With the assumption quickly growing that the current coronavirus-caused economic downturn will be the worst since the Great Depression, the question becomes what path the eventual recovery will take.
In a new report issued Thursday, IHS Markit looked past the expected horrific second-quarter drop in real gross domestic product (GDP), which is forecast to reach 25 percent to 30 percent and drive a deeper recession in 2020 than in the Great Recession of 2008–09.
Assessing the shape and strength of the recovery, IHS chief economist Nariman Behravesh and executive director for global economics Sara Johnson said a V-shaped recovery in the manufacturing sectors seems plausible, once the large increase in inventories is worked off.
“However, the anticipated tsunami of small-business bankruptcies could further damage business infrastructure and challenge the recovery,” the economists said. “For many of the consumer-facing service sectors, a U- or even L-shaped recovery seems more likely, given the expected reluctance of people to engage in activities that put them in contact with groups of other people,” such as travel and entertainment.
Behravesh and Johnson said the damage to household and business finances, including a plunge in the stock markets and rising debt levels, will also preclude a sharp snap-back in spending.
“All this assumes that once the pandemic is over, any return of the virus in local pockets is of limited consequence,” they said. “If not, and if renewed restrictions are required, then a double-dip recession cannot be ruled out.”
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In the U.S., the economists estimate real GDP declined at a 3.5 percent annual rate in the first quarter ended March 31 and expect a 26.5 percent annualized drop in the second quarter from April through June. The Commerce Department on Wednesday reported an 8.7 percent drop in retail sales in March as stores across the country closed due to coronavirus mandates and massive unemployment followed.
“We do not expect real GDP growth to turn positive until the fourth quarter of this year, reflecting our view that economic activity will not begin to improve materially until new U.S. cases of the COVID-19 virus are driven down substantially,” the economists said.
For Europe, “a severe recession is unavoidable,” according to Behvaresh and Johnson. The IHS Markit composite Purchasing Managers Index, an output index for the Eurozone, fell around 20 points in March–four times the magnitude of the prior record monthly decline at the height of the 2008–09 global financial crisis.
“Consequently, we now predict the virus-induced recessions this year will be significantly deeper than during 2008–09,” they said. “The most severe quarter-on-quarter contraction will occur in the second quarter, when Eurozone real GDP falls at a quarterly rate of 5.7 percent. Although they will not prevent deep recessions in the near term, stepped-up fiscal and monetary policy measures can help to avoid a prolonged Eurozone downturn by preserving businesses and jobs.”
For China, which has long been reliant on exporting to drive its economy, Johnson and Behravesh believe collapsing world demand and weak stimulus will challenge the country’s recovery. They noted that most of the January and February data were the worst in China’s reported history, as the government’s lockdown measures to combat the COVID-19 virus outbreak paralyzed most facets of the country’s economy.
Now, “the necessary conditions for recovery appear to have materialized,” they said. The national average of large industrial enterprises’ work resumption rate has reached 97 percent, but recovery is lagging in more resource-constrained small and medium-sized enterprises, with only 80 percent having resumed operations.
“Two large obstacles could hamper mainland China’s recovery–crumbling world demand for its exports and the hesitation of its government to provide massive stimulus,” the economists said. “Stimulus programs amount to about 2 percent of GDP now, compared with 12 percent in 2009, which kept the economy growing during the global financial crisis.”
For Japan, postponing the Olympics will hurt 2020 growth, but massive stimulus may help, the IHS report contended and noted that even before the worst of the COVID-19 virus pandemic was apparent, Japan’s economy was in recession. IHS Markit projects Japan’s economy will contract 3.3 percent this year.
Rising infection rates in the emerging world, including some of the largest economies, such as India, collapsing world trade and depressed commodity prices are among the daunting challenges.
On top of that, these economies are now facing massive outflows of capital–nearly $100 billion since the beginning of the year–four times as big as during the Great Recession. As a result, in the past three months many emerging markets–Brazil, Mexico, Russia and South Africa–have seen their currencies crash by more than 20 percent. Because of these depreciations, the burden of foreign debt for emerging markets has risen sharply, leading to a wave of sovereign debt downgrades, the report noted.
“As dire as these predictions are, they are likely to be revised down,” Behravesh and Johnson added. “Nevertheless, there is a good chance we will see the light at the end of the tunnel by the end of 2020.”