ECONOMIC IMPACT AND A SCENARIO FORWARD
Now all bets are off. As the COVID-19 pandemic spreads around the globe, its potential to derail the world economy has become increasingly clear as large parts of economic activity came to a sudden halt in China, Europe and the US.
Rigorous public-health responses are impacting both the demand and supply side of the economy. Wide-ranging restrictions on passenger transportation and labor mobility are especially impacting the tourism, leisure + hospitality sectors, as well as education services, while factory and office closures, or reduced activity are hitting global manufacturing supply chains. As consumers and businesses alike face growing uncertainty, many are deferring non-essential consumption and investments.
In the US, payroll employment saw its largest monthly drop in March, at a time when the impact of COVID-19 was just starting to be felt. Initial claims for unemployment insurance was 6,606,000 in the week ending April 4, which compares to the previous high of 695,000 in October 1982. This unprecedented spike in claims illustrates the depth of the layoffs across the country, as millions of Americans have been advised or ordered to “shelter-in-place” and businesses deemed “non-essential” have been shuttered. As of March, US stock markets saw a 30% decrease, credit markets have seized up and default risk is rising in the corporate sector.
The final tally of job losses, the size and persistence of economic damage, and the speed and strength of recovery will be critically dependent on the duration of the pandemic and the interaction of public health and economic interventions, which at this stage we cannot predict.
On the public policy side, a first emergency relief package has been enacted, which the Congressional Budget Office (CBO) estimates will result in $7.6 billion of discretionary spending between 2020 and 2030, which is judged to be too insignificant to make a meaningful difference. A second bill, the Families First Coronavirus Response Act provides for testing, unemployment benefits, and paid sick leave.
A third bill, a $2.2 trillion economic stimulus bill was signed into law at the end of March. The package includes loans to both small businesses and large companies, as well as direct payments of up to $1,200 for individuals. The package also includes enhanced unemployment aid, including for self-employed individuals and gig economy workers.
On the back of the economic fallout, forecasters have revised their predictions significantly downwards for this year. IHS for example now expects the US economy to contract by 13% in Q2 2020, forecasting an overall decline in the economy of 1.7% in 2020. This predicts a downturn that is more severe than the financial crisis but much shorter-lived, with growth returning in Q4 2020.
The recovery scenario is uncertain. The situations will inevitably vary by country and region. The majority of forecasters currently expect a gradual recovery to begin in late summer 2020, when the rate of new cases of COVID-19 is expected to dwindle and economic activity restarts. A firmer rebound in economic activity is not expected before the fourth quarter of this year. This is an optimistic but not unlikely scenario, in which:
• Effective public health interventions initially succeed but localized future outbreaks cannot be prevented and social distancing restrictions are maintained regionally for several months.
• Effective public policy interventions partially offset economic damages, a financial crisis is largely prevented, allowing economic activity to start a gradual recovery in summer.
Of course, the uncertainty surrounding these projections is immense and other more extreme negative scenarios can also be conceived. Severe structural damages to the economy, caused by a prolonged spread of the pandemic combined with a failure of public policy response, widescale bankruptcies, unemployment, and a financial crisis cannot be excluded.
We will continue to monitor the depth and length of disruption, and the shape of the recovery locally and in countries that were exposed early in the pandemic.