Macroeconomy

Global Economy: Assessing the virus damage

With data revealing more clearly the extent of the coronavirus-related damage, we are once again cutting our GDP forecasts for major economies.

Jean-Pierre Durante, Thomas Costerg, Nadia Gharbi & Dong Chen

Global Economy: Assessing the virus damage

Global: The covid-19 pandemic has created a global shock unprecedented in modern history. All countries have been affected  After having been hit by a dual shock— first a supply side shock (with disruption to the global supply chain), then a demand shock (with lockdown measures depressing consumption)— the scars on the global economy are progressively being revealed as data are released.

Western economies will likely see double-digit GDP contractions in both Q1 and Q2, confirming our conviction that the world economy will follow a deep, asymmetrical U-shaped recovery as some countries’ recoveries lag those of others. The asymmetry of the ‘U’ means that the recovery will be slower than the collapse. As lockdown measures will only be lifted gradually, large parts of the economy (notably some service sectors) will remain moribund. The information already on hand is leading us to adjust the depth of the ‘U’ lower. As a consequence, we are revising down our central scenario for world GDP growth to -4.1% in 2020 from -0.4% previously.

The two assumptions on which this scenario is based remain unchanged. First, we assume that the world will be affected by only one wave of the virus, not two. Second, we assume that the duration of lockdown measures in Europe and the US will be the same as seen in China (approximately 60 days).

US: We are reducing our 2020 US growth forecast to -7.7% (versus a prior -2.1%). Our central scenario is for a gradual re-opening of the US economy to begin by mid- May. The Q2 GDP drop is likely to be much more severe than we previously forecasted (-34% q-o-q annualised vs. -15% expected previously).

Euro area: We have cut our euro area GDP growth forecast to -9.5% in 2020 (from a previous -2.5%). We see GDP plummeting by about 16% q-o-q annualised in Q1 and 38% q-o-q in Q2before growth picks up in Q3—assuming that the pandemic fades and that policy actions are effective in preventing widespread corporate bankruptcies and job losses. Testing capacity and recovery policy packages could be swing factors in H2 and determine the extent of the recovery.

Japan: The recent upsurge in coronavirus infections in Japan has prompted the government to declare a state of emergency for the entire nation. Also, recent data point to worse-than-expected damage to the economy in Q1. As a result, we are cutting our growth expectation for Japan further, to -5.8% in 2020 from -1.2% previously.

China: The contraction in Chinese Q1 GDP turned out to be less severe than our previous projection. But the collapse in global demand and continued difficulties faced by the services sector imply the path to recovery could be longer than we expected. While our 2020 GDP forecast for China remains unchanged at 1.2%, the growth trajectory has been adjusted to reflect the latest developments.

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