Evercore ISI economist Dick Rippe lays out the case for second-half growth after a first-half plunge.
The increased difficulty of cash forecasting and other financial planning since the COVID-19 outbreak means that many treasury and finance teams are eager to hear informed economic analysis and forecasts while we all wait for a vaccine.
- At a NeuGroup meeting in late May, Dick Rippe, managing director and economist at Evercore ISI, provided his firm’s US and global economic outlook and responded to member questions. Mr. Rippe this week provided updates to his firm’s forecast and analysis.
Two quarters of pain. Evercore ISI forecasts the economy will contract by a 40% annual rate in Q2, following a drop of 5.0% in Q1. Mr. Rippe noted that the combined decline in the first two quarters is the largest in the post-World War II period.
- The firm has counted over 1,300 instances of layoffs, pay cuts, and business or institution closures; many of these may be temporary, but as they occur, they reverberate throughout the economy, Mr. Rippe said.
Encouraging signs. Evidence of an upturn has been accumulating rapidly in Evercore ISI’s view:
- Employment picked up in May (after an enormous fall in April); filings for unemployment insurance – while still high – have diminished substantially in recent weeks; and retail sales rebounded sharply in May, as have auto sales. Similar gains are being seen in China and Germany.
- Massive economic stimulus is being provided by both the Federal Reserve and the fiscal authorities in Congress and the Trump Administration.
- A major GDP driver is consumer net worth—the value of houses, securities, and bank accounts. It is close to an all-time high, Mr. Rippe said, adding that it fell much further during the 2008-2009 financial crisis than it did when the coronavirus pandemic started.
Growth likely to resume in H2. Based upon those signs and fundamentals, Evercore ISI updated its economic forecast to show a faster recovery in the second half of 2020.
- The forecast now shows growth in both Q3 and Q4 at a 20% annual rate; even so, measured from Q4 2019 to Q4 2020, real GDP is expected to decline by 4.8%.
- Evercore ISI forecasts an increase of 5.0% in 2021.
- The improvements depend upon maintaining simulative economic policies which will help keep companies open and consumers solvent, Mr. Rippe said.
- The emergence of a country-wide second wave of infections would be very damaging, he added. On the positive side, the rapid development of a vaccine would allow a much more secure economic advance.
Dollar doldrums? Responding to a member’s query about the outlook for the US dollar, Mr. Rippe noted that low interest rates brought about by highly accommodative monetary policy would usually be expected to lower the dollar. But in the current global environment, almost all central banks are moving in the same direction. So while the dollar might decline a little, no big move was likely, he said.
Negative Rates? Addressing another member’s concerns about short-term rates possibly going negative, Mr. Rippe said that given the US’s productive economy, when growth resumes negative rates won’t be necessary. And the Fed would go negative only in an absolute emergency, he said, because of the havoc it would reap on money-markets.
- “But if you asked me three years ago to bet on what German 10-year bond yields would be, I never would have bet they would be negative.”