March Economic Update - Coronavirus: The unknown and unprecedented risk
The virus, along with its impact on economies and markets, is posing an unknown and unprecedented risk. Economic forecasts are surrounded by even more uncertainty than normal, including our own. Read our latest thinking
Financial markets and the global economy are still in the stranglehold of a real global shock that doesn’t stop at borders and can't be tamed by words or negotiations: Covid-19. The outbreak of the new coronavirus comes at a time when the global economy was about to gain traction again on the back of the Phase One Deal between the US and China, a turning inventory cycle and a bottoming out of global manufacturing. Instead, the virus, along with its impact on economies and markets, is posing an unknown and unprecedented risk. Economic forecasts are surrounded by even more uncertainty than normal, including our own.
Inside this edition:
Coronavirus: The unknown and unprecedented risk
Financial markets and the global economy are still in the stranglehold of a real global shock that doesn’t stop at borders and can't be tamed by words or negotiations: Covid-19
US: Hope for the best, prepare for the worst
Coronavirus concerns are gripping the nation as an initial supply shock morphs into a financial shock and now a demand shock. The Federal Reserve has leapt to action, but we are still in the early phase. The economic disruption will likely intensify in the coming weeks.
Eurozone: Just when things were looking up
The eurozone economy started the year on a stronger footing. But the coronavirus disruption is likely to become a major drag that might only peter out in the course of the second quarter. Negative GDP growth in the first half of the year now looks likely
UK: Rate cut coming as consumption risks build
Like elsewhere, there is a rising risk that the Covid-19 demand shock will cause a decrease in GDP in the second quarter. We expect the Bank of England to cut interest rates later this month, although the bigger focus for markets should be the forthcoming budget, which arguably offers greater scope to tackle the virus impact
China: The supply chain is still broken
The spread of the coronavirus in China seems to be slowing down, but the global supply chain remains broken. As a result, we've revised our growth forecast to 4.4% YoY in 1Q20 and 5.2% for this year
Japan: in search of a paddle
Last month, we pre-emptively took an axe to our growth forecasts - looking back on it, we may still have work to do
FX: The dollar deflates
Given the US dependency on the capital markets for financing, the Fed looks set to be at the forefront of the monetary response to the Covid-19 crisis. The end of US ‘exceptionalism’ in terms of growth and interest rates means that we should now be looking at a temporary 5-10% correction in the dollar. We revise our 2Q20 EUR/USD forecast up to 1.15
Rates: Getting dumped
Risk assets were the darlings of 2019. Tainted now with virus risks, they are seriously stressed. Core bond markets are the ultimate safe haven. Even 3-month German bills at -0.7% are deemed an acceptable alternative versus the bigger risk implied in equity markets. It's
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