• We have changed our base case to the pandemic scenario

• Data on real economy impact is scarce, but the information that we do have points to a sharp slowdown in economic activity.

• Given the increasing number of countrywide lockdowns, this slowdown is not likely to subside soon

• Global growth will shrink this year

• The US economy will contract in 2020; the story for Europe is broadly similar

• Growth will fall substantially in China while growth in the emerging markets is also getting slammed

• Governments and central banks seem to be using different approaches to fight the spread of Covid-19 and mitigate its economic impact

• There are too many unknowns at this moment to make a meaningful estimate of the economic impact at this point in time

We are in the pandemic scenario

In the span of less than three months, the novel coronavirus has shuttered much of the global economy. Broad uncertainty remains regarding the extent of the economic damage and the vitality of an eventual recovery. This short-term uncertainty may bring additional anxiety and confusion regarding the path of the virus, global economy, and markets.

The coronavirus is hitting the global economy like a bolt of lightning. The quarantines and “social distancing” necessary to protect public health have triggered widespread shutdowns on the production side of the economy and a collapse of spending on the demand side. To make matters worse, economic uncertainty has spiked. At this point, it’s difficult to project with any confidence how long these disruptions will persist. In response, central banks around the world have taken aggressive actions to provide liquidity to markets and support their economies. Sizable fiscal stimulus is also being implemented in many countries. While these efforts will help blunt the virus’ blow, the outlook for growth ultimately depends on how quickly the virus can be contained – the longer the contagion persists, the more severe the economic downturn. A longer-lived pandemic will also translate into more sustained damage to the economy’s underlying structure, likely meaning a more muted recovery once the virus abates.

In parallel with the coronavirus, the global economy has sustained a first-order oil shock, which has sent prices tumbling. Oil prices have been extremely volatile in the last few months, hit by twin shocks due to the Covid-19 pandemic and the unexpected price war between Saudi Arabia and Russia. Brent is now trading at around USD30 per barrel from as high as USD52 per barrel in early March.

Virtually most G10 countries could enter a recession and global economic growth could fall in 2020. We expect a rebound in 2021, but this hinges on the assumption that the economic fallout due to the coronavirus is limited to this year, which is far from clear.

Source: BIMB Securities Research - 17 Apr 2020