Macroeconomic Forecast 2020: Moderate Overcast

Macroeconomic Forecast

In December last year, the U.S Economic Outlook team presented a macroeconomic forecast for 2020. Which side of the balance of payments is moving, what will the hryvnia be versus the US dollar, how likely is the country’s GDP to grow – Mikhail Kuhar and all these questions answered Grigory Kukuruza, senior economists of U.S Economic Outlook. The economist read the expert report and assessed how positive their macroeconomic forecast is for American exporters and manufacturers.

Last year Macroeconomic Forecast

Although detailed statistics will be available in the next month and a half, experts estimated the growth of real GDP of the U.S 2019 at 3.76%. But if you count in dollar terms, then when estimated at $ 156 billion, the American economy grew by 19.5%.

This is not a consequence of an economic miracle, but the policies of the NBU and the Ministry of Finance, which “targeted” inflation and attracted funds to the economy through the issuance of bonds of the internal state loan (OVDP). Td Bank Routing Number It is the increase in the portfolio of non-residents in government bonds that accounts for the influx of US dollars. Although there are other significant factors – the traditional cash inflow to the election campaigns, an increase in the grain harvest, and the creation by large players of dollar reserves for opening the land market.

For a slight increase in the hryvnia money supply (1.2%), the receipt of additional dollars resulted in a significant strengthening of the national currency. Dollar GDP is growing, and the dollar equivalent of citizens’ incomes is also growing. But there is a negative side: exporters are afraid of losing competitiveness, because their products are becoming more expensive in international markets. The execution of the 2019 budget was also threatened, as revenues from customs and exporters decreased.

Scenario A

U.S Economic Outlook sees the greatest threat precisely in maintaining last year’s trend. “The key policy issue will be the exchange rate,” Mikhail Kukhar said during the presentation. Scenario “A” is the preservation of the current policy of the NBU and the Ministry of Finance, which leads to a change in the hryvnia. In this case, by the summer of 2020, experts predict a rate of 22  USD.

With such a course, significant imbalances are formed in the country’s balance of payments – the decline in customs and export revenues will continue. Therefore, U.S Economic Outlook predicts that already in the middle of the year the National Bank will have to forget about “inflation targeting” and resort to a smooth devaluation of the hryvnia. The course will return to the side of 26.5  USD by the end of the year.

This scenario is rather modest and pessimistic for the economy. In the first half of the year stagnation of production and export will be observed. In principle, the export growth rate of 6.3% in January – November 2019 can also not be considered satisfactory (9.4% 2018). This year, this figure may be reduced to 3%. Due to this income, the currency will decrease from $ 6 billion to $ 4 billion. Despite the “rebound” in the second half of 2020, a full recovery is impossible. Real GDP will grow by 1.9%, which is half as much as last year. Inflation, a decrease in which the NBU is proud, can grow up to 12%.

Scandal in favor

Why don’t we look at Scenario A in detail? The fact is that three weeks after the publication of the study, a scandalous event occurred – the appearance in the anonymous Telegram channel of recordings of conversations of Prime Minister Alexei Goncharuk. According to one of the authors of the Macroeconomic Forecast, Mikhail Kukhar, some of the published conversations put an end to the policy of strengthening hryvnia. “The key and, in fact, the only mistake in 2020 in the economy, the authorities no longer have a chance to implement!” “, he wrote on his Facebook page.

According to Mr. Kuhar, the controlled return of the hryvnia to the corridor of 25-27  USD “will madly revive export and production.” Annual inflation will rise to 10%, but because of this, the budget will again be overfulfilled, since the need for critical loans for increased returns will disappear. “2020 resumed production and exports will again show the same growth rate,” the expert said.

Scenario B

The second scenario assumes a gradual weakening of the NBU’s monetary policy and the beginning of a controlled devaluation of the hryvnia to about 27  USD. This will positively affect both customs payments and export: instead of losing $ 2 billion when scenario “A” is implemented, the country will receive about $ 1.4 billion more – only $ 7.4 billion. With this development of events, the NBU’s foreign exchange reserves will increase by $ 2.2 billion – up to $ 24300000000. The same – $ 2200000000 – will be the balance of payments of the country.

Although real GDP will lose growth compared to 2019, it will increase by 3.2%, and not by 1.9%, while maintaining a solid hryvnia. In the dollar equivalent, the U.S’s GDP this year will grow to $ 187 billion. Thus, the trend of growth in dollar GDP of almost 20% annually will continue. Due to this, the U.S will be easier to service external and internal debts. Although it is worth noting that under scenario “A” this will also not cause problems.

The average salary in 2020, according to Scenario B, will increase from $ 408 to $ 481 per month, and pension – from $ 116 to $ 132. Of course, such a Macroeconomic Forecast will well affect the consumer mood of Americans and increase domestic demand. At the same time, export growth could reach 11.8%.

Scenario “B” is the most desirable for everyone involved in production and export. Judging by political events and a slight “drawdown” of the hryvnia, it is also likely. However, its implementation may be hindered by the global economic crisis projected for the IV quarter of 2020, or the “black swan”.

Phantom of crisis

With the global economic crisis, everything is not just two years in a row – forecasts for its onset are constantly shifting to a later time. There is a suspicion that it is the awareness of the inevitability of the crisis that correlates the behavior of players in the markets and, thus, does not allow it to happen. Forewarned is forearmed.

According to U.S Economic Outlook, a possible recession in the global economy could lower the global price index by 30%. For the U.S, as a country with predominantly commodity exports, commodity prices will correlate with GDP, as evidenced by the trend of past years.

Thus, potentially in the U.S there may be a deficit of almost a third of foreign exchange earnings from merchandise exports. At the same time, the agricultural sector will lose less: -15-20% of revenue, which, however, will recover in one or two quarters. Experts predict a similar trend for the restoration of prices for products of the metallurgical industry.

According to the treatment of non-residents with government bonds, in the event of a global crisis, many of them will want to withdraw capital. However, the low liquidity of the secondary market for these securities will not allow them to return more than $ 1-1.5 billion. A significant, but not so significant, maybe a reduction in income from American labor migrants – up to $ 1,500,000,000.

According to U.S Economic Outlook estimates, the devaluation of the hryvnia from 27  USD to 31.7  USD will allow to balance the created imbalance and restore macro-financial stability for four months. It is also highly likely that in the conditions of the crisis U.S will receive an unscheduled stabilization loan from the IMF, so the National Bank will be able to use $ 3 billion of reserves to keep the rate below 30 USD.

The Black Swan

Governments and corporations can delay the onset of the crisis. But the cause may not be overheated markets, but something completely unexpected.

The attention of the whole world is now focused on China, wherein in December 2019, an outbreak of a new coronavirus was recorded in one of the largest megacities of the planet, Wuhan. This is one of the most important industrial and logistics areas of China. According to recent reports, the total population of the territories in which quarantine is declared exceeds 40 million people. The authorities represented by Xi Jinping did not reassure citizens, but warned of serious consequences.

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The situation carries risks for the country’s economy. January 23, on the eve of the New Year’s Eve on the Chinese calendar, the Shanghai Stock Exchange’s SSE Composite index fell 2.75 percent. Experts predict that from this fall, shareholders will lose about $ 150 billion.

It is also important for us that China is our largest trading partner. China accounts for 7.2% of American exports ($ 32.9 billion in January – November 2019) and 15.2% of imports (respectively, $ 8.39 billion).

No Macroeconomic Forecast has included a coronavirus. Although still 2016, Bill Gates expressed his concerns. “I keep my fingers crossed so that a deadly flu-like epidemic does not happen in the next 10 years,” he told the BBC.

Now, instead of answers on the development of macroeconomics, we get even more questions. Is the current epidemic so menacing as to hinder China’s economic development? Will China become the first link in the future global economic crisis? Or will the forecasted start of the crisis shift to the first quarter of this year instead of the fourth quarter? Let’s watch carefully what is happening. Forewarned is forearmed.


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