The Forward View – Global: April 2020

Global economy in its worst post-WW2 recession, recovery timing uncertain.

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Our podcast series to accompany the NAB Forward View – Global continues, giving you a 10 minute summary of our key forecasts this month. Listen now.

Overview

  • The global economy is clearly in a deep recession due to the rapid and widespread escalation in Covid-19 containment measures from mid-March. The cause of this global recession is very different to past episodes, with government policy –in the form of containment measures –forcing a decline in economic activity in order to reduce the Covid-19 death toll. While the cause may be very different, some of the longer-term consequences will be similar –many businesses that have been forced to shutdown will not re-open. And the extra debt that households and businesses are being forced to take-on to address a severe cashflow squeeze will have to be worked off over time, constraining future consumption and investment. As a result, activity is unlikely to return to its pre-virus trajectory for a while to come.
  • The main purpose of the massive policy response from Governments and central banks is to keep as many businesses and households as possible solvent and liquid until containment measures are eased. Policy does appear to have helped to alleviate the significant tightening in financial conditions that occurred, but conditions remain tight, particularly for lower rated entities –however capital outflows present a financial market risk for emerging markets.
  • The timing and strength of the recovery will be crucially dependent on when, and to what extent, containment measures are eased. China was the first country to implement severe restrictions and has already eased restrictions. While some other countries are now flagging an easing, others are still debating whether to escalate measures further –so it is not clear that we are yet at peak containment. Even an official easing in containment measures may have limited impact if households, still fearful of the virus, stay at home and avoid previous activities such as dining out.
  • There is a high degree of uncertainty around any forecast right now. The magnitude of the falls in activity mean that the impact on quarterly growth of extending containment measures by a few weeks can be substantial. Any easing of measures risks second and third waves of virus spread and the reimposition of containment measures to address them.

For further details, please see The Forward View – Global: April 2020