Recession deeper still, but worse and better outcome possible
The extension and widening of the lockdown in the Eurozone and the US has driven us to make a further downward revision of our baseline expectations for the economy in 2020. We also sketch a negative and a positive scenario, with the former slightly more likely than the latter.
All our scenarios, however, are subject to extreme uncertainty. Hence the more detailed look at our assumptions in this monthly.
In our baseline scenario the combination of longer and wider lockdowns causes more severe economic damage than we had assumed so far. In the US in particular, but also elsewhere, this is due to a concurrence of negative developments such as accelerating unemployment, a sharper slump in investments, more bankruptcies, tighter financial conditions and, finally, hard-to-resolve disruptions in the supply chain.
For the Netherlands, our assumption of a 2-month lockdown remains valid now that the cabinet has announced that the lockdown will stay in place until at least the May holiday. Our assumption that social distancing must be observed until at least the end of this year also remains intact. Despite these unchanged assumptions, we have also reduced our baseline scenario for the Netherlands in view of the longer and wider lockdowns being imposed in our key export countries.
Based on these developments jointly, our new baseline scenario foresees a somewhat deeper global recession as well as stronger second-round effects, which will delay the recovery and cause a double dip for the world economy around the end of this year. In this event, the eurozone will sink into a renewed recession in Q4 2020 and Q1 2021.Unfortunately, an even weaker development of the major global economies than sketched in this new baseline scenario cannot be ruled out. We have therefore drawn up a negative scenario with the lockdowns in the eurozone and the US lasting some 3 months.
In China, where the lockdown is already over, the greater fall-off in global demand for Chinese products and services is the main driver in the negative scenario.But there is also potential for a positive scenario. Such a scenario could occur if, for instance, universal testing demonstrates that more people than assumed so far have already developed immunity to the virus. In such a situation, public life could recover faster, pulling up the economy in tandem. In this scenario, there could be a growing perception in financial markets that the crisis will be short-lived. Against the backdrop of unprecedented global monetary accommodation, this could, in turn, translate into an accelerated easing of financial conditions (compared to the baseline scenario).