Damage to Global Economy Keeps Growing thanks to Ineffective Policy Responses to Spread of Coronavirus

- GDP forecasts slashed again at BofA
- West hasn't learnt lessons from Asia
- European GDP to fall 7.6% in 2020
- U.S. GDP to fall 6%

Recession store closures

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Economists at Bank of America Merrill Lynch (BofA) have advised clients they have yet again had to slash their forecasts for the global economy, blaming "the lack of an effective policy response to control the spread of the virus in developed markets and some emerging markets," for the move.

BofA say governments in western economies have failed to learn the lesson of China, which proved that the most effective policy in dealing with the coronavirus outbreak is to enforce a quick and strict lockdown.

"Each week of ineffective health policy adds roughly a week to the duration of the shutdown," says Ethan S. Harris, global economist at BofA. "This not only damages the current quarter but also means a deeper confidence shock and an even weaker post-shutdown recovery."

The warning comes as UK Prime Minister Boris Johnson on Thursday expressed concern that car journeys were increasing, a sign that the public is increasingly ignoring instructions for citizens to stay at home.

"Yesterday's data showed more people were using transport than in previous days," said Johnson. "Please do not leave your house unless absolutely necessary. It really will save lives."

There are suggestions from political journalists that the government might have to enforce stricter measures to further suppress the spread of the coronavirus, but such a move would surely knock economic growth further and push up a fast-rising unemployment rate.

Yet, the case of the UK provides a case-in-point for the team at BofA who say an inability to enforce a strict lockdown from an earlier starting point ultimately translates into greater economic damage.

Harris says the response by Asian countries to the disease leave Western countries with three key takeaways:

1) Governments must be fully transparent about the risks of the virus.
2) Policymakers must aggressively and consistently advertise to the public both the dangers of the disease and the behavior needed to limit its spread.
3) Social distancing must be applied consistently across regions with high levels of migration. Unfortunately, many countries have been slow to adopt these lessons, which likely means a longer fight to flatten the curve.

BofA now forecast European growth to fall by 7.6% in 2020 compared to a decline of 1.7% previously. They have cut U.S. growth to -6.0%, down from -0.8% previously.

"Even these forecasts are at risk if either region fails to follow through on a strong, national policy of social distancing. The only upside risk, in our view, is either a medical breakthrough or that the disease slows in warmer weather. Neither seems likely in the near term," says Harris.

BofA have revised their 2020 global growth from 0.3% to -2.7%. "This is considerably worse than the 2008-09 recession," says Harris.

Warnings that the current recession the world has slipped in is worse than that of 2008-2009 is echoed by another Wall Street name.

"The unfolding global contraction is poised to supplant the Great Financial Crisis (GFC) as the new benchmark for extreme economic disruption – the current collapse in economic activity is much deeper within individual economies and is enveloping a much broader range of economies concurrently than was the case in the 2008 crash," says Daniel P Hui, a strategist at JP Morgan.

U.S. economists at JP Morgan last week more than doubled their expected quarterly contraction for the U.S. economy in the second quarter and they now expect the economy to be 10% smaller by mid-year.

Giving a flavour as to the scale of the contraction was the release last week of U.S. jobless claims for March which suggest U.S. unemployment surged 2.0% in a single week, confirming suspicions that the speed of the current downturn is unprecedented, "and that the extent and duration of the downturn remains difficult to pin down," says Hui.

According to JP Morgan, the peak contraction in developing market economies in the first half of 2020 is now forecast to be almost twice as severe as during the GFC, moreover this is occurring over only two quarters compared to the 1.5 years during the GFC.

JP Morgan warn that unlike during 2008 and subsequent years, China will not be able to buffer global growth unlike in 2008, indeed economists at the investment bank forecast China to contract 10% in the first quarter of 2020.

"China’s shutdown in 1Q underscores the much more synchronised nature of the current downturn compared to 2008 when global growth as a whole didn’t contract until 3Q08 after Lehman’s," says Hui.

JP Morgan economic forecasts

Above: Percentage of countries contracting per quarter. The downturn is also much more synchronised and immediate than 2008, which took longer to gather speed and affect other economies despite the US starting to contract by Jan 2008 say JP Morgan.

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