Sit for Victory

**Correction: Due to an error, the original version still contained the previous set of economic forecasts for Australia, China and Japan. This version has been updated with the correct projections.**

Amidst an unfolding global humanitarian disaster we are trying to make sense of one of the greatest crises in our lifetime from an economic and markets perspective. Like everyone we are forced to combine various disciplines, ranging from economics and politics to psychology and virology, to gauge the impact and way forward. It’s a humbling experience, from which I’d like to share some observations with you.

We see a tremendous need for context. Barely two months ago this was “just a flu” to many, now it’s a global synchronized downturn on a scale that’s hard to take in. It requires a lot of uncomfortable thinking. We compared Covid-19 to the Spanish Flu outbreak a century ago to glean useful insights. With politicians across the globe invoking the metaphor of waging a major war against the virus, we also took a look at past major wars and lessons we could learn from them. Other comparisons we made in our regular coverage include the global financial crisis of 2008-2009 and the Great Depression. None of these are perfect matches, all have their shortcomings, but comparisons are useful to provide at least partial context.

Acknowledging Covid-19 is a unique storm hitting us, we resort to scenarios to provide both narratives and the opportunity to consistently model different paths. Our new global scenario will be released shortly and incorporates the grim prospect of a protracted fight against the virus. It assumes gradual improvements in medicines to reduce morbidity and mortality, better testing capabilities and larger ICU capacity, with eventually an effective and tested vaccine arriving after around twelve months. Monetary and fiscal policymakers will go all in to try and limit the economic damage and stabilize financial markets where possible, but this will be a gargantuan task. During those twelve months we assume relatively strict lockdowns that vary between three weeks to up to two months across countries, followed by a “smart” lockdown in which restrictions will be relaxed, but life and the economy will be far from normal. We will ultimately beat the virus, but it’s a story of slow progress, no magic bullets and the economic impact will be severe: we see a deep global recession, with a stunningly negative impact in the second quarter of the year.

In a world full of uncertainty there are obviously many risks to this base scenario, both negative and positive ones, some of which could coincide. Negative scenarios include a full-blown financial crisis, as opposed to the already severe financial stress witnessed so far, among which concerns about USD liquidity, and a more extended lockdown. But also potentially feature food and medicines scarcities, social unrest and negative virus mutation. It’s challenging to be hopeful when the news flow is extremely pessimistic, but we have also explored some potential positive risks, ranging from an earlier vaccine arrival, or breakthroughs in medicines that reduce morbidity and mortality rates, to cheap mass testing becoming available and positive virus mutation.

We also try to look past the Covid-19 crisis and ask what it could permanently change. Clearly the Leviathan State is here, endangering civil liberties and fueled by a genie of monetary financing that will not easily go back into its bottle. Inequality is set to rise massively, both within economies and between developed economies and emerging markets. Supply chains are likely to be overhauled, with a focus on health and food security, while just-in-time and lean manufacturing practices will be scrutinized. Behavioral patterns may also permanently change due to extended lockdowns with significant economic consequences for whole industries. It’s very much early days, so expect more thinking from us on this front. Meanwhile we hope you all stay safe and healthy, wherever you are locked down.

Rabobank | RaboResearch | Global Economics & Markets

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