- In Q2 2020 the world experienced the worst economic quarter since WWII. Some countries had entered recession in Q1.
- World: The IMF expects a 4.9% recession for 2020. The effects of the Great Lockdown have been more pronounced in the UK versus other parts of the world. UK Q2 GDP fell 20.4%, double that of the US (~10%) and more than Europe (-15%). Global employment picture remains uneven, due to different policies (US subsidised unemployment, Europe subsidised employment) and statistical difficulties (those “not looking for work” because of Covid lockdowns are not counted as unemployed). All over the world, however, there are pressures for higher unemployment, which could prolong the recession and give it its own post-Covid dynamic.
- In Europe, France and Germany, are seeing some pickup in economic activity, although still nowhere near previous pre-Covid levels. Industrial activity has picked up, mostly on pent up demand and previous unfilled orders, and there is some stream of new orders coming through various countries, but not at a pace which can counter the effects of the downturn.
- China on the other hand has shown remarkable resilience. It has reported very few cases of Covid-19 since April, and GDP rebounded in Q2 covering for all the Q1 shortfall.
- Europe has taken a significant step towards easing economic risks, by agreeing on a EUR 750b rescue package and accepting part mutualisation of debt during the 19th July conference. Conversely, Britain still struggles with uncertainty ass probabilities for a Hard Brexit grow by the day.
- The virus is still a major concern. At the time of writing (19th August), the world was seeing a resurgence of cases, enough to talk about a “second wave”, albeit at a slower pace than before. Hospitalisations and deaths were also slower and national healthcare systems seem readier than before. This means less probability of universal lockdowns especially in developed countries.
- We are closer to a vaccine, either from the UK or Germany.
There are still significant risks for the economy. The rebound is still weak and will depend on further lockdowns, the efficacy of monetary and fiscal policy, and consumer behavior. We think the probability of a universal lockdown is diminishing and everyday that passes we are closer to a successful vaccine. It is plausible that behaviourally we will see some return to pre-Covid normality by early 2021. The fuel of the crisis, Covid-19, will end with a successful vaccine. The question is: Will the recession acquire it’s own post-Covid dynamic? If unemployment pressures persist, or policy transmission mechanisms fail (banks not giving out loans fast enough) or markets panic about high levels of debt, then the crisis could have a life of its own, even if commerce returns to normal.
This is why our base case for a U-shaped recovery is still our main scenario.
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