The unprecedented stoppage in global activity amid the lockdowns due to COVID-19, could lead to the weakest growth ever.
I expect global growth to be around -3.2% in 2020; a contraction greater than the -1.8% we saw in 2009 due to the Global Financial Crisis (GFC) induced recession.
While there is enormous uncertainty ahead, the current crisis is less akin to the GFC’s financial shock but more to a natural disaster – where recoveries tend to be quite rapid and include some overshoot, as lost production is recovered.
The crisis evolved into a financial crisis as well, but the policy response has been far more aggressive than in the aftermath of the GFC. Therefore, while there will be a very deep recession in the first half of 2020, it will likely be shorter than the GFC recession and the recovery should be stronger in nature.
This sharp “V”-shaped cycle is crucially dependent on the assumption that strong social distancing policies and effective country-wide lockdowns will mostly end by mid-May, and that the virus infection rate will peak by end of May.
This should result in activity returning to closer to normal levels by late May into June.
My latest growth forecasts for the main areas are:
US growth likely around -6.5% (from +2.3% in 2019 and -2.5% ECONOMICS in 2009) in 2020 and +4.8% and +2.6% in 2021 and 2022, respectively.
China +1.2% (from +6.1% in 2019 and +9.4% in 2009) in 2020 and +9.5% and +6.0% in 2021 and 2022, respectively.
Euro area growth -3.5% (from +1.2% in 2019 and -4.5% in 2009) in 2020 and +4.8% and +1.5% in 2021 and 2022, respectively.
These forecasts include truly shocking negative quarter-onquarter annualised GDP growth numbers in the first half of 2020. But the end of lockdowns in most economies by end of May, and some returning to normality during June, should aid a strong recovery in the second half of the year.
The pace of recovery after the end of lockdown measures will depend on how quickly production and consumption recover. In China, production has recovered to approximately 80% of pre-lockdown levels in about 7 weeks after the peak in new virus cases, while the demand side remains muted.
The policy response across developed and emerging economies has been very quick in most economies – especially in the US. The Federal Reserve’s quick reaction has also created room for emerging market central banks to cut rates – in many cases more than once – since February. Apart from rate cuts, quantitative easing (QE) has also been very aggressive. Across the US, UK, Euro area and Japan an aggressive QE plan to the tune of US$6.5 trillion has been implemented. In the US alone, QE could be US$4trn to US$5trn, although it has been described as “unlimited” in size and duration.
Fiscal policy measures in the US have already been more aggressive than during the GFC. Already, the US fiscal expansion equals 10% of GDP and more fiscal support packages are likely. Fiscal policy measures have been more limited in the Euro area, while emerging markets (EMs) don’t have enough room for huge fiscal support packages.
The US dollar will likely remain strong during the crisis phase due to a flight to safe-haven assets, which also results in US Treasury yields dropping. Later, as the virus infection rates start to roll over and the economy stabilises, expectations of a growth recovery should gain ground. But, similarly to the GFC, policy will remain expansionary for a long time while the economy recovers, as policymakers will want to ensure the recovery remains on track. Very low returns in the US, relative to those available in emerging markets, will likely lead to large capital outflows out of the US and towards emerging markets as investors look for better returns. This means that the US dollar will likely weaken and emerging markets currencies will strengthen.
The risks to this base case V-shaped cycle are the virus cycle timeline and the extent and duration of the containment measures. Should the virus infection rate peak later than expected, i.e. not within the next two months or so, the cycle is likely to take on an “L” or a “U” shape.