Overview

• We have significantly lowered our global growth forecasts, mainly due to the slower than expected recovery in activity in China and the increasing spread of the Coronavirus to other countries, along with growing containment measures. We now expect global growth to be only 2.4% in 2020, revised down from 3.0% last month (and 3.2% pre-virus).
• Financial markets have gone into a tailspin with large falls in equities, bond yields and commodity prices. Central banks have, or are likely to, ease policy including through rate cuts, asset purchases and other measures to assure liquidity and credit availability. We now expect the US Fed to cut its policy rate by a further 75bp this month (and 25 bps in April).
• Growth is only likely to show recovery when panic around the spread of the Coronavirus starts to ease and containment measures (by government or self-imposed by households/businesses) start to recede. For now we are assuming that this will occur during Q2 but there is a high degree of uncertainty and it will vary by country (this is already occurring in China to some extent but for other countries further containment measures are likely to be announced). The economic impact of existing containment measures is also highly uncertain but is potentially significant. We now expect a large fall in China GDP in Q1, recessions in the Euro-zone and Japan and much lower growth elsewhere in H1, with risks skewed to the downside.
• Fiscal policy is also starting to step up –with several countries already announcing support packages. So far these measures have mainly been targeted at addressing the direct impacts of the virus (health funding, keeping affected households/businesses afloat), however they may well broaden, as flagged by the US’s consideration of a payroll tax cut. While monetary/fiscal policy cannot address the underlying problem, it can reduce the risk (but not remove it) of an even deeper downturn (e.g. triggered by corporate failures, job lay-offs or capital flight from vulnerable EM countries).

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