Economists warn recession will be worst of the century

As financial markets and society process the ongoing threat posed by the coronavirus, economists now expect a global recession — which will be worse than the one triggered by the 2008 to 2009 global financial crisis — to hit this year.

COVID-19 has been hitting health-care systems and markets across the globe since late December. Stock markets have plummeted as countries around the world grapple with the virus, lockdowns and reduced output.

Global growth for 2020 is now heading toward zero, according to ratings agency S&P Global Ratings. The company had forecast 2020 global GDP growth at 3.3% at the end of last year.

"I find it very hard to think we're not going into a global recession," said Karen Ward, London-based chief market strategist for Europe, the Middle East and Africa at J.P. Morgan Asset Management. "The very initial data we're going to get for Q2 are going to be horrific — numbers we've never seen before in terms of the GDP collapse. The single-quarter numbers will make 2008 look like it was a doddle."

Growth in 2009, during which the global financial crisis came to an end, was -0.4%, according to In-ternational Monetary Fund data.

A 1% to 2% contraction is forecast for the global economy in 2020, said Mauricio Vargas, senior global economist at Union Investment Institutional GmbH, based in Frankfurt. "I think the coronavirus is a fundamental game-changer for the economy."

Union Investment expects lockdown measures to depress private consumption at a rate of around 30% to 40%, assuming such strict restrictions are in place for most of the developed world for at least four to five weeks. "And there's a very big downside risk that if the containment measures have to be in place for a much longer time. Every week of containment and lockdown … counts for 0.7% to 1% of GDP," Mr. Vargas said.

Economists at other money managers agree that a global recession is in the cards.

"We are headed for a global recession, there are no doubts about that," said Peter van der Welle, strategist at Robeco Institutional Asset Management in Rotterdam, Netherlands.

While it's a concern that global markets are headed into a recession in 2020 overall, with some expecting growth to fall into negative territory, economists are generally accepting of that fact. Forecasting just how deep and lasting the recession could be is a bigger problem.

"Knowing Q2 is going to be pretty dire isn't really the problem; the question really is, what does Q3 and Q4 look like?" Ms. Ward said.

One factor in answering that question is how many times lockdown measures and the disruption to general life and workforces occur as a result of the virus.

"The economic question we're grappling with is, how many shutdowns?" said Richard Barwell, head of macro research at BNP Paribas Asset Management in London. "If it is one and done, we have an economic response once: There is pain and we socialize that cost. But if there are multiple shutdowns, we are paying that price or socializing that cost every time. We're looking for good news about antivirals, diagnostic and serological tests and herd immunity, because that is what will give us a little more confidence that (we) won't have to pay this cost twice or thrice."

There are four potential recovery scenarios: a V-, U- or L-shaped recovery or an inflationary outcome, the latter of which is least likely, said Shamik Dhar, London-based chief economist at BNY Mellon Investment Management.

"The first three really focus on the disease. We get a V-shaped recovery if, as we much all hope, the peak hits around high summer. New cases start to fall, numbers of recovered start to rise and, crucially, we don't get a second wave toward the end of the year," Mr. Dhar said.

Under that scenario, lockdowns would gradually be removed, "but nevertheless sufficiently quickly to enable parts of the economy to bounce back very quickly."

A U-shaped recovery follows the same course of the virus but with "an additional recessionary effect: a huge sell-off in financial markets. In a U-shaped scenario, it takes a lot longer for things to right themselves, and it's really around 2021 that things start to kick in," Mr. Dhar said.

An L-shaped recovery means the coronavirus lingers, lockdowns last longer and a second wave of infections could hit.

"The length and duration of this downturn fundamentally accelerates what was an underlying trend anyway: deglobalization," Mr. Dhar said.

That means borders remain shut, supply chains are disrupted for longer and people cannot return to work. "That mounts up and you get a permanent loss in output. You do get a recovery but not all the way back to where you were," he said.

Mr. Dhar put probabilities of scenarios at 35% each for the V- and U-shaped recoveries, a 20% likelihood of an L-shaped recovery and a 10% chance of an inflationary scenario.

Moves by central banks and governments, which unveiled trillions of dollars in stimulus across the globe through monetary and fiscal policies, were appropriate and well-thought-out, sources said.

"We want suspended animation: Households and businesses want to be sufficiently supported in this period of revenue or wage collapse such that they don't start to make these second-round effects," such as cutting staff or household expenditures, J.P. Morgan's Ms. Ward said. "So that's how recessions get deep."

Policymakers "have not dragged their heels. And then we know that good fiscal policy is going to result in massive amounts of government debt — central banks played their cards really well and are going to take the debt out of the market. They have taken control, (provided) vast swaths of liquidity and are doing what they can in the credit market," Ms. Ward said.

However, stimulus will be less effective than it would be in a financial-led recession since a big part of the economic hit is coming from employees being told not to go to work.

"Market confidence can be helped, but the main effect will be over the medium-run as the subsequent recovery proves brisker than otherwise (thought)," said Eric Lascelles, chief economist at RBC Global Asset Management Inc. in Toronto. "What I care about most in terms of the government response is making sure an artificial and temporary decline in output doesn't turn into something long-lasting and organic — that means avoiding insolvency (of businesses) and ensuring households don't lose their homes."

And while investors and economists like to look back at past performance or examples for indications of where events might lead, comparisons to the current virus and ensuing market collapses are hard to come by. However, some are using the 2008 global financial crisis as a loose comparison — if only to demonstrate how bad things might get.

"From peak to trough, COVID-19 is likely to deliver a larger blow than the financial crisis," though the shock should be shorter than the "lingering effects of the financial crisis," Mr. Lascelles said. "Governments are putting the patient into an induced coma here — this increases the chance of survival, but at considerable financial and economic cost. History tells us pandemics are temporary affairs."