Stratfor 2020 Fourth-Quarter Forecast Summary 1/2

Published September 28, 2020

Overview

The last quarter of 2020 will be a waiting game — waiting for the results of the U.S. election in November, waiting on economic numbers to see if any of the third quarter's rebound can be sustained, and waiting to see where COVID-19 outbreaks continue to grow and if trial vaccines will see any initial success. Economic activity will be subject to the uncertainty of renewed restrictions in the face of new outbreaks. China will likely be the only major economy to close out the year with positive growth. Much of the rest of the world, including advanced economies and many emerging markets will have negative growth for 2020, with many having strong positive growth from a low base in Q3 and a deceleration in Q4.

U.S. influence on global behavior as well at the U.S. presidential election will be center stage during the fourth quarter. Multilateral and bilateral decisions involving the United States will decelerate during the quarter as the world waits to see who wins the election on Nov. 3, and the outcome will result in either policy scrambles or last minute-appointments by a lame-duck administration or renewed determination regarding some policy agendas like trade disputes or immigration policy by a second-term Trump administration focused on leveraging an electoral mandate to carry out its policies.

One trend that will continue regardless of the election outcome is U.S.-China competition across all current economic and security challenges, with points of particular tension over technology, Hong Kong the South China Sea and human rights issues. We expect anti-China rhetoric from either a Biden or Trump administration, while China will seek to leverage its current economic growth while the rest of the world struggles, even using global trials of its COVID-19 vaccine to gain soft power.

Global Trends

Global Economy Still Affected by COVID-19

The course of the global economy in Q4 will be determined by noneconomic factors including the course of the COVID-19 pandemic and continued efforts to mitigate it; development and distribution of a vaccine; and political issues and uncertainty surrounding U.S. elections, Brexit, and possible renewed trade tensions. China is likely to be the only large economy that sees positive GDP growth in 2020, but at a historically disappointing 1-2 percent. Other advanced economies and many emerging markets will go into recession for 2020, with many having strong positive growth from a low base in Q3 and a deceleration in Q4.

A reinstatement of national lockdowns is unlikely, and mitigation will be restricted to local and regional lockdowns as occurred in Q3. Consumption and business viability under these conditions depend on government support and the political will to absorb swelling budget deficits and burgeoning public sector debt. Government job retention and income support schemes have done the most to buoy global consumption, but pent-up demand is slowing and precautionary savings are increasing for households that still have incomes.

In Europe and the United States, employment recovery may be plateauing as productivity increases lag, business investment is tepid or there is even net disinvestment, and many businesses lack the ability to return to profitability. Such permanent scarring and uncertainty will remain and may retard recovery versus a rebound for many economies until well into 2022, with permanent pullbacks in consumption and investment.

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Global trade is recovering and global financial conditions have rebounded from their flight to safety in Q1 and early-Q2. Major central banks have kept interest rates close to or below zero, flooding markets with liquidity, but their ability to go further is limited. "Lower for longer" interest rates in the U.S. and Europe as the Fed and European Central Bank try to rekindle inflation through "financial repression" will keep public sector debt affordable. Robust fiscal policies in advanced economies will support activity in Q4, but stimulus in many emerging markets will be constrained by a lack of policy space that will slow further their recovery.

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Some Emerging Markets Have Heightened Risks

Several emerging markets remain vulnerable with outsized external financing needs. Capital flows that recovered in Q3 could reverse, again particularly in countries seen as pursuing policies that undermine economic fundamentals and balance-of-payments buffers that increase exchange rate volatility.

Revenue losses from weak economic activity and plunging exports as commodity prices remain low, weak tourism receipts, and the need for stimulus will widen primary fiscal deficits in nearly all EMs. Several, including Brazil, Chile, Colombia, India, Indonesia, the Philippines, South Africa, Romania, Saudi Arabia and Thailand will see debt as a percentage of GDP increase by 10 percent or more, although low debt-to-GDP ratios for Chile (36 percent), the Philippines (45 percent), Saudi Arabia (33 percent) and Thailand (46 percent) will buffer financial and balance of payments pressures.

Exchange rate effects will be somewhat limited for countries that have contained depreciations or where foreign currency debt and domestic liabilities are modest. Exceptions are countries expected to have relatively large current account deficits and a high proportion relative to foreign exchange reserves of debt due over the short-term plus internal foreign currency liabilities. Those include Argentina (312 percent, despite the $65 billion bond exchange), Ghana (163 percent), South Africa (105 percent), Turkey (263 percent), Sri Lanka (200 percent), Ukraine (205 percent), and Zambia (190 percent). Any could see sudden stops in capital flows or capital outflows if monetary policy easing is seen as counterproductive to economic prospects.

For the 73 poorest countries eligible for the G-20 debt service suspension initiative, fewer than 40 have requested assistance from the Paris Club and fewer than a dozen have gotten relief from China. Most countries borrowing in eurobond markets have not requested DSSI treatment. The G20 is expected to continue the initiative into 2021 and possibly for the entire year.

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The United States Continues its Hard-Line Policy on China

The United States will continue its aggressive strategy against China and implement visa and travel restrictions on diplomats, increase export controls on Chinese tech companies, and increase trade restrictions on China. Such moves will be taken in response to China's activities in the South China Sea, human rights concerns in Xinjiang and Beijing's Hong Kong policy on top of the broader tech war against China. The expansion of U.S. efforts will reverberate across the tech sector as foreign companies will be forced to reduce business relationships with sanctioned entities and companies targeted by export controls.

The phase one trade deal with China will likely survive through U.S. elections as Trump seeks to use it as an example of the success of his policy – but after the election, he will not be encumbered by such concerns. In the event of Trump losing the election, U.S. policy towards China could become even more aggressive as outgoing China hawks in the administration, such as Secretary of State Mike Pompeo, seek to cement their legacy of a tough approach toward China.

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U.S. Calls to Extend Arms Embargo on Iran Fail, but Arms Sales Do Not Follow

The U.S. attempt to extend the U.N. arms embargo on Iran when it expires Oct. 18 will fail to get recognition from much of the international community, including the other permanent members of the U.N. Security Council in hopes of keeping Iran inside the Joint Comprehensive Plan of Action. In practice, any resumption of arms sales to Iran will likely be limited in scope and even symbolic, with delivery dates years out so as to avoid U.S. sanctions. Nevertheless, the United States will remain undeterred this quarter and maintain its heavy sanctions strategy against Iran. This strategy will intensify if Trump loses the November election since as with China, Iran hawks within the administration will seek to cement their legacy — in this case by complicating any future talks between Iran and the United States through even tougher sanctions targeting the higher echelons of the Iranian military and political system.

Conflict Avoided in the Eastern Mediterranean, but NATO's Rift With Turkey Widens

Turkey will continue its aggressive actions in the Eastern Mediterranean driving the European Union —driven by Cyprus, France and Greece — to implement increased sanctions against Turkey. Sanctions, however, will remain limited in scope, and will not broadly target the Turkish economy or financial system. Instead, their narrow focus will target Turkish executives, specific companies and officials. Nevertheless, intense meditation led by Germany will be needed to avoid a significant escalation. Most NATO members, including the United States, will side with Cyprus and Greece against Turkey, driving Turkish President Recep Tayyip Erdogan to continue to reduce collaboration with other NATO members, although Turkish membership is not in jeopardy.

Early Vaccine Rollouts Will be Highly Politicized and Will Meet Intense Skepticism

Before the end of the year, one or more of the late-stage experimental COVID-19 vaccines will have initial data from large trial groups as political pressure grows to get candidate vaccines through trial and ready for rapid distribution. This will be especially true in the United States ahead of the election. Even if an emergency approval order is issued, however, we will likely see significant pushback from the medical community in the United States over administering the vaccine, further limiting the potential for distribution before the Nov. 3 election.

With numerous Phase III trial candidates, China will continue to administer the vaccine to larger and larger groups of its population. Limited manufacturing capacity will hamper Beijing's ability to distribute beyond its borders and trial centers before the end of the year, though China will prioritize overseas distribution for political gain.