• What if we get a second round of lockdowns because the virus resurges? How great will the economic damage be? What will happen to unemployment and how can governments and monetary policymakers still intervene to protect jobs, businesses and banks?
• These are questions that we as economists are asked every day. There are also the optimists who dismiss the idea of a renewed lockdown. They ask us how fast the recovery will be, now that the major economies are out of lockdown and a vaccine is (most likely) on the way.

200827-Global-Monthly-What-if-there-is-a-second-lockdown-and-what-if-there-isnt.pdf (409 KB)

Negative scenario: a second wave of infections and a second lockdown

If the infection rate continues to rise and the virus slips out of control, hospital capacity would once more be stretched to breaking point and a second lockdown would be inevitable.

This scenario assumes renewed lockdowns in Q4 2020 and Q1 2021, again triggering a global economic contraction, albeit to a much lesser extent than earlier this year. China’s economy would also shrink in Q1 2021, but full-year growth would remain positive.

Though still considerable, the economic damage would be less severe than during the first lockdown. Firstly, because the measures would be more locally targeted, avoiding unnecessary restrictions. Secondly, the initial fear of the virus will have subsided, making consumers less scared to venture into the public domain.

At the same time, escalating social unrest and less acceptance of sweeping restrictions could engender chaos and impede efforts to control the virus. All in all, the consumption shock would probably still be substantial.

Business investment, which already sank during the first wave, would slide further. The ensuing rise in bankruptcies would erode employment. What’s more, anticipating an economic decline, consumers would start to save rather than spend.

All of this points to a double dip. World trade would once again suffer a major contraction as countries close their national borders to stem the second wave of infections.

Two risks that have been eclipsed by the pandemic, but remain highly relevant for the economic outlook, are Brexit and the US-China trade conflict. If Brexit ends with the UK trading on WTO terms after December 2020, European commerce will take a hit. In addition, escalating rhetoric over the US-China trade conflict ahead of the US elections would impair sentiment, while a Trump victory would raise the spectre of chaotic disruption to world trade.

The global economy would be plunged into renewed recession, with monetary policymakers powerless to prevent a tightening of financial conditions. Risky asset spreads would widen, sentiment would deteriorate sharply and investors would flee to the dollar and yen safe havens.

In this scenario, a sustainable recovery would not take hold until a vaccine becomes widely available in 2022. In the course of 2023, the economy can then move back towards trend growth.

Baseline scenario: Second wave less severe, no renewed lockdowns

Although the risks of a renewed lockdown are still substantial, our baseline scenario assumes that the virus remains reasonably under control. Local outbreaks will continue (as at present) and fresh measures will be taken where necessary, but no national lockdowns will be imposed.

Pending the widespread availability of a vaccine – which, going by the WHO prediction, will be in late 2021 – the economic recovery will be slow at best. The global recovery in Q3 2020 is primarily technical and far from spectacular. High frequency consumer spending indicators already suggest that the recovery, notably in the eurozone, will stall at between 90 to 98% of the pre-pandemic level.

We expect social distancing to remain the norm until a vaccine becomes available, and that consumers will stay cautious and even cut down their spending in response to local outbreaks. Large events, international travel and tourism will also remain well below pre-pandemic levels, despite businesses and consumers beginning to adapt to the new circumstances.

Even without a second wave and renewed lockdowns, world trade will suffer sharper contraction than witnessed during the financial crisis. Despite the substantial catch-up growth in June (+7.6% m-o-m), world trade volume still contracted in Q2 by 12.5%. Global industrial output also showed a clear recovery in June (+4.8% m-o-m), but even then was still 8% below the level at year-end 2019.