Global Macro: We have downgraded our forecasts again – We have revised down our global GDP growth forecasts for the fourth time during the coronavirus economic shock. We present our new base case, which is for an even deeper global recession. The new and old forecasts are presented in the table below.
Longer lockdowns, stronger second round effects – There are a number of factors behind the new wave of downgrades. Firstly, we now assume that lockdowns (defined as a set of measures that severely restrict economic activity) will be two weeks longer compared to our previous base case. At the same time, some restrictions on activity may be in place for longer still. For the eurozone, this takes the lockdown to end April, for the US to mid-May.
Second, for the US, the proportion of the economy that is under lockdown has turned out to be much higher than we previously assumed. We now assume that the whole economy will be in lockdown compared to states covering around 25% of GDP previously.
Third, this leads to even larger second round effects via a set of propagation mechanisms that we have been highlighting in our analysis over recent weeks. In particular, higher unemployment and corporate defaults, weaker capital spending, tighter financial conditions and more significant supply-side disruption. The severity of these effects tends to build in a non-linear way on the back of longer periods of lockdown.
Fourth, the initial signs in terms of these second round effects suggest that they are proving more powerful than we previously assumed, just on the back of the lockdowns we have had so far. Unemployment has seen a breath-taking surge in the US and to a lesser extent in Europe. The US unemployment rate looks to have already matched its high during the global financial crisis (GFC) given the rise in initial jobless claims. Meanwhile, the tightening of financial conditions has been sharp and is not yet abating despite unprecedented central bank monetary easing.
Fifth, these negatives are being only partially cushioned by a yet more aggressive macro policy response. Discretionary fiscal stimulus (at 6% in the US and 2.5% in the eurozone) will probably be further stepped up as will the pace and duration of central bank asset purchases. We continue to assume that central banks will continue to do ‘whatever it takes’ to absorb new bond supply, while also keeping markets functioning smoothly. Finally, while the US and Europe are now at the epicentre of this crisis, we will see economic shockwaves to every economy around the world. Given weaker global demand, we have lowered the profile of our China GDP growth forecast. In addition, the Q1 data so far, points to a much deeper contraction than we previously expected, though a rebound in Q2 still looks to be on the cards.
Watch out for the double-dip – In the US and the eurozone, unprecedented and breath-taking falls in GDP are likely in Q2, illustrating the economics of sudden stops in activity. As economic activity gradually returns from the end of this quarter, we will see a sharp rebound in economic growth in Q3. However, there will be a subsequent dip in economic growth thereafter as the second round effects continue to weigh heavily on demand. In the eurozone, we will likely see a double-dip recession in Q4 and Q1 of next year. We do not expect a significant, durable recovery in the economy to materialise until 2021.
In our new base case, the recession is somewhat shorter than during the GFC. The output loss in the two years since the start of the recession (see last column of the table) is also foreseen to be less. During the GFC, the comparable two-year output loss was 2.6% in the US and 4.5% in the eurozone. (Nick Kounis, Aline Schuiling, Bill Diviney and Arjen van Dijkhuizen)