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Headlines
- Global economic activity may have hit its trough in the past couple of weeks
- But output is likely to remain below pre-COVID 19 levels for an extended period
- It is unclear how much restrictions can be relaxed while keeping R below 1
- Excess mortality data from a range of countries suggest official figures understate the COVID-19 impact on deaths
There is increasing evidence that the trough in global economic activity may be behind us. China (16% of global GDP in USD) seems to have passed the worst of its COVID-19 crisis for now, while many European countries have already relaxed restrictions or are in the process of doing so. In the US, perhaps the last major economic centre to be affected by the virus, there are signs of a bottom, too. The trough in air passenger throughput occurred twelve days ago, and individual states, such as Texas, are also beginning to re-open their economies. However, air travel remains down 95% year-on-year, and Texas has said venues will have to limit their capacity to 25% of previous levels. Global GDP may have stopped declining, but is still at levels well below those from just a few months ago.
While we may be reaching the bottom, it is too early to identify real green shoots. The US Conference Board survey of American consumers offers some dose of optimism. Its measure of households’ ‘present situation’ fell by a record 90.3 points in April, which was more than double the previous record monthly decline. However, the ‘expected’ situation actually increased by 7 percentage points after declining in March. Are US consumers already pricing in a swift recovery? Perhaps. Large fiscal and monetary stimulus has supported asset prices and should keep incomes broadly stable in the coming months even for those who have lost their job. The pessimistic interpretation is that consumers remain too sanguine about the medium-term economic and health consequences of COVID-19.
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It is now clear that while entry into lockdown was swift, exit will not be. Estimates of the New York COVID-19 reproductive rate suggest that this figure has dropped to 0.8 and is therefore consistent with a gradual erosion of the virus. It is a big improvement from COVID-19’s reproductive rate without mitigation, which is thought to be around 2.5 or 3. But it remains very close to the critical threshold of 1, which separates erosion and expansion of the virus. Moreover, that figure bottomed around two weeks after lockdown and has remained broadly stable since then, suggesting measures to reduce it further such as centralised quarantine of infected patients would not be politically palatable. More importantly, it means that even gradual restrictions on New Yorkers risk moving the reproduction rate back above 1, leading to increasing daily caseloads. Indeed, reports from Germany yesterday said its reproduction rate had risen to above 1.
While almost all countries are following similar approaches, there appears to be a difference between those who want to flatten and those who want to bend their curves. Countries such as Australia and New Zealand seem to be trying to suppress the virus entirely, with daily new cases below 100 before relaxing restrictions. That is consistent with bending. Getting cases to such low levels should mean that future test-and-trace strategies are more achievable. In contrast, countries in Europe and individual US states appear willing to ease lockdown measures subject to the constraint of the reproduction rate being below 1 and the health system not being overwhelmed, even if that means an ongoing spread of the virus.
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Further signs of a different approach come from the UK government, which appears to have changed one of its five rules for exiting the lockdown. Previously, no exit would be considered before the government was confident of no “second peak of infections”. That language has since been changed to no “second peak of infections that would overwhelm the NHS”. The distinction is key. The latter suggests comfort with rising cases as long as there is increased NHS capacity to deal with them. (The construction of new hospitals in recent weeks suggests that there is.) It points to a desire on the part of policymakers for easing the UK lockdown earlier rather than later even if it means continued transmission of the virus.
This more relaxed approach will almost certainly boost economic activity earlier than a world of more extended lockdowns but it comes with risks. For one, some citizens will be less willing to resume normal economic activity with ongoing cases and fatalities. Moreover, attempting to fine-tune restrictions risks moving too fast, particularly if the reproduction rate is only slightly below 1, perhaps leading to a re-introduction of more severe restrictions. For those reasons, it is difficult to see economic activity returning to pre-virus levels anytime soon. Our most likely, and most optimistic, scenario sees GDP in Europe and the US 5% below 2019 levels through 2021. The risks to that, however, are skewed to the downside.
Interesting reading
Fathom forecast scenarios
Economic forecasting is difficult even at the best of times. It is particularly difficult today. At Fathom, we think in terms of scenarios and seek, wherever possible, to downplay point forecasts. A severe contraction in global economic activity through the first half of this year is inevitable – we are facing what French economist Pierre-Olivier Gourinchas has referred to as a ‘sudden stop’, something the global economy has never experienced before. But how long will it last? In our Global Economic and Markets Outlook for 2020 Q1, we set out three scenarios. The first was a V-shaped recovery, in which the number of cases peaks within months and begins to decline, allowing activity by the end of this year to return to normal levels. The second was a U-shaped recovery, where the virus continues to spread, depressing activity until a vaccine is found, but the economic and financial market infrastructure remains in place to deliver a strong rebound when that occurs. The third was an L-shaped recovery. Since we finalised our forecast on 17 March, a number of major economies have placed more severe restrictions on movement, and imposed a temporary shutdown on more industries than we had thought likely. This more aggressive action has caused us not only to anticipate an even sharper contraction in economic activity in the first few months of this year, but to increase the weight we attach to a V-shaped recovery. At the same time, we have also increased the weight we attach to our more severe risk scenario, making the outlook somewhat bimodal. In the event that COVID-19 returns with equal or greater vigour once restrictions that are holding back economic activity are lifted, then a severe financial crisis will be very hard to avoid.
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