ASIRI Global Economic Outlook Q1 2020 : The Coronavirus crisis

After eleven years the post-GFC economic expansion is ending. The global spread of the coronavirus , the implementation of extreme containment measures, supply chain disruptions, and a massive spike in financial stress, are combining to create a huge demand and supply shock for the global economy.

The questions remaining are only how deep and persistent the downturn will be, and how much long term damage is done.

It is difficult to gauge the size of this shock in real time. In February we expected 2020 global growth to decline to 2.4%. In early March we lowered that to 1.7%, which would already be the third weakest year since 1980. And according to our new ‘information tracking’ estimate that allows us to update our forecasts more rapidly to account for all available data and virus news, a 4% peak to trough contraction may be on the cards. This will inevitably be associated with a significant increase in bankruptcies and unemployment. We will refresh our official estimates in early April when we have much more information, but the direction of travel is clear.

On a country and regional basis, the hit to growth this year will differ depending on the incidence of the virus, the scale and success of containment measures, and the speed, size, design and space for fiscal and monetary policy responses.

In China, incoming evidence still implies that Q1 will be the weakest quarter for growth. But the magnitude of the decline will be historically large and the Q2 rebound will be tempered by the slow recovery in the services sector and the extraordinary hit to external demand from viral impacts in the rest of the world.

Elsewhere in EM we expect growth will also drop precipitously, with recessions only avoided in countries with either low direct exposure to the spread of the virus or high potential growth rates.

In the advanced economies we expect Q2 to be the weakest quarter for growth, with most economies experiencing contractions on a scale that meet any reasonable definition of a recession. The Eurozone, Japan and the UK all experience consecutive quarters of negative growth and while our official forecast still has the US experiencing only one quarter of outright declines, the latest information implies at least two quarters of contraction there too.

Neither monetary nor fiscal policy will be able to fully offset the near-term disruptions from containment measures and behavioural responses to the crisis. That is why financial stress is unlikely to abate until there is clearer evidence that the global flow of new coronavirus cases is beginning to slow.

But if (and it is a big if) disruptions don’t go on past the summer, monetary and fiscal easing can help banks, firms and households bridge some of the income gaps that might otherwise transform the liquidity shock into a more damaging solvency crisis. They can also help the elastic band of the global economy snap back once the virus shock abates.

Indeed, responses are already kicking in. The PBOC has been providing targeted liquidity support since January. The Fed has cut rates to the lower bound and restarted QE, but it is only a matter of time before it is forced to do much more. The BoE followed the Fed with an emergency 50bp cut, expanded its targeted lending scheme and renewed QE is not far off.

The ECB has also belatedly come to the party and announced a new Pandemic Emergency Purchase Programme, which will lift asset purchases to €115b per month for the rest of the year. Elsewhere, the cutting (and QE) cycle is continuing across a range of smaller economies, though some emerging markets will find it harder to ease with US dollar liquidity conditions tightening.

Fiscal measures are also being scaled up rapidly, focused mostly on relief to businesses and households suffering short-term income disruptions. These already amount to 1.0% of GDP in many countries, with much larger packages likely soon, alongside significant contingent loan programmes.

While a deep downturn in the global economy is now almost certain, the length of that downturn, and the long-term damage it causes is not. Going back to 1945 the average US recession – a good proxy for the global cycle – has lasted 11 months, with an average increase in unemployment of more than 2ppts.

What is needed now is for governments to dramatically scale up containment measures, ramp up direct transfers to companies and individuals that goes beyond what was seen in the wake of the financial crisis, with all the additional issuance effectively absorbed by central banks so that long-term interest rates fall to cushion the shock rather than rise as they have in recent weeks.

If all that can be done, and on a global scale, there is still hope that the trajectory of global growth will follow a ‘U’ shaped path, bouncing back very strongly when containment measures can be dismantled. Indeed, on that scenario, global growth in 2021 could hit highs rarely seen before. However, get the viral containment strategy wrong, and compound them with the policy mistakes that have been all too common over the past decade, and the downturn will be more prolonged, and any recovery much weaker. There is not time to waste.

 

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Source: ASIRI( as of February 2020) at the bottom of the table.

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Risk warning

Risk Warning

The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.