A world recession is now almost a certainty, with global GDP set to decline twice as much as during the financial crisis. The challenge now is to prevent the recession from turning into a 1930s style rout.

March 22, 2020

Cebr Global Prospects Highlights March 2020

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  • We have severely downgraded our forecasts for virtually all economies covered. Given that only very little hard data is available showing the impact of the virus on world economies, the forecasts largely reflect our estimates of the economic effects of a partial shutdown of countries for a limited amount of time, mostly focused in Q2 2020.
  • One exception here is China, which has seen the largest impact in the first quarter and can expect to slowly return to more normal economic activity in Q2. The Chinese example, however, also shows that it won’t be easy to just switch back to ‘normal’ production modeas businesses will continued to implement strict public health measures to prevent a new outbreak.
  • We estimate that world GDP will fall by at least 4.0% this year, clearly with a huge margin of error. If this is correct, the fall will be more than twice as large as in 2009 during the financial crisis and will be the largest drop in GDP in one year since 1931 other than in years affected by war.[1]
  • Provided that both fiscal and monetary action are taken on the extensive scale promised, there should be a sharp economic recovery in 2021 with world GDP growth of 3.4% although it will be 2022 before world GDP overtakes the 2019 level.
  • Of the major economies we expect China, with a fall in GDP of only 2% in 2020 and rise in GDP of 5.0% in 2021, and India, with a fall in GDP of 3% in 2020 and a rise of 8% in 2021, to do best.
  • The biggest falls in GDP this year in the major economies are predicted to be in Italy (11%), Brazil (8%), Germany (8%) and Spain (8%).
  • We expect US GDP to fall 5% this year. With a relatively modest recovery of 3% in 2021 and 1.6% in 2022, US GDP is not forecast to overtake its level in 2019 until 2023.

 

Preventing a repeat of the 1930s

  • The authorities are unlikely to be able to prevent a short-term sharp decline in activity as major parts of the world economy go into lockdown. Cebr’s own study of the impact in London shows that a London lockdown could reduce London GDP by 31% on a weekly basis. Though the same study points out that had this crisis occurred at a time when remote working was less possible, the loss of economic activity could have been of a different magnitude. But it is important that this initial blow is cushioned and that knock on effects are prevented to the extent possible.
  • The first and most important lesson for now is that even at the risk of huge rises in debt, the fiscal and monetary authorities need to cushion the blows of falling activity and in particular prevent them from generating a further round of contraction as falling activity leads to falling incomes leading to falling spending. This means preventing corporate collapse and limiting falls in household incomes.
  • The second lesson is that to the extent possible, autarkic trade and exchange rate practices should be avoided.
  • Our modelling suggests that if the scale of the reduction in real disposable incomes in economies emerging from the effects of the virus can be kept below 5%, it ought to be possible to see a sizeable bounceback as pent up supplies and demand come on stream to overcome the impact of reduced spending power. The aim of the authorities should be to enable people to spend when they are able to.
  • It is encouraging to see the degree of coordination by some authorities and the extent to which governments have realised the need to act fast and decisively. This gives us hope that by 2021 the main macroeconomic impacts of the crisis will be over.
  • We expect public borrowing in the countries that we are following (roughly the 20 largest economies in the world) to reach 17% of GDP during 2020. This should fall back to 9% of GDP in 2021 as temporary measures are phased out and the recovery boosts revenues.
  • Inflation should fall to close to zero in the US in 2020 as a result of falling primary product prices. Other countries with weaker currencies should have inflation in the 2-4% range. In 2021 there could well be an inflationary push as demand returns and we expect monetary policy to be tightened.

[1] We estimate world GDP fell 11.8% in 1946; 9.6% in 1945 and 18.6% in 1914. The biggest multiyear fall in world economic activity in peacetime since 1900 was the 12.1% fall in world GDP from 1929-32. These estimates are based on the Maddison Historic Growth Data from Groningen University Growth and Development Centre.

 

 

NOTES TO EDITORS

Cebr’s Global Prospects is a monthly report which we prepare for the subscribers to Cebr’s Prospects Service

Please refer to this in copy when quoting as Cebr’s Global Prospects Report.

For more information, please contact:

Douglas McWilliams             +44 7710 085 652

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