The impact of the Covid-19 pandemic on the global economy and financial markets is unprecedented within the past 50 years in terms of its direct effects on global supply and demand. The timing of Covid-19 is particularly challenging following the US–China trade war and the ongoing decoupling between the two countries, the forthcoming US election, and the collapse in the oil price (a new low was reached on 20 April when the May contract for West Texas Intermediate briefly traded at US$-39.55/bbl).¹

Given that the virus started in Asia, moved through Europe and then on to the US, the damage left in its wake varies significantly regarding case numbers and economic impact, with the latter depending on a country’s reliance on exports, tourism and service sectors, and vulnerability to changes in global trade patterns.

In less than three months, the Covid-19 virus has spread to more than 200 countries.² By mid-April 2020, case numbers had hit two million and they surpassed three million at the end of that month. A number of countries had surged past their peak for new cases reported daily (see Figure 1). Kristalina Georgieva, Managing Director of the International Monetary Fund, has predicted that more than 170 of its 189 member countries will suffer falling output per head in 2020. “The bleak outlook applies to advanced and developing economies alike. This crisis knows no boundaries. Everybody hurts,” she said.³

The Organisation for Economic Co-operation and Development (OECD) has said that the lockdowns imposed in many regions of the world will directly affect sectors; amounting to up to one-third of GDP in major economies. The OECD also predicts that each month of containment means a loss of two percentage points in annual GDP growth. Even once these measures begin to be eased, it adds, “the extent of any subsequent recovery in output will depend on the effectiveness of the policy actions taken to support workers and companies through the downturn and the extent to which confidence returns.”⁴

Not only has the pandemic transformed the economic outlook, with a deep global recession for 2020 regarded by most as inevitable,⁵ but the policy landscape has changed as well. The problem, noted Deutsche Bank’s market strategists Oliver Harvey and Robin Winkler on 20 March 2020, is not one of demand shock but rather supply shock that is now spilling over into demand.

“Consumers did not initially stay away from shops and restaurants because they were worried about their future economic prospects, but because governments told them to stay at home,” they reflect. “Holidays are not being cancelled to shore up household finances but because countries have closed their borders. Workers have not been furloughed from factories because of insufficient orders, but because employers are worried about the risk of spreading disease.” Their point is that the mass unemployment arising from the social distancing and lockdown measures lowers aggregate demand and the fiscal responses of the various stimulus packages coming from governments could drive up inflation while not being particularly effective.⁶

“The extent of economic impairment is broadly of the same order of magnitude for all regions,” explain the authors of Deutsche Bank Wealth Management’s report, From Monetary Magic to Fiscal Faith, which was published on 8 April 2020. They continue: “As a rule of thumb we estimate that around 1.5% of a country’s annual gross domestic product can be subtracted per month of lockdown. Hence, we expect a severe and sharp contraction around the world followed by a recovery in H2 once the measures fade, and a subsequent more muted expansion as the consequences of the crises need to be digested, including rising debt levels across all regions as the consequence of massive fiscal stimulus.”

Figure 1: Covid-19 case growth after 100 confirmed cases

Source: Deutsche Bank, WHO, CDC, Wordlometer

When doors are closed and plants mothballed, the corporate sector has much lower revenue and workers have much lower incomes. As a result, a government has to step in and replace that income by giving grants or loans to companies and workers, explains Torsten Sløk, Chief Economist at Deutsche Bank Securities.⁷ This rescue, he adds, has to be financed and the result is more government debt issuance, which further increases an already significant amount of government debt outstanding in a number of countries, most prominently the US.

An alternative way to raise money is for corporates to issue bonds that raise cash to keep them afloat through an extended lockdown. This option heightens the level of debt in the corporate sector. Similarly, households may have to increase debt levels; for example, if workers lose their jobs because of the virus.

Examples of major stimulus packages include the US’s landmark US$2.4trn Coronavirus Aid, Relief, and Economic Security Act, which comprises credit facilities for smaller firms as well as loans and grants to larger ones. Germany’s supplementary budget of €156bn (4.5% of GDP) is the biggest package among the major EU countries, with most of the money going towards emergency relief for small companies and the self-employed, along with easing access to basic security benefits and additional healthcare spending. Introducing short-time working, which eases the salary burden for companies without making employees redundant, is a key element and was already heavily used during the global financial crisis. France has agreed on an emergency fiscal spending of €45bn (1.9% of GDP), which includes measures for partial unemployment and simplification of unemployment schemes. The aim here too is that companies do not have to lay off staff who they will need after the crisis. In order to provide companies with cash flow, the state will give a guarantee of up to €300bn for new bank loans.

As the Deutsche Bank Research team notes in its 30 March report, Impact of Covid-19 on the Global Economy: Beyond the Abyss, the timing and shape of the recovery will be determined by several factors, including:

• The course of the pandemic and effectiveness of efforts to contain it;
• Depth of the initial decline in activity; and
• Magnitude, timing and effectiveness of macro policy responses.

Predictably, the city of Wuhan in China – the location of the first reported cases of Covid-19 – was also the first to end its lockdown, and after 76 days it reopened for business. Other Asian economies such as South Korea and Singapore have shown how early containment and proactive tracking and tracing policies – via the deploying of mobile phone and personal data technology – have been important elements of those countries’ exit strategies, while vaccine research continues.

Sources

¹ See Covid-19 and commodities at flow.db.com
² See coronavirus.jhu.edu
³ See imf.org
⁴ See Towards a silver lining at flow.db.com
⁵ See fitchratings.com
⁶ See End of the tunnel at flow.db.com
⁷ See endnote 4