Global recovery to take years
The global economy is in the midst of the worst downturn since the 1930s. China's real GDP plunged a record annual rate of 33.8% quarter on quarter (q/q) in the first quarter of 2020. On a comparable basis, IHS Markit estimates that US real GDP will plummet a record 36.5% or more in the second quarter. Modest recoveries are expected in subsequent quarters. For calendar year 2020, we project real global GDP to fall 5.5%. This is more than three times the contraction in the 2009 aftermath of the Global Financial Crisis. Given the unrelentingly bad news and data on the coronavirus disease 2019 (COVID-19) virus and the economic carnage, there is high likelihood that the near-term outlook will get worse before it gets better.
Nevertheless, attention is now beginning to shift from the depth of the recession to the shape and strength of the recovery. The massive uncertainty about the path of the virus makes any assessment about the economic outlook especially challenging. The current IHS Markit baseline forecast is predicated on three working assumptions: 1) that new global infections will peak by the late summer (with localized recurrences likely); 2) that an effective and widely offered vaccine will be not be available until late 2021 or early 2022; and 3) that the lockdowns will continue to be eased gradually throughout the summer and autumn. These imply that the world will be inching toward "normalcy" over the coming year.
The recent experience in China is instructive. In Wuhan, while most factories are up and running, restaurants are mostly empty. More broadly, the Caixin China General Services Purchasing Managers' Index™ (PMI™), compiled by IHS Markit, remains in contraction territory. The pattern in other economies, which are opening early, is similar—consumers remain ultra-cautious. Thus, while growth in the hardest hit economies may snap back briefly, the momentum will soon fade. This is sometimes called a "square-root-sign recovery."
A combination of factors will make the post-crisis recovery unusually slow. A tidal wave of bankruptcies among small and large industries will make restarting the manufacturing sector more challenging than in typical recoveries. Moreover, the damage to the finances of households and businesses will substantially delay any return to old spending levels. Last, but by no means least, the fear of crowds will postpone any return to "normal" in the travel and leisure industries. Even massive stimulus will only offset a small part of plunging growth (roughly 0.4 percentage point in 2020 for the US economy). Crucially, any resurgence in the number of infections will only worsen these trends. The recent flare up of cases and re-imposition of restrictions in South Korea and parts of China are worrisome.
Bottom line: The fastest we can expect output in key economies to return to pre-pandemic levels is early 2022 (the exception is China, where the infections occurred earlier and recovery is now under way)—in many economies the recovery could be even more prolonged.