EDC EconomicsOct. 1, 2020

Insights on the world’s key economiesGDP growth, commodity prices, interest rates and exchange rates.

GLOBAL ECONOMIC OUTLOOK

FAST WON’T LAST

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Change is no more evident today than in near-term forecasts. In COVID-19 we’re dealing with an event and a response that no living economist has seen before. We’re all learning as we go. All the same, whether you believe it or not, economic fundamentals are still in operation.

Pandemic data are preeminent. For the moment, they’re the leading indicator of near-term growth. They determined the initial world-wide lockdown that devastated output and brought on unprecedented monetary and fiscal stimulus. Moderation of infections, in turn, initiated the return to work and the subsequent surge in output. Today’s big question concerns second-wave infections, and what kind of shutdowns will be required.

A second critical forecast factor is the prior state of the economy. Unlike the global financial crisis, we didn’t enter this downturn with a huge overhang of cyclical excess. In fact, it was quite the opposite. A decade of sub-standard growth left us with significant room to grow. Evidence of pent-up demand across OECD nations was abundant. And COVID-19 conditions have only added to the pent-up pressure, with precautionary prudence and a lack of things to spend on spiking bank balances and savings rates. All this suggests fundamental resilience, at the very least, the potential to rebound from the current mess.

This is one of the key reasons for a third factor: the aggressive rebound in current key indicators. Retail sales are back to pre-COVID-19 levels in the United States, the European Union and Canada, among others. Export data is also zooming back to the pre-pandemic mark, hitting the 94% threshold in Canada in July. Stock markets—a key leading indicator—are euphoric, and key commodity prices are doing far better than initially expected. Fuelled by these sources of growth, total production across the economy now seems to be over half-way back. It’s a great achievement, but there’s still a long way to go.

At this point, it’s back to the pandemic. We have countries going back into full lockdown. Others are isolating problem-zones, or imposing regional lockdowns. Put it together, and it looks like the fast start is giving way to a more moderate global growth path.

EDC Economics autumn 2020 Global Economic Outlook sees the current aggressive growth paving the way for a 6.6% increase in the world economy in 2021. That’s hard to fathom when many are still coming to grips with the 4.3% global decline this year, an unthinkable turn of events from 2019’s moderate-to-fair 2.9% performance. Next year’s outlook is far from fanciful, though. By the math, 6.6% doesn’t get us back to pre-pandemic levels of activity.

EXECUTIVE SUMMARY

GLOBAL ECONOMIC OUTLOOK: FAST WON’T LASTBy Peter HallVice-President and Chief Economist, EDC

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Disaggregate these numbers and it’s clear that all will not ride the growth wave. The food, advanced technology, telecom, wood products and minerals sectors will greatly outperform oil and gas, aerospace and anything connected with business and personal tourism, and for some time. Countries and individuals tied to these sectors will do likewise.

Ample supplies and uncertain growth are sure to keep the lid on key commodity prices over the near-term. Interest rates are ultra-low and will be for ultra-long. Currencies will experience localized volatility, but in general are expected to see only modest movement over the medium term. The Canadian dollar is expected to stay in the US74-76-cent range this year and next.

The bottom line?

We’re a long way from COVID-19’s last chapter—the drama is still unfolding, although the initial growth rebound has been very encouraging. In spite of this, don’t expect fast to last: We’re already seeing a growth moderation that will test our mettle, and future containment of infections is far from guaranteed.

Resumption of the Northern Hemisphere’s school season is a key test of the system, and we’ll be watching events closely. For now, we take comfort in the economy’s current resilience, potent stimulus and pent-up spending. If containment goes well, the economy still has key sources of firepower.

EXECUTIVE SUMMARY (continued)

GLOBAL ECONOMIC OUTLOOK: FAST WON’T LAST

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Given rapidly changing global events, there’s a higher-than-usual degree of uncertainty around this forecast, which incorporates information available as of Sept. 3, 2020.

KEY ASSUMPTIONS

COVID-19The base case forecast assumes that, with continued social distancing measures in place, COVID-19 outbreaks will be relatively contained in most systemically-important economies over the medium-term. This doesn’t necessarily require an effective vaccine or treatment to be made widely available in the near-term. We simply assume that containment measures will remain in place from most governments, and they’ll be generally followed. Furthermore, government responses to any future waves of the virus are expected to be more decentralized than the economy-wide “lockdowns” in the first half of 2020, and should therefore result in less economic disruptions than have already occurred.

U.S. election—November 2020The forecast for the U.S. economy is based on long-term fundamentals and policies currently in place. Any updated policies coming from the presidential election, to be held Nov. 3, 2020, will be incorporated only after enacting legislation is passed.

Financial conditionsCentral banks around the world are expected to continue to provide extraordinary liquidity to maintain market functioning and overall financial stability. The base case forecast doesn’t include any systemic financial crises resulting from COVID-19 pandemic. However, the outlook doesn’t rule out the potential for localized debt defaults in some sectors and amongst some emerging markets during the later stages of the recovery as debt overhangs are worked out.

U.S.-China trade disputeThe forecast assumes the Phase One Trade agreement signed in January 2020 remains in place over the near-term.

BrexitThe forecast assumes the United Kingdom and European Union eventually agree on an orderly transition, based upon a comprehensive trade agreement, which includes essentially “free trade” on most goods and services traded between the EU and U.K. However, COVID-19 will likely result in the current “status quo” persisting into the medium-term.

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RECENT DEVELOPMENTS

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U.S.6.3M China

90K

Spain 525K

Italy279K

26 millionRussia

1MU.K.352K

Sources: EDC Economics; Johns Hopkins Coronavirus Research Center.

Brazil 4.1M

Canada134K

0

50

100

150

200

250

300

350

400

Mar Apr May Jun Jul Aug

Global confirmed casesDaily change, thousands, five-day averageWorld total

India4.3M

South Africa639K

Mexico 637K

Peru689K

CONFIRMED COVID-19 CASESAs of Sept. 3, 2020

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FINANCIAL MARKETS

Sources: Haver Analytics, EDC Economics; EDC Global Financial Markets.

0

2

4

6

8

10

12

14

0

2

4

6

8

Jan Feb Mar Apr May Jun Jul Aug Sep

EM Bond Spread (bps, rhs) U.S. Corp. Yield: B Rated (%, lhs)

-40%

-30%

-20%

-10%

0%

10%

20%

Jan Feb Mar Apr May Jun Jul Aug Sep

S&P 500 Emerging Markets TSX

Equity markets have largely recovered or surpassed their pre-COVID-19 levels—although with large variationacross sectors; while bond spreads are slowly improving, but remain somewhat elevated.

Global stock markets% change since Jan. 1

Global debt markets%

8

0

20

40

60

80

100

120

140

2017 2018 2019 2020

EDC Commodity Index Energy Metals Agriculture

Sources: Haver Analytics, EDC Economics; The Commodity Tracker

COMMODITY PRICESCommodity prices have generally rebounded. Metals prices have benefitted from global uncertaintyand supply disruptions, while weak demand continues to weigh down energy prices.EDC commodity indices2017 = 100

9

Oil prices collapsed amid depressed demand and a temporary price warthat increased supply, but prices have strengthened and stabilized in recent months.

OIL PRICES

-40

-20

0

20

40

60

01-Aug-19 12-Sep-19 24-Oct-19 05-Dec-19 16-Jan-20 27-Feb-20 09-Apr-20 21-May-20 02-Jul-20 13-Aug-20

Western Canada Select (WCS), US$/bbl West Texas Intermediate (WTI), US$/bbl

Jan. 20: China confirms coronavirus can be transmitted human-to-human

Sources: Haver Analytics, EDC Economics

Mar. 7: OPEC+ agreement falls apart and Saudi Arabia increases production and cuts prices Apr. 12: OPEC+ agrees

to cut production

Apr. 20: Settlement date for May oil futures contracts. Lack of demand and limited storage capacity causes prices to temporarily go negative.

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Travel restrictions grounded most international air travel, which has grown slowly to remain about 40% belowpre-COVID-19 levels, up noticeably from the trough of -75% in April.

INTERNATIONAL AIR TRAVEL

0

20,000

40,000

60,000

80,000

100,000

120,000

10-Jan-20 9-Feb-20 10-Mar-20 9-Apr-20 9-May-20 8-Jun-20 8-Jul-20 7-Aug-20 6-Sep-20

40% decline

Source: FlightRadar 24

Daily active commercial flightsweekly global average

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Global merchandise trade volumesannual % change

-18%-16%-14%-12%-10%

-8%-6%-4%-2%0%2%4%6%8%

2017 2018 2019 2020

Sources: CPB Netherlands Bureau for Economic Policy Analysis, WTO April 2020 Trade Forecast

WTO forecast for goods trade expects a 13% drop in 2020.

GLOBAL MERCHANDISE TRADEWhile global merchandise trade was hit hard during shutdowns in March through May,early indications suggest that a rebound began in June.

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Merchandise tradeBillions of dollars

Source: Statistics Canada

Services tradeBillions of dollars

30

35

40

45

50

55

2017 2018 2019 2020Exports Imports

7

8

9

10

11

12

13

14

2017 2018 2019 2020Exports Imports

CANADIAN TRADECanadian goods trade rebounded quickly with a V-shape driven by restarting autos plants,but travel and transportation services has suffered an L-shaped setback.

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CONFIDENCE

Canadian jobs in “high-COVID-risk” sectors

Notes: 50+ = positive consumer sentiment. Consumer sentiment is weekly, aggregated monthly using last value. June value corresponds to the first week of June.Sources: Nanos Canadian consumer sentiment index, CFIB business barometer

Canadian confidence for businesses and consumers has improved significantly in recent months.

20

30

40

50

60

70

2014 2015 2016 2017 2018 2019 2020

Business

Business and consumer confidence indices (monthly)

Consumer

14

450

470

490

510

530

550

570

590

610

630

650

3,500

3,600

3,700

3,800

3,900

4,000

4,100

4,200

4,300

4,400

4,500

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Sources: Haver Analytics, EDC Economics.

LABOUR MARKETDuring lockdowns in March and April, the total hours worked fell by historic amounts in the U.S. and Canada. However, as containment measures eased in May, there have been stronger-than-expected rebounds so far.

Total weekly hours workedMillions, monthly

U.S. (LHS)

Canada (RHS)

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Services sector employment, which held up reasonably well in past Canadian recessions,has been hit particularly hard, in areas such as restaurants, retail and recreation.

LABOUR MARKETS CONTINUED

In GDP at risk

Sources: Haver Analytics, EDC Economics

-300 -250 -200 -150 -100 -50 0

UtilitiesFinance, Insurance, Real EstateAgricultureProfessional, Scientific & TechnicalForestry, Fishing, Mining, Oil & GasEducational ServicesHealth Care and Social AssistancePublic AdministrationBusiness, Building & Other Support ServicesOther ServicesManufacturingRetail & Wholesale TradeConstructionTransport and WarehousingInformation, Culture and RecreationAccommodation and Food Services

Employment changes, by sectorAugust 2019 to August 2020, Thousands

Goods and services employmentyear-over-year % change

-20

-15

-10

-5

0

5

2008 2010 2012 2014 2016 2018 2020

Goods

Services

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Orders fell dramatically as COVID-19 began to spread at the start of this year, but have since moved backinto growth territory, first in China and then in Europe and North America.

PURCHASING MANAGERS’ INDICES

Canadian jobs in “high-COVID-risk” sectors

Sources: Haver Analytics, EDC Economics

10

20

30

40

50

60

2016 2017 2018 2019 2020

U.S. Euro Area China

Purchasing managers’ indices50+ = expansion

17

56.2%

39.3%

21.1% 20.0%15.0% 14.9% 14.5%

0

10

20

30

40

50

60

Italy Germany Japan France Canada UnitedKingdom

UnitedStates

UNPRECEDENTED GLOBAL POLICY RESPONSE

Sources: EDC Economics; IMF COVID-19 policy tracker.

U.S. Federal Reserve150 bps rate cuts to effective lower bound (ELB) of 0.0-0.25%

Bank of Canada150 bps rate cuts to ELB of 0.25%

European Central BankOperating at ELB of -0.5%

Bank of England65 bps rate cuts to ELB at 0.1%

Bank of JapanAlready operating at ELB at -0.1%

People’s Bank of ChinaVarious term lending rates cut to ease financial conditions

Central bank asset purchases have grown rapidly, and in G7 countries has been more than three times larger than the 2008-2009 global financial crisis.

To address COVID-19, rapid central bank interest rate cuts and various large-scale asset purchase programs were followed by massive expansions in direct support for households and businesses in order to maintain liquidity.

G7 Fiscal Policy Responses to COVID-19% of GDP, US$ PPP

Monetary policy

18

GLOBAL ECONOMIC OUTLOOK

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2020 GROWTH OUTLOOKReal GDP growth, %

-5.8

-3.4

-10.0

-6.5

1.7

-11.7

-5.6-9.6

-5.6

-4.3%World

-5.5% Developed

-3.6% Emerging

Source: EDC Global Economic Outlook, October 2020

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2021 GROWTH OUTLOOKReal GDP growth, %

5.7

4.9

5.9

4.0

9.0

16.1

4.68.9

6.3

6.6%World

5.7% Developed

7.0% Emerging

Source: EDC Global Economic Outlook, October 2020

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Global Economic Outlook (Annual % change)

2019 2020* 2021*

Developed countries 1.7 -5.5 5.7

Canada 1.7 -5.8 5.7United States 2.2 -3.4 4.9Eurozone 1.3 -7.5 7.0Germany 0.6 -5.6 6.3France 1.5 -9.6 8.9

Japan 0.7 -5.6 4.6

Emerging countries 3.7 -3.6 7.0

China 6.1 1.7 9.0India 3.7 -11.7 16.1Brazil 1.2 -6.5 4.0Mexico -0.3 -10.0 5.9

Total World 2.9 -4.3 6.6

REAL GDP GROWTH

Note: * denotes the forecast period.Source: EDC Global Economic Outlook, October 2020

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Global Economic OutlookReal GDP Growth (percentage point change)

2020* 2021*

Developed countries -0.1 -0.4

Canada 3.2 -1.5United States 1.7 -2.0Eurozone -1.3 0.4Germany -0.7 0.4France -1.4 0.6

Japan -1.5 0.5

Emerging countries 0.0 -0.3

China 3.3 -1.0India -8.1 5.0Brazil 0.6 -0.2Mexico -2.1 1.1

Total World 0.0 -0.3

CHANGES FROM PREVIOUS FORECAST

Note: * denotes the forecast period.Source: EDC Global Economic Outlook, October 2020 relative to June 2020.

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CURRENCIES AND INTEREST RATESGlobal Economic Outlook 2019 2020* 2021*

Currency Exchange Rate

U.S. dollar USD per CAD 0.75 0.74 0.76

Euro CAD per EUR 1.49 1.52 1.56

Euro USD per EUR 1.12 1.13 1.18

Interest Rates, annual average

Bank of Canada, Overnight Target Rate 1.75 0.56 0.25

U.S. Federal Reserve, Fed Funds Target Rate (Upper limit) 2.14 0.39 0.10

European Central Bank, Policy Interest Rate 0.00 0.00 0.00

Note: * denotes the forecast period.Source: EDC Global Economic Outlook, October 2020

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COMMODITY PRICESGlobal Economic Outlook 2019 2020* 2021*

Brent Crude Spot, USD / bbl 64.36 42.80 43.95

West Texas Intermediate, USD / bbl 56.99 38.65 41.13

Western Canada Select, USD / bbl 43.30 27.76 31.76

Natural Gas, USD / MMBtu 2.55 1.84 2.12

Gold, USD / troy ounce 1,392 1,806 1,920

Copper, USD / tonne 6,002 5,924 5,989

Note: * denotes the forecast period.Source: EDC Global Economic Outlook, October 2020

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Measures of global economic uncertaintyhave started to fall back from all-time highreached in May 2020.

• There still remains an exceptionally high degree of uncertainty around this forecast, due to the severity and spread of the pandemic, its interdependence on containment efforts, as well as the scale and efficacy of unprecedented policy responses.

• This report represents EDC’s base case economic forecast, as of Sept. 3, 2020, and is based on assumptions described above. There are significant risks to this base case, both to the upside and the downside.

UNCERTAINTY AND RISKS

0

50

100

150

200

250

300

350

400

450

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Sources: PolicyUncertainty.com, Haver Analytics

Economic Policy Uncertainty IndexMean = 100

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