Economic Commentary 2020Q2
The COVID-19 virus has made a brief global recession likely. While the duration of the virus pandemic is unpredictable, policy stimulus, pent-up demand and a lack of major imbalances argue for a solid upswing when the virus threat clears.
The containment measures being taken across the globe to combat the virus will have a large economic impact. Global gross domestic product (GDP) growth will probably be negative in the first quarter and will enter the second quarter at risk of contracting further.
Provided the virus is transitory—perhaps contained in the second quarter—the global economy should be poised to rebound in the second half of 2020. The combination of monetary and fiscal stimulus on top of last year’s global central-bank easing, in addition to the reduction in China-U.S. trade tensions, argues for a solid recovery when the virus threat recedes.
In the U.S., the government’s virus containment measures mean a technical recession—negative GDP growth in Q1 and Q2—seems likely. Fiscal policy will be important in helping to offset the recession.
The economic impact of the virus may turn out larger than expected. The shock to consumer and business confidence could generate a self-sustaining economic downturn.
A re-run of the 2008 financial crisis seems unlikely. Tier 1 capital ratios for large U.S. banks are significantly improved from where they were in 2007 and should cushion against the risk of a severe drawdown. Bank mortgage lending has also been prudent, and consumer balance sheets are fairly healthy.
The chief uncertainties are around the length and duration of the virus threat and whether it will re-escalate when containment measures in many countries are reversed. It’s likely that markets will find a bottom when the daily number of new virus cases in Europe and the U.S. begins to decline.
Goldman Sachs has offered a revised Outlook for 2020, with the largest GDP drop in history in quarter two, followed by the best quarter in US history in quarter 3.
JP Morgan also sees contraction in the first and second quarters, with significant growth in the 3rd and 4th quarters.
Ben Bernanke, former Chairman of the Fed, likens the coronavirus outbreak more to a “major natural disaster” than a depression. While he does expect a sharp downturn, he expects a “fairly quick recovery.”
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