Three signs that a global recession is imminent
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Head of Economics, Macroeconomics
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How will the coronavirus pandemic affect the global economic outlook for 2020 and beyond? Will the lockdown trigger an economic meltdown? Read on to find out why we are downgrading our economic outlook for 2020.
Here are the key findings of Peter’s latest research:
- The global economy is being ground to a halt in an unprecedented way to contain the coronavirus pandemic.
- Given the impact of measures to control the spread of the virus, Wood Mackenzie is preparing to downgrade our economic outlook to a global recession for 2020.
- Turmoil in global stock and bond markets indicates this could be the worst recession in the post-war period.
- China is a leading indicator for economies that have followed its lead in imposing strict lockdown measures. Recent data shows a collapse in investment and industrial production.
- Stimulus measures will not prevent recession, they can merely cushion it.
- Recession could lead to depression. Wood Mackenzie’s high-level recession scenario shows a possible protracted economic recovery.
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From lockdown to economic meltdown
A global recession is all but certain. Indeed, it is likely underway already. Given the impact of the coronavirus pandemic, we are preparing to downgrade our economic outlook to a global recession for 2020. The uncertainty lies in its magnitude.
Will this recession surpass 2008/09, and how quickly can the economy recover?
Draconian lockdowns have followed coronavirus around the world. The priority is to ease pressure on health services and minimise loss of life – so-called flattening the curve. In the worst-affected countries, all but essential businesses, industries and public services are shut, and citizens advised to stay home. Such restrictions on civil liberties, unthinkable just a few weeks ago, are the new reality.
Never has the global economy been suppressed like this. Lockdowns have a severe impact on economic demand and supply and risk triggering an economic meltdown.
Three signs point to a dismal outlook:
1. Losses in equity markets
On 9 March, Italy placed the entire nation under lockdown, changing the rules of the game. It became clear that developed western economies were willing to adopt stringent containment measures despite previous reservations. And as infections grew exponentially across the world, it became apparent that the economic impacts were going to be much more severe than initially projected. Markets tumbled.
In this report, Peter looks at the reaction in markets as a guide to what might follow for the global economy.
2. China’s February freefall
What can we learn from China's experience? Recent data confirms that containment measures have had a drastic and immediate impact on the economy. Investment and industrial production plummeted in February. Economies badly affected by coronavirus, such as Italy and the US, are about one to two months behind China in introducing lockdowns — the economic pain is in the post.
3. The scale of macroeconomic policy measures
For too long, policymakers adopted a wait-and-see approach as coronavirus spread beyond China. But that is changing as monetary and fiscal measures have ramped up worldwide.
Fiscal ideology has shifted a long way in a short period of time. In key economies, budget rules are being overlooked and fiscal prudence abandoned.
The scale of stimulus is revealing – underlining the trouble the global economy is in. Make no mistake, this is damage limitation. Policy can only cushion the recession, not prevent it.
A short, sharp recession, followed by long-lasting damage
Will the policy response enable the global economy to hibernate through the worst of the pandemic crisis then rebound quickly? Unfortunately, it doesn't appear so.
This is not like previous recessions. The near-immediate impact sets it apart — the peak-to-trough contraction will be swift.
The lifting of societal lockdowns will facilitate a surge in growth as economic activity normalises from suppressed levels. But we expect an economic hangover. According to our high-level recession scenario, global GDP levels might always trail the pre-coronavirus trend.
It goes without saying that many uncertainties remain. Not least, the length of time it takes to bring the pandemic under control. That will determine the duration of the lockdowns and the extent of the economic damage.