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COVID-19 recession could be one of the deepest and shortest on record

Open-access content Thursday 9th April 2020 — updated 10.15am, Friday 1st May 2020
Authors
CHRIS SEEKINGS

A global recession brought on by the COVID-19 pandemic could be one of the deepest, but also one of the shortest, on record, according to research published today by Swiss Re.

web_recession_ _iStock-618516848-(1)

The reinsurance company's research suggests that global economic activity will contract by 1.2% this year, with GDP falling by 3% in the US, and 4.5% in the euro area.

The partial economic shutdown is forecast to remain in place through most of the second quarter if new infections in Europe and the US peak in April/May, followed by a gradual return to growth in quarter three.

Swiss Re said that it expects an atypical recession which will be twice as deep, and more than twice as fast, as the financial crash of 2008, but relatively short lived.

This is assuming containment measures for the pandemic are successful and safely allow staggered exits from the economic lockdowns, and that policy action is coordinated across the world.

“Still, we shouldn't underestimate the longer-term economic and political implications that could bring paradigm shifts, such as quicker adoption of digitalisation, a larger role for governments and a monetisation of government debt,” said Swiss Re group chief economist Jérôme Jean Haegeli.

“On the interest rate front, we expect government bond yields to remain low and central banks to cap yield increases to accommodate the massive fiscal stimulus, if needed. 

“In terms of medium-term risks, we believe the likelihood of a 'stagflation' has increased on the back of unprecedented fiscal stimulus and potential debt monetisation.”

Swiss Re also said that the balance of risks remains tilted to the downside, with a 25% likelihood of a credit crisis.

This comes after financial services company Allianz said that it expects a “U-shaped recovery” in global economic activity in the second half of 2020 and 2021, assuming coronavirus containment measures are successful.

However, a recession could run into next year if there is a protracted economic downturn due to a 12-18 month health crisis, with possible reinfection, and policy mistakes made, leading to a “L-shaped recovery".

Allianz chief economist, Ludovic Subran, said that the world will be “a different place” once the coronavirus crisis has passed.

“COVID-19 will certainly change how we see investments in health, define inclusive capitalism, China’s soft power; globalisation, the fight against climate change, and maybe how we save for life events,” he added.

Picture Credit | iStock
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