COVID-19 scenarios: a turbulent year ahead
Some possible scenarios on how the global economy fares in the coming months.
The oncoming coronavirus recession is different from previous recessions. This economic shock was not caused by an asset bubble or over-leveraged bank balance sheets. Instead, the cause is endogenous. A virus that originated in China spread to every corner of the globe and has resulted in 3+ billion people confined to their homes for varying periods of time. That is an astounding figure.
Nobody knows for certain the way this pandemic will play out. It is dependent on the efficacy of lockdown measures coupled with government decisions around how and when they decide to reopen their countries. We are already seeing differing opinions regarding necessary medical precautions versus the economic toll being inflicted on large swathes of the global population. No government wants to inflict the type of economic pain we are now seeing on its citizens. However, an uncontained outbreak has similarly devastating economic effects.
There is no question that the coronavirus outbreak will result in a historically bad economic Q2. Beyond that, many have posited varying expectations for the remainder of the year. As country-wide lockdowns continue to exact their toll on peoples’ lives, people are understandably wanting to know when and how a recovery will take place. Let’s run through some possible big-picture scenarios to provide an idea of what could be in store for the world in 2020.
Bad Q2 – V-shaped rebound in Q3 and Q4
Following a serious Q2 recession when economic activity was brought to a standstill, business and life returns to normal in late May and June. The months that comprise Q2 are very difficult for businesses and people as much of the world cannot even leave their homes. Thankfully, the extreme quarantine measures contain the worst of the virus. In May, governments begin a phased ending of extreme lockdown measures. By June, a majority of small businesses are able to open back up with their same workers (either rehired or retained during lockdown) who were supported during the down period via government intervention. Supply chains, from China to Europe to the U.S., come back online and stores are stocked. Newly reopened stores and restaurants are full of people who are looking to get out and spend (and maybe even travel) after spending 6-10 weeks in their homes. Elevated consumer spending helps economies recover quickly and begins a sharp recovery from the March and April doldrums.
Many people base this theory around a couple of faulty assumptions:
1. Life snaps back to normal very quickly - This is not at all guaranteed. While the degree of lockdown severity varies from country to country, it doesn’t appear the end is just around the corner. Here in France, where Efma is headquartered, they imposed an initial 15-day lockdown that has already been extended twice and will last until May 11, when only schools will begin to reopen. Italy announced they are extending their lockdown until May 3rd. The UK government has been telling its citizens to prepare for 12 weeks of shutdowns. In California, the fifth largest economy in the world, the governor told his state to expect a minimum of eight weeks. India just expanded their lockdown, the world's largest, until May 3rd. Even if, as we all hope, these lockdowns manage to slow the spread of the virus and give hospitals and health systems the necessary time to treat patients, it is still hard to imagine that normal life resumes immediately following an extended period of confinement. Governments and policymakers will rightly be concerned with a second wave of infections. Health experts warn that easing restrictions too quickly could undo progress and result in sustained lockdowns in varying forms. This is why assuming an immediate return to “normalcy” – people moving freely and businesses operating as they were pre-crisis – is probably not right around the corner.
2. There will be a lot of pent up demand - Many people assume that following 2-3 months of confinement, people will be eager to get back out in the world and spend more money than they typically would in a month. They were only allowed to buy groceries for two months, so obviously they will want to buy a new car or update their summer wardrobe, the thinking goes. While many people will certainly be anxious to return to their local café and neighborhood stores, not everyone will have the ability to resume normal spending levels. Those that continue to be paid their normal wages while working from home will have some additional money they might be looking to spend, but for the many people who aren’t able to work for 2-3 months, they won’t magically have more money to begin spending freely. The money they have received in the preceding months, thanks to the government program implemented in their country, will have covered bare essentials. People are more likely to be quite prudent with their money in 2020, given the economic precarity many are experiencing. One bad quarter with a sharp bounce back in the summer is wishful thinking given the severity of the damage that is being inflicted on broad sectors of economies.
Bad Q2 – Life takes a while to return to normal with sluggish Q3 and Q4 resulting in a global recession in 2020
The United States and Europe are forced to remain largely shut down for April, May, and June. When July arrives, normal life begins to resume slowly but it is not a full return to normalcy. Only certain businesses are allowed to reopen. Gatherings of more than 100 people remain banned for a couple of months longer. Travel is still heavily restricted, meaning continued losses for tourism and adjacent industries. The travel industry experiences its worst year on record with many airlines going out of business.
The fiscal stimulus provided keeps a majority of people and businesses afloat but consumer spending, the primary driver of most economies, stays very low. People are only spending their money on bare necessities as great uncertainty hangs over the entire economy. There are signs of “normalcy” later on in the year but it is not enough to overcome the deep damage already incurred in the spring and summer. This means both Europe and the U.S experience difficult Q3 and Q4, leading to a global recession in 2020. Governments will be eager to turn the page on 2020 but will face a herculean task in getting their economies and countries going in 2021. More knowledge about the virus and how to combat it, combined with a vaccine on the way in early 2021, means everyone is cautiously optimistic about a strong recovery. The v-shaped recovery everyone is hoping for finally does arrive, it’s just not in 2020, but in 2021.
Full blown depression – Negative global growth for 1-2 years with slow multi-year recovery
This is the worst-case scenario. Three billion people are forced to stay home for 3+ months, through to the end of the summer. Many countries continue limiting gatherings until the end of the year. Economic activity stays almost completely subdued throughout the western world. Asian countries such as China and South Korea that have managed to get the virus under control get their economies humming again, but there is no one in the west who will buy their goods. Cafés and hotels are forced to close permanently, as they are not able to pay any of their bills. Even when people are allowed to leave their homes again at the end of the summer, people are deeply wary about resuming their normal, pre-outbreak routine. While many governments provide financial support for their citizens, nobody has any real purchasing power for the next year or two.
Banks, while they initially had healthy balance sheets when the pandemic broke out, have seen all of their capital used up by businesses and companies that are tapping every bit of liquidity they can to stay alive. The stimulus and bailout plans that governments have recently put into place pale in comparison to the size of the disaster. This means governments will have to come up with second and third rounds of support later in the year in attempts to finally get their economies moving again. Ultimately, the globe stays in a prolonged period of negative growth, as the virus keeps coming in waves that affect different parts of the globe at different times.
Can governments get this right?
So much depends on policy decisions made by government officials. How do governments ensure their health systems can handle coronavirus patients while simultaneously turning their economies back on in a controlled and coordinated manner that doesn’t initiate a second or third wave of infections later in the year? The hard truth is that a vaccine for COVID-19 is still some ways off – 12-18 months according to most health experts. Before a vaccine is available, decisionmakers have to navigate incredibly complex health, economic, and societal problems.
It is important to note that peoples’ experiences will vary widely depending on the situation in their respective country. As we are already seeing, there is not a uniform approach to this from country to country. While most countries have now implemented some type of lockdown, many were quick to act while others (see Sweden) have been slower to adopt the most restrictive measures. Similarly, some countries will be more eager than others to restart their economies as soon as possible. Many variables will factor into these decisions: how severely the virus impacted a country, its health system’s capacity, its citizens’ reactions to lockdown orders, and the whims of a country’s leader, among others.
While predicting the future at this moment in time is certainly a fool’s errand, it is important to keep possible scenarios in mind as you set and manage your expectations. 2020 will not be a normal year for anyone. The more information you have, the better you will be able to plan, adjust, and act in order to best position yourself throughout this tumultuous year.
To discuss these scenarios further, you can join Efma’s upcoming webinar on April 21st with our Middle East manager, Fahim uz Zaman. Fahim will dive deeper into each of the three scenarios and what they portend for retail banks.