Covid-19: The scenarios, the lockdown, the reaction, the recovery

It’s often said that economists live in ivory towers, taking a macro, holistic or sometimes nerdy view on things without really knowing what it is all about.

I will not even try to debunk these myths but the truth is that right now we're all in the same boat. The outbreak of Covid-19 affects everyone. A virus doesn't stop at borders, a virus does not distinguish between jobs, lockdowns, social distancing, empty shelves in supermarkets, death tolls, reinventing the work-life balance in times of home office and many more. What sounded like the script from a Hollywood movie (I can recommend the 2011 movie “Contagion”) at the start of the year has become a reality.

A reality with unprecedented economic consequences.

It is an abrupt stop of economic activity... a virus-driven ice age

It started as a supply-side shock, on the back of supply chain disruptions in China, which then turned into a demand-side shock, with first China going into lockdown and then other countries following and has now transformed into a standstill of many sectors of the economy. Recession is not the correct description of what we are currently witnessing. It is an abrupt stop of economic activity, from 100 to zero in just a few days or weeks. A virus-driven ice age.

Governments across the world have to balance health care issues with economic interests. The lockdowns could be compared to a medically induced coma to ‘flatten the curve’. The enormous rescue packages from both governments and central banks are the vital lifelines to make sure the patient is still in good health once brought back to life.

In these times, it's more difficult than ever to come up with adequate economic forecasts. The best we can do is to describe several possible outcomes, based on different scenarios regarding the length of the lockdown and the spread of the virus. As a result, we would like to present four scenarios in this Monthly Update.

Our base case scenario assumes a U-shaped recovery with a wide bottom, as social distancing and travel restrictions are likely to stick, even beyond the lockdowns. After a severe contraction of most economies in the first half of 2020, a subdued recovery would follow, with most economies returning to their pre-crisis levels in 2022. In more adverse scenarios, the return to pre-crisis levels could take until 2023 or even later.

While the different scenarios give some guidance on the economic impact of Covid-19, there are currently many other important issues. Do central banks still have any ammunition left? What is the endgame for fiscal policies? Which eurozone countries are the most vulnerable? Is this the time for a Eurobond? And what could an exit from the lockdown measures look like? Also, at some point in time, the crisis will be over. How will the world look then?

Our Research Team provides some food for thought in this edition of our Economic Monthly Update.

In the meantime, stay healthy.