Fra Handelsbanken:
Recession is now a clear and present danger
It now appears inevitable that the COVID-19 outbreak will have a significant negative impact on global and Danish GDP growth. The draconian measures taken by governments in their attempt to cushion the severity of the virus’ spread, the meltdown of financial markets, the escalation in the oil price war, and the very likely hit to discretionary spending and investments all indicate that recession is now a major and real threat.
Of course, the spread and duration of the virus, as well as the policy response, will determine the girth of the decline, but a likely scenario is that Denmark will have close to zero growth this year and gross unemployment will rise up towards 5 percent by the end of the year. Benign scenario seems like wishful thinking.
The speed of the spread of COVID-19 outside China and the measures being taken by authorities to cushion the severity of the outbreak have made the negative economic impact ever more obvious. We have so far operated with two scenarios regarding the impact of the virus and with the help of Oxford Economics’ global model have looked at possible outcomes for the Danish and global economies.
Scenario 1: Contained outbreak. The spread of COVID-19 tails off quickly and economic activity in China, South Korea and Italy starts to normalise during the second quarter. In this benign scenario, global growth would be 0.5 p.p. lower in 2020 and growth in Denmark would be around 0.3 p.p. lower compared to our forecast in January.
Scenario 2: Pandemic. The virus continues to spread rapidly in many countries in the first half of the year. Quarantines, travel bans and increasing uncertainty hit production, investment and consumption hard, and leads to a negative demand shock on top of the initial supply shock.
Those developments lead to a global recession and a 1.3 p.p. reduction in Danish GDP growth this year. Given that we already expected the Danish economy to slow this year, even before the virus outbreak (1.2 percent in our January forecast), it leaves GDP growth at close to 0% or below. The unemployment rate would increase
dramatically.
As things are changing rapidly on a daily basis, it is clear that the uncertainty regarding the economic consequences of the virus is enormous. However, given the recent extremely negative trends in financial markets and the WHO now declaring the outbreak a pandemic, the first, more benign, scenario is looking less and less likely. Currently, we assess that
we probably are somewhere in between the two scenarios, but also that the recession threat in scenario 2 is approaching at an eerie speed.
Wherever we end up will of course depend on the continued spread and duration of the virus, as well as the responses by policy makers. On a positive note, it appears that China’s draconian containment measures have got the outbreak under control. However, the
response from the US authorities seems so far to be inadequately behind the curve. Also, the complete lockdown of the Italian economy will have negative repercussions for the rest of Europe; the risk is that other countries will have to implement the same sort of measures at some point.
In addition, the recent collapse in oil prices poses an added threat to the global economy, in our view. In ‘normal’ times, a sharp drop in oil prices is seen as a boon for oil-importing countries, leading to higher consumption growth, for example. In combination with the virus outbreak, it is very uncertain if lower fuel prices will lead to higher consumption, as uncertainty keeps households’ propensity to consume at bay.
Furthermore, lower oil prices – if sustained – will most likely also have a negative impact on the US economy, which today is a net oil exporter, and hurt the already somewhat distressed shale-oil industry.
