. In line with the good economic mood in the country, car sales in China also developed better in the third quarter than the annual average for 2019. The positive trend was maintained in recent weeks.

There are also signs of recovery in foreign trade. In October, exports grew by 11.4% year-on-year, more strongly than they have been since March 2019. Meanwhile, imports rose for the first time in four months (+ 4.7%). However, there is still a great risk for Chinese foreign trade due to the simmering trade conflict with the USA. It remains to be seen how the result of the US presidential election will affect this.

In its October forecast, the IMF only anticipates growth in the current year for China and predicts an increase in economic output of 1.9%. A strong plus of 8.2% is expected again for 2021.