IHS Markit is looking past the horrific second-quarter drop in real GDP, and a deeper recession in 2020 than in 2008-09, to assess the shape and strength of the recovery. A V-shaped recovery in the manufacturing sectors seems plausible, once the large increase in inventories is worked off. However, the anticipated tsunami of small-business bankruptcies could further damage business infrastructure and challenge the recovery. For many of the consumer-facing service sectors, a U- or even L-shaped recovery seems more likely, given the expected reluctance of people to engage in activities that put them in contact with groups of other people (travel, entertainment, etc.). The damage to household and business finances (the plunge in the stock markets and rising debt levels) will also preclude a sharp snap-back in spending. All this assumes that once the pandemic is over, any return of the virus in local pockets is of limited consequence. If not, and if renewed restrictions are required, then a double-dip recession cannot be ruled out. The United States: A historic contraction in the second quarter, as social distancing shuts down large swaths of the US economy. We estimate real GDP declined at a 3.5% annual rate in the first quarter, and we look for a 26.5% annualized drop in the second quarter. We do not expect real GDP growth to turn positive until the fourth quarter of this year, reflecting our view that economic activity will not begin to improve materially until new US cases of the COVID-19 virus are driven down substantially. Europe: A severe recession is unavoidable. The IHS Markit composite PMI output index for the eurozone plunged by around 20 points in March, four times the magnitude of the prior record monthly decline at the height of the 2008-09 global financial crisis. Consequently, we now predict the virus-induced recessions this year will be significantly deeper than during 2008-09. The most severe quarter-on-quarter contraction will occur in the second quarter, when eurozone real GDP falls at a quarterly rate of 5.7%. Although they will not prevent deep recessions in the near term, stepped-up fiscal and monetary policy measures can help to avoid a prolonged eurozone downturn by preserving businesses and jobs. Japan: Postponing the Olympics will hurt 2020 growth, but massive stimulus may help. Even before the worst of the COVID-19 virus pandemic was apparent, Japan's economy was in recession. The pandemic has hurt trade and tourism and resulted in a one-year postponement of the Tokyo Olympics. In response to the growing crisis, Prime Minister Shinzo Abe recently declared a state of emergency and announced a stimulus package of JPY180 trillion (roughly 20% of GDP). Based on past observations, IHS Markit believes the effective stimulus will be much smaller than the announced package. We project Japan's economy will contract 3.3% this year. China: Collapsing world demand and weak stimulus will challenge mainland China's recovery. Most of the January-February data were the worst in their reported history, as the government's lockdown measures to combat the COVID-19 virus outbreak paralyzed most facets of mainland China's economy. The necessary conditions for recovery appear to have materialized. The national average of large industrial enterprises' work resumption rate has reached 97%. Recovery is lagging in more resource-constrained small and medium-sized enterprises, with only 80% of them having resumed operations. Two large obstacles could hamper mainland China's recovery: crumbling world demand for its exports and the hesitation of its government to provide massive stimulus. Stimulus programs amount to about 2% of GDP now, compared with 12% in 2009, which kept the economy growing during the global financial crisis. Other large emerging markets: The next wave? Rising infection rates in the emerging world (including some of the largest economies, such as India), collapsing world trade, and depressed commodity prices are among the daunting challenges facing the emerging world. To make matters far worse, these economies are now facing massive outflows of capital — nearly $100 billion since the beginning of the year (four times as big as during 2008-09). As a result, in the past three months many emerging markets, such as Brazil, Mexico, Russia, and South Africa, have seen their currencies crash by more than 20%. Because of these depreciations, the burden of foreign debt for emerging markets has risen sharply, leading to a wave of sovereign debt downgrades. Bottom line: As dire as these predictions are, they are likely to be revised down. Nevertheless, there is a good chance we will see the light at the end of the tunnel by the end of 2020. — SG
