Is a positive growth surprise coming?

10 September 2020

Global economic data improved over the summer, often exceeding analysts' expectations. In this Macro Flash Note, GianLuigi Mandruzzato looks at the implications of the latest statistics on the growth outlook. The conclusion is that, although uncertainty is high, it seems likely that GDP estimates for 2020 will be revised upwards, especially in the US.

There has been a notable improvement in recent economic data releases. For example, in August, the JP Morgan Global PMI index rose to 52.4, the highest since Spring 2019. In the US, the August unemployment rate fell sharply to 8.4% and non-farm payrolls rose by 1.4 million from July. In Asia, the 6.4% year-on-year increase in the value of goods exports from China, Taiwan and South Korea suggests that the recovery in international trade is gaining momentum (see Chart 1). This will foster the further recovery of industrial production that began, including in Europe, during the second quarter after the easing of lockdowns.

Chart 1. Exports from China, Taiwan and South Korea (y/y)

Source: Refinitiv and EFGAM calculations.

A useful indicator for understanding whether and by how much the published economic data is better or worse than analysts' expectations is the Economic Surprise Index (ESI) calculated by Citigroup. A prolonged period of better-than-expected data corresponds to positive and increasing values of the index and would be likely to lead to upward revisions of the growth outlook. Conversely, worse-than-expected data depresses the Surprise Index and can be the prelude to a reduction in growth estimates.

Chart 2. Global Economic Surprise Index

Source: Citigroup, Refinitiv and EFGAM calculations.

Reflecting the impact of the Covid19 pandemic on the economy, the global ESI, calculated as the arithmetic average of the developed and emerging country indices, collapsed from late February to the end of April (see Chart 2). From the low at the end of April, it rose to a peak in mid-August; in early September, the ESI remains much above its pre-Covid19 peak although is a little lower than its August high. The high level of the ESI in recent months suggests that the scenario for global growth is improving sharply.

Chart 3. Developed and emerging market Economic Surprise Indexes

Source: Citigroup and Refinitiv.

However, this improvement is unevenly distributed across countries. The ESI is much higher in developed than in emerging economies (see Chart 3). This reflects, above all, the performance of the US, whose ESI returned above zero in early June and is still close to 200, about double its pre-Covid19 peak (see Chart 4). In contrast, the eurozone ESI only turned positive again in mid-July; the widening of the gap from the US index indicates that growth prospects in Europe have improved less than on the other side of the Atlantic.

Chart 4. US and eurozone Economic Surprise Indexes

Source: Citigroup and Refinitiv.

So far, these trends are only partially reflected in the consensus estimates for 2020 growth. The median of the sample of analysts surveyed by Bloomberg shows that the expected decline in US GDP in 2020 has moderated to -5% at the end of August compared to -5.7% at the beginning of June. The Chinese GDP growth estimate also rose slightly to 2% from 1.7% at the beginning of June. Despite improved expectations for the world’s two largest economies, the global GDP growth estimate fell to -3.9% at the end of August, predominantly due to downward revisions for the eurozone (to -8.1% from -7.8%) and the UK (to -9.7% from -7.9%).

Chart 5. 2020 GDP Growth Consensus

Source: Citigroup and Bloomberg.

The current consensus estimates for US GDP may prove too pessimistic. Based on the central projection of the GDPNow model of the Federal Reserve Bank of Atlanta for third quarter GDP, equal to +29.6% quarter-on-quarter annualized, and anticipating further moderate growth in the final quarter of the year, the contraction of US GDP for the whole of 2020 would lie between 3 and 4%. It would remain the most severe recession since the end of World War II, but the decline in GDP would be much less severe than currently expected by analysts. Moreover, it would also be above the upper end of the range of GDP growth projections published by the FOMC after its June meeting.

The consensus estimates for the eurozone seem more reasonable. While the second quarter of 2020 saw GDP falling by 11.7% quarter-on-quarter, Eurostat revised the data upward by 0.3 percentage points from the previous release. Using the ECB’s central GDP estimates for the third and fourth quarter of 2020 of 8.3% and 3.2% quarter-on-quarter published in June, GDP would fall by slightly less than 8% for the whole of the year. Given the uncertainty of growth estimates following the Covid19 pandemic, the difference to consensus expectations would not be economically relevant. Moreover, the figure would fall comfortably within the range of the estimates published by the ECB in June, which went from -12.6% to -5.9%.

In conclusion, the improvement in global economic data in recent months points to an upward revision of GDP growth for the whole of 2020, although uncertainty is high. On closer inspection, it appears that the economic data surprises were much stronger for the US than elsewhere. The likely upward revision to the US GDP growth outlook will be a factor not only for financial markets but also for the presidential election on November 3rd.