Macroeconomy

Our Global House View in the wake of Covid-19

We see a desyncrhronised recovery in the global economy. But recession is inevitable, leading us to revise our scenarios for economies and major asset classes.

Asset Allocation & Macro Research

Our Global House View in the wake of Covid-19

The covid-19 crisis will generate a succession of economic shocks stretched over time and space, resulting in a global recession comparable, in some respects, to what was experienced in 2009. Our central scenario is for real global GDP to decline by -0.4% in 2020.

In the US, the focus is on Congress, which is about to provide a stimulus worth 10% of GDP, including in the form of direct payments to citizens; meanwhile, the Fed is engaging in creative facilities to help fund small businesses and the federal government via ‘QE infinity’. This will help limit but not avoid a recession. We forecast US GDP shrinking 2% in full-year 2020 GDP, with risks still to the downside.

The Chinese economy, after a slump in Q1, should gradually recover throughout the year as the coronavirus is brought under control. While weak external demand will pose strong headwinds to the recovery, more policy stimulus could help boost domestic demand. Under our updated core scenario, we expect the Chinese economy to expand by 1.2% in 2020.

A hit to the euro area economy in H1 cannot be avoided. The extent of the damage will depend on how long lockdown measures last. At least concrete measures undertaken by both governments and the ECB will help limit the second-round effects that could hamper the rebound. In our central scenario, we expect the greatest harm in Q2, with a very gradual recovery starting in Q3. Euro area GDP growth in 2020 as a whole could be -2.5%, with risks tilted to the downside.

Japanese growth will likely be hurt significantly by a plunge in external demand. Given the BoJ limited policy room, more hope is being pinned on fiscal stimulus. We expect the Japanese economy to contract by 1.2% in 2020 under our core scenario. Japanese equities are being supported by increased BoJ buying of ETFs.

Based on the 23 March closing price, US stocks are pricing in a 30% earnings decrease in 2020. Equities still have the potential to decline 5-15% before bouncing back. Our new year-end target for the S&P 500 is 2,900 (from a forecast of 3,280 at end- 2019).

Emerging market equities find themselves in a dire situation which calls for caution. As we do not expect them to rebound before DM equities, our preference goes to North Asia, where economic and sanitary conditions seem under control. Our year-end target for the MSCI EM Index is revised down to 950 (from 1,080).

Massive monetary easing by the Fed and ECB is likely to help absorb the surge in sovereign bond issuance linked to fiscal stimulus. Central bank actions should also improve liquidity in the investment-grade corporate bond market at a time of significant stress.

The current high demand for cash is boosting the value of the US dollar. However, in the background, macro support for the greenback has deteriorated significantly. Our 12-month projection for the EUR/USD rate stands at USD1.16.

We remain positive on gold in the medium term, although our 12-month projection has been revised down from USD1,780 to USD1,700 per troy ounce.

The covid-19 crisis followed by the collapse in the OPEC+ oil production agreement is leading to an unprecedented build-up in oil inventories that will weigh on oil prices at least for the rest of this year.

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