SUMMARY

  • Uncharted Waters

COVID-19 continues to wreak havoc on global financial markets and the global economy. Nations and cities around the world are in lockdown. Vast amounts of economic activity have come to a standstill.

As a result, most major world economies are expected to suffer outright contraction in 2020. Policymakers have moved with a greater sense of urgency to add support, but these efforts have struggled to keep pace with the pandemic. Economic activity in developed markets is expected to recover in the second half of the year, but the shocks in some parts of the world could last longer. Though the oil price war has ended with a record deal to cut production, a slump in demand will continue to weigh on oil prices and, in turn, its producers.

Following are our views on how major world economies will fare this year and next.

United States

  • Viral contagion in the U.S. is still rising, and a good portion of the country’s economic activity has been halted. The U.S. economy is 68% consumption. When consumers stay home, the disruption is immediate and severe. The greatest risk of lasting economic damage will come from worker layoffs and employer closures, defaults and bankruptcies. Unemployment claims are surging while credit spreads remain elevated.
  • To respond, the U.S. Federal Reserve has reduced overnight rates and launched programs to extend credit and repair liquidity in the financial markets. Three rounds of fiscal stimulus have passed, and more may follow. The near-term disruption will be substantial, but we expect a return to trend growth in late 2020.

Eurozone

  • The outbreak of COVID-19 across eurozone economies has pushed the area into recession. Growth drivers like domestic demand and tourism have dropped like stones. Outbreaks in Italy and Spain have been cause for major concern. Germany’s reliance on external demand will be a major hindrance. Unemployment rates for the eurozone are likely to peak at levels never seen before. Recent survey data confirms the severe shock to sentiment, presaging declines in hard data ahead.
  • Colossal challenges posed by the outbreak have forced the European Central Bank to adopt a massive asset purchase program that covers an expanded range of assets and countries. These supports should help ease some strain, but region-wide fiscal relief is still missing. Agreement was reached late last week on the contours of stimulus, but it may take time to reach areas of greatest need.