20 March 2020
The global economy is in a precarious position. Whatever definition you use for a recession, we are in one. The question is not whether there will be a global recession, but how deep and long will it be. To prevent this recession evolving into a depression, governments must be bold and creative in deploying new, comprehensive and large-scale fiscal tools, which specifically address the current crisis, rather than solely relying on the existing tool kit designed for crises past. The multitude of policy measures announced in the major economies over the past few days is certainly encouraging but more will be needed to help countries – and their people - cope.
Recession in 2020, sluggish in 2021
As containment measures designed to slow the spread of Covid-19 also halt economic activity, we expect GDP growth in most developed countries to contract in 2020, with two or three quarters of deeply negative growth. The contraction in the second quarter is likely to be on a scale never seen before. Regions will tentatively start to grow again towards the latter part of 2020, but the recovery is likely to be weak. Do not expect V-shaped graphs.
Indeed, our current base case, a ‘protracted rebound’, suggests a laboured climb dragged backwards by a negative feedback loop between China and the rest of the world. Despite the nearly full resumption of activity, China – past the supply shock - will face a huge fall in demand as the global economy contracts. In a worst-case scenario, China’s economy could also contract over the year, but it’s more likely to have low single digit growth in 2020, similar to levels we had been accustomed to in developed markets.
Double whammy of oil and virus shocks will spill over into economy
Second order effects from the Covid-19 shock, such as the unwinding of excesses accumulated in the economic system during the post-financial crisis period, are also likely to hit growth.
Systemic risks stemming from corporate leverage are already resurfacing, with the US energy sector now in the spotlight. The double whammy of the virus disruption and the recent collapse in the oil price is set to unleash a wave of corporate sector defaults over the coming weeks. This will spill over into the real economy and financial markets.
The high leverage of households, excesses in the housing market, and the precarious fiscal positions of many developed and emerging markets are further areas of vulnerability that, if unwound, could lead to further dislocations, magnifying the shock. Under our current base case scenario, we expect some reversal of the excesses, but, for now, not enough to trigger a fully-fledged financial crisis.
Eurozone faces perilous situation, but ECB bazooka helps
We think the Eurozone is the most exposed of all the regions. It already faced a weak growth outlook before this crisis, but the virus-related shock presents one of the biggest - if not the biggest - challenge the member states have seen so far.
Existing structural fault lines, the unfinished integration within the union, as well as the lack of political cohesion, make the Eurozone particularly vulnerable to another crisis. It is possible, however, that this one will make the options of fiscal union and debt mutualisation more palatable, possibly triggering further integration, which is the only way for the bloc to remain intact over the long term.
Meanwhile, the European Central Bank is back to its ’whatever it takes’ mode. Its €750 billion Pandemic Emergency Purchase Programme (PEPP) announced on 18 March is a formidable new weapon. The combination of €20 billion of monthly purchases announced in September 2019, the €120 billion program announced 13 March, and the PEPP, implies monthly purchases of more than €100 billion (if spread equally), beating the previous peak purchases of €85 billion for several months in 2016. The PEPP has fewer constraints than previous programmes and should bring Italian yields back down, buying European governments precious time to coordinate further fiscal responses. But this is not the last weapon the ECB will have to deploy in this crisis.
Many moving parts
The question of how bad the impact of the virus on the economy and markets will be is highly complex. Our scenario analysis suggests a wide range of outcomes, from a mild global recession with contraction in developed and some emerging countries to a deep 2020 recession encompassing all regions. The difficulty for economic forecasting in this environment is that events are highly fluid, with new daily developments literally rendering yesterday’s assumptions obsolete. Because we know so little about the virus - its spread, treatment, duration and the reliability of case statistics - and so little about the potential effectiveness of policies and the behaviour of consumers and firms in such an unprecedented situation, it’s extremely difficult to model the effects on the economy with high level of conviction.
As the virus progresses, we will be able better to understand all the moving parts and how they interact. We are entering a new phase in the global economy, matched by new monetary tools and fiscal measures. Investors will have to adapt to the new paradigm.
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.
ED20 - 083