The COVID-19 pandemic could produce a 3.3 per cent contraction in the global economy by the end of 2020, a significantly worse downturn than the 2.1 per cent experienced in 2009. It is already wreaking havoc across a number of sectors, and could have a major impact on already vulnerable developing economies.

COVID-19 has already spread to virtually every country in the world and cases almost everywhere are increasing. The lockdown measures put in place to contain it are curtailing economic activity, driving up unemployment, and depressing international trade. They have forced central banks and governments to commit trillions of dollars to keep households and companies afloat and prevent financial markets from seizing up.

The collapse in the services sector has been particularly savage

The collapse in the services sector has been particularly savage, with hotels, restaurants, bars and cafes all effectively closed for the duration of the lockdown. Many services purchasing managers indices plummeted from a reasonably healthy 50-55 at the start of the year to below 30 by the end of March.

This has contributed to sharp increases in unemployment rates across a variety of countries. Norway’s jobless rate jumped from just above 2 per cent in February to 10.4 per cent as of 24 March, while US initial jobless claims hit more than 6.6 million in the week ended 28 March, on top of the nearly 3.3 million registered in the previous week. Though much of this unemployment is likely to prove temporary and a large portion of furloughed workers are unlikely to show up in headline unemployment rates in many countries, the impact on labour markets is unprecedented.

HSBC forecasts generally assume that the lockdown measures, particularly in Europe and the US, are gradually lifted from May onwards, initially by easing some social distancing measures and gradually allowing more businesses to open up. But, the longer the suppression measures remain in place, the worse the picture becomes. Even strong companies may struggle to keep their existing staff on their current pay while people on temporary contracts and the self-employed, who in many countries are not covered by government support, would have little prospect of a return to work.

Millions of workers in advanced economies who have been furloughed would not have jobs to return to and, assuming government measures were to remain in place across the advanced world, a larger and larger share of companies and households would be on some degree of state support.

Though the developed markets of the West are currently at the centre of the storm, emerging economies may soon be subject to severe financial shocks as budget deficits widen and credit downgrades become more frequent. Further regulations may even be considered, but only adopted as a last resort and the International Monetary Fund has already received requests from dozens of strained countries around the world. The Fund is seeking more financing from their wealthier members that has not so far been forthcoming.

While policymakers are hoping that rate cuts, asset purchases and liquidity measures, as well as the targeted fiscal support, will help tide the private sector over a brief, though very deep, economic contraction, a more prolonged recession will have a more lasting impact on public finances everywhere. Government debt burdens will be much bigger.

This may call into question the sustainability of social safety nets, and raise concerns about whether austerity and higher taxes beckon in the longer term.

Other longer-term implications of this global pandemic relate to protectionism and nationalism, which were already on the rise. Early signs are that this will not reverse. Although world trade growth is set to be very weak over the next year, regulation around much of the global goods trade can be expected to resume normally once the pandemic is contained.

There will, however, be some lasting restrictions for certain sectors and products, most notably in the medical sector, in terms of re-shoring of some production or restricting exports, as well as greater scrutiny over FDI flows. There could also be a more lasting impact on migration flows, as well as investment more broadly, which in turn would have implications for productivity growth.

Note: Additional analysis from James Pomeroy, HSBC Global Economist.

Key GDP forecasts (per cent/year)

2019 2020f 2021f
World 2.6 -3.3 5.4
Developed 1.7 -5.9 5.5
Emerging 4.0 0.5 5.2
US 2.3 -6.5 6.0
Mainland China 6.1 3.0 6.5
Japan 0.7 -4.1 2.8
India 5.3 0.0 8.1
Eurozone 1.2 -6.4 6.1
UK 1.6 -5.5 6.3
Russia 1.3 -1.5 1.2
Brazil 1.1 -2.7 2.6

Source: HSBC Global Research

In focus – UK rescue package

After just a few weeks in the job, Rishi Sunak, UK Chancellor of the Exchequer, is now presiding over an unprecedented fiscal expansion that, in the view of Elizabeth Martins, HSBC UK Economist, will undo almost all of the efforts made by his predecessors over the last ten years to reduce the deficit.

The cost of the rescue scheme is highly uncertain, but HSBC estimates the Jobs Retention Scheme alone could increase borrowing by GBP36 billion, with the total package coming in at around GBP84 billion (4 per cent of GDP). HSBC expects the UK economy to take a significant hit from COVID-19, seeing a contraction of 5.5 per cent this year, with a corresponding GBP70 billion increase in public borrowing.

The only good news for Mr Sunak is that inflation forecasts and interest rates are also lower. That should save the government around GBP10 billion in 2020/21 if sustained, bringing the budget deficit to 9.3 per cent of GDP in 2020/21, compared to 2.1 per cent last year. Gilt issuance is expected to rise to GBP260 billion this year, but quantitative easing purchases provide a supportive backdrop for net supply over the next few months.


Analyst Certification

The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Janet Henry, James Pomeroy, Elizabeth Martins.

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