Summary

  • The COVID-19 pandemic has dealt a historic shock to the world economy, with Q1’s decline alone comparable to the peak-to-trough decline in the worst recession before the 2008/09 financial crisis. At the same time, the anticipated cumulative 12% drop for the G7 in the first half of this year more than doubles the hit from that historic downturn a little more than a decade ago.
  • The heightened concern and pessimism over the current situation permeated into expectations for growth; however, these downbeat views largely neglected to take into account what actually happened to the global economy.
  • The fact that the downturn, sharp as it is, is the result of an exogenous shock to the supply-side of the economy rather than structural issues impacting demand, making it very different from previous experiences. Typically, in scenarios of this kind, activity can normalize fairly quickly once those external forces subside, resulting in a rapid ‘V’-shaped rebound in momentum.
  • Indeed, data covering everything from housing to consumer spending to construction to industrial production across the globe are exhibiting a conspicuously sharp inflection from the lows registered amid widespread shutdowns in April.
  • There is still plenty of ground to make up before we can consider things are ‘good’ in an absolute sense. How the recovery progresses from here depends on whether or not the rolling back of
    emergency measures to stem to the spread of infection can continue unabated — a process that is being complicated by the accelerating spread of infection in the US and major EM economies.
  • To the extent that the non-zero odds of a renewed large-scale lockdown can be diminished — for example, by indications that the contagion is coming under control, or there is progress on the development of therapeutics — that would present upside risks to the outlook. It still appears that the balance of risks is tilted in this direction.
  • As such, risk assets appear primed to continue on their road to recovery from their crisis lows, as investors continue to pare the undue weight assigned to the worst-case scenario outcomes.
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