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IHS Markit is looking past the horrific second-quarter drop in
real GDP, and a deeper recession in 2020 than in 2008-09, to assess
the shape and strength of the recovery. A V-shaped recovery in the
manufacturing sectors seems plausible, once the large increase in
inventories is worked off. However, the anticipated tsunami of
small-business bankruptcies could further damage business
infrastructure and challenge the recovery. For many of the
consumer-facing service sectors, a U- or even L-shaped recovery
seems more likely, given the expected reluctance of people to
engage in activities that put them in contact with groups of other
people (travel, entertainment, etc.). The damage to household and
business finances (the plunge in the stock markets and rising debt
levels) will also preclude a sharp snap-back in spending. All this
assumes that once the pandemic is over, any return of the virus in
local pockets is of limited consequence. If not, and if renewed
restrictions are required, then a double-dip recession cannot be
ruled out.
The United States:A historic
contraction in the second quarter, as social distancing shuts down
large swaths of the US economy. We estimate real GDP
declined at a 3.5% annual rate in the first quarter, and we look
for a 26.5% annualized drop in the second quarter. We do not expect
real GDP growth to turn positive until the fourth quarter of this
year, reflecting our view that economic activity will not begin to
improve materially until new US cases of the COVID-19 virus are
driven down substantially.
Europe: A severe recession is unavoidable. The
IHS Markit composite PMI™ output index for the eurozone plunged by
around 20 points in March, four times the magnitude of the prior
record monthly decline at the height of the 2008-09 global
financial crisis. Consequently, we now predict the virus-induced
recessions this year will be significantly deeper than during
2008-09. The most severe quarter-on-quarter contraction will occur
in the second quarter, when eurozone real GDP falls at a quarterly
rate of 5.7%. Although they will not prevent deep recessions in the
near term, stepped-up fiscal and monetary policy measures can help
to avoid a prolonged eurozone downturn by preserving businesses and
jobs.
Japan: Postponing the Olympics will hurt 2020 growth,
but massive stimulus may help. Even before the worst of
the COVID-19 virus pandemic was apparent, Japan's economy was in
recession. The pandemic has hurt trade and tourism and resulted in
a one-year postponement of the Tokyo Olympics. In response to the
growing crisis, Prime Minister Shinzō Abe recently declared a state
of emergency and announced a stimulus package of JPY180 trillion
(roughly 20% of GDP). Based on past observations, IHS Markit
believes the effective stimulus will be much smaller than the
announced package. We project Japan's economy will contract 3.3%
this year.
China: Collapsing world demand and weak stimulus will
challenge mainland China's recovery. Most of the
January-February data were the worst in their reported history, as
the government's lockdown measures to combat the COVID-19 virus
outbreak paralyzed most facets of mainland China's economy. The
necessary conditions for recovery appear to have materialized. The
national average of large industrial enterprises' work resumption
rate has reached 97%. Recovery is lagging in more
resource-constrained small and medium-sized enterprises, with only
80% of them having resumed operations. Two large obstacles could
hamper mainland China's recovery: crumbling world demand for its
exports and the hesitation of its government to provide massive
stimulus. Stimulus programs amount to about 2% of GDP now, compared
with 12% in 2009, which kept the economy growing during the global
financial crisis.
Other large emerging markets: The next wave?
Rising infection rates in the emerging world (including some of the
largest economies, such as India), collapsing world trade, and
depressed commodity prices are among the daunting challenges facing
the emerging world. To make matters far worse, these economies are
now facing massive outflows of capital—nearly USD100 billion
since the beginning of the year (four times as big as during
2008-09). As a result, in the past three months many emerging
markets, such as Brazil, Mexico, Russia, and South Africa, have
seen their currencies crash by more than 20%. Because of these
depreciations, the burden of foreign debt for emerging markets has
risen sharply, leading to a wave of sovereign debt downgrades.
Bottom line: As dire as these predictions are,
they are likely to be revised down. Nevertheless, there is a good
chance we will see the light at the end of the tunnel by the end of
2020.
Posted 16 April 2020 by Sara Johnson, Executive Director – Global Economics and