Economic and financial risk insights – Watch out for paradigm shifts

We expect a global recession in 2020, with economic activity contracting by 1.2%, not far off the -1.8% drop in 2009. The partial economic shutdown is likely to remain in place through most of Q2, assuming new infections in Europe and the US peak in April/May, followed by a gradual return to growth in 3Q (see chart a). We project an atypical recession which will be twice as deep and more than twice as fast as the Global Financial Crisis (GFC), but relatively short lived.

Key Takeaways:

• We expect a global recession with global economic activity contracting by 1.2%.
• We expect real GDP to fall 3% in the US, and 4.5% in the Euro area in 2020.
• The immediate output loss will be twice as deep and more than twice as fast as during the Global Financial Crisis.
• Output lost, especially in the service sector, will not be fully recovered.
• Interest rates will remain low and central banks are likely to cap yield increases to accommodate the massive fiscal stimulus.
• The balance of risks remains tilted to the downside. We see a 25% likelihood of a credit crisis.
• The risk of "stagflation" has increased given unprecedented fiscal stimulus and potential debt monetisation.