As good as goods get

The COVID-19 shock has generated powerfully synchronized growth and

inflation dynamics, but it is also creating wide divergences in regional and

sectoral performance. The outperformance of China and other Asian tech producers

that were successful in containing the virus early is generating a large

regional divide. Given its FIFO position, China is past its initial growth surge.

But this week’s August trade reports from mainland China and Taiwan show

that these economies continue to reap significant benefits from a surge elsewhere

amid sustained global tech demand. We expect next week’s data on

August activity to show continued solid gains in China’s factory output and

domestic demand, even as weather-related drags weigh on GDP this quarter.

Although both goods- and service-sector activity slumped in 1H20, the rebound

now underway is concentrated in goods. Retail sales recovered its prepandemic

level by midyear and continues to post solid gains this quarter. Reinforced

by the recent business spending rebound, global factory output is on

track to rise at a historic 50% ar this quarter and move close to its prepandemic

level. The more limited data available for service-sector activity

point to a far more sluggish recovery, as mobility restrictions and caution continue

to constrain the sector. As a result, the nearly complete recovery in

goods sector activity is not reflected in global GDP, which we project will

remain 3.7% below its 4Q19 level this quarter.

Identifying whether the strong goods rebound or the sluggish services recovery

points to the path ahead is central to the outlook. As the goods sector tends to

have a higher beta to the cycle, it is natural to place more weight on its sectoral

strength as the main signal for growth ahead. However, current dynamics are far

from usual and pent-up demand for durables and inventories spending is providing

a considerable amount of fuel for the goods sector pickup. This support

should fade as we turn into next year, while at the same time the recovery in

services sector activity should remain constrained. In addition to the lingering

problems with controlling the virus, this year’s large loss in service sector revenue

is likely to limit credit availability and the recovery in business spending.