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The United States, Europe, and Japan are headed for recession.
The IHS Markit forecast for world real GDP growth in 2020 has been
revised down to 0.7% in response to the spread of the virus.
Growth below 2.0% is classified as a global recession.
The number of active world cases is assumed to top out by the
third quarter.
Nevertheless, the result will be a U-shaped rather than
V-shaped cycle, as a sharp reduction in near-term growth is
followed by a slow recovery.
Forecast risks are overwhelmingly on the downside and depend
crucially on how governments respond.
Central banks have already taken emergency actions, but the
fiscal response is more uncertain.
The recent sharp drop in oil prices will help energy consumers
and hurt energy producers. The net effect on global growth is
likely to be negative, but small.
The United States:A recession will
start in the second quarter
Incoming data point to solid growth at the start of 2020. Fear
and financial stress stemming from the spread of the COVID-19 virus
have swamped that good news. Volatility has surged, risks spreads
have widened, and equity values have fallen more than 25% year to
date, wiping out trillions in household net worth. Real GDP growth
will be hurt badly in the second quarter as consumers spend more
cautiously and businesses put some investments on hold until the
outlook clears up. Bans on travel and public gatherings will also
hurt. Growth is not expected to return until the end of the year.
The US Federal Reserve (Fed)'s emergency cuts of 150 basis points
and liquidity measures will help. Nevertheless, fiscal relief will
be needed. The net effect of the large oil price drop will be to
cut growth a little, with consumers being helped, but oil producers
and their suppliers being hurt. All told, US real GDP should fall
0.2% on a calendar year basis in 2020.
Europe: A downturn is imminent
The eurozone and UK economies were already in a weak state
before the impact of the virus that causes COVID-19. Eurozone real
GDP increased just 0.1% quarter on quarter (q/q) and 1.0% year on
year (y/y) in the fourth quarter of 2019, the weakest performance
in six years. Germany's output was flat, while Italy and France
suffered q/q contractions. The UK economy also stalled in the
fourth quarter. IHS Markit expects the spreading virus will do
serious damage via trade, travel and tourism, financial markets,
and sentiment. Italy is especially vulnerable, given its fragile
economy, the high incidence of COVID-19, and resulting restrictions
on activity. Germany will be hit hard by a drop in exports to
mainland China, especially the steep decline in light vehicle
sales. We now expect a recession in the eurozone, with real GDP
declining during much of the rest of 2020. For the full year, we
expect eurozone real GDP to fall 1.5% and UK real GDP to decrease
0.7%, before recovering weakly in 2021.
Japan: Already in recession
Japan's real GDP fell 7.1% q/q, annualized, in the fourth
quarter of 2019, led by sharp declines in household consumption and
private fixed investment. Real GDP is expected to drop again in the
first quarter because of the impacts of the COVID-19 virus. Both
foreign and domestic tourism have declined, and several major
events have been scaled down, postponed, or canceled. Nevertheless,
our forecast assumes that the 2020 Tokyo Summer Olympics will go
ahead. After a 0.7% expansion in 2019, Japan's real GDP is
projected to contract 0.8% in 2020 before recovering 0.6% in 2021
and 0.5% in 2022. The Bank of Japan (BOJ) has repeated that it will
not hesitate to introduce additional monetary easing if downside
risks to the economy and inflation arise, but its actions so far
have been limited.
China: First in, first out?
While the incidence of the COVID-19 virus in mainland China has
been concentrated in Hubei province, the economic damage has been
more widespread because of supply-chain disruptions. Moreover,
labor shortages have hampered work resumption, as a good portion of
the workforce traveled to their home regions during Lunar New Year
and cannot return to work quickly owing to travel restrictions and
local self-quarantine requirements. The data for January and
February show a precipitous drop in economic activity. The central
government has announced a series of policies to limit the negative
impacts of the outbreak on the economy. One key measure is to
coordinate work resumption across regions. The authorities have
also indicated they will intensify monetary stimulus and speed up
and expand investment spending. IHS Markit projects mainland
China's real GDP growth to slow from 6.1% in 2019 to 3.9% this
year, with the economy contracting sharply y/y in the first
quarter. We predict growth to rebound in 2021.
Other large emerging markets: Few safe
harbors
The COVID-19 virus outbreak has created an even more challenging
environment for emerging markets. Most do not have the financial or
healthcare resources to deal with this pandemic. Fortunately, to
date, only one country (Iran) in the emerging world has been hit
hard. That could change very rapidly. Meanwhile, much lower global
growth and commodity prices will hurt prospects everywhere. Few, if
any, countries will be immune to the economic damage.
Bottom line
The rapid spread of the COVID-19 virus beyond mainland China has
set the global economy up for the worst growth downturn since the
2008-09 financial crisis.