The world economy is in for a mammoth shock this summer – and this is what it will need to do to recover

A sustained and strong bounce back is possible. But the key is getting the detail right, and that could prove to be rather tricky, writes Hamish McRae

A deeper recession than after the 2008 crash is predicted (Getty/iStock)

The scale of the damage to the world economy is starting to become evident. Until now we have been overwhelmed by the flood of news: about the progress of the coronavirus itself, the measures taken by different countries to check its spread, and about the increasingly desperate efforts by governments and central banks to prop up the economy. What we had little feeling for would be the scale of the economic damage.

That data is starting to come through. The purchasing manager indices are traditionally the best forward-looking indicators, and the latest set is glum. The composite Eurozone PMI that has just come out at 31.4 is worse than those after the great financial crisis of 2008-9. The UK number at 37.1 tells the same story. The comparable US number was 40.5, the lowest since October 2009.

The inescapable message is that there will be a recession at least as deep as in 2009, probably deeper. Indeed if you take just the second quarter (April, May and June), the depth is going to be much worse. As far as the US is concerned, Morgan Stanley expects a fall of more than 30 per cent in US GDP, and Goldman Sachs one of 24 per cent.

For the UK, I have not seen any forecasts made since the lockdown announced on Monday evening, but the contraction must be of a similar order of magnitude. As for Europe, there have been no forecasts since the PMI data noted above, but again we have to expect a second-quarter crash deeper than in 2009.

And for the year as a whole? Well, the story is moving so fast that I don’t think it makes sense to take any detailed forecast too seriously, but a brave shot from the London-based Centre for Economic and Business Research suggests a fall of at least 4 per cent. It comments:

“If this is correct, the fall will be more than twice as large as in 2009 during the financial crisis and will be the largest drop in GDP in one year since 1931 other than in years affected by war.”

The much better news is its forecast of a strong recovery in 2021. Growth next year is projected at 3.4 per cent, though it will not be until 2022 that global output climbs back above that of 2019.

This pattern of a mammoth shock this spring and summer, followed by a strong recovery, feels right. We have no experience of near-total shutdowns of economies, so predicting how deep they will go is guesswork. We just know that the world economy will take a huge hit. But we do know a lot about recoveries, and that surely is a more helpful area to try to analyse.

Most economists’ projections are for a deep V, a precipitous decline followed by a strong, though maybe not quite as steep, recovery. Some have worried about a U, with a few quarters bouncing along the bottom before recovery takes hold. That was the pattern after the 2009 recession. The other two possibilities are a W-shaped recession with a rebound then a second decline, or perish the thought, an L with no significant recovery at all.

So what do we know so far? Three things:

One, there is enormous damage to a large chunk of service industries: tourism, travel and hospitality. These have been strongly growing sectors, so several of the great engines driving the world economy have stalled.

Two, the money being pumped into the world economy by the governments and central banks is larger both in absolute terms and proportionately than the stimulus in 2009. It is already astoundingly huge, and there is more to come.

Three, there will be long-term effects on the structure and level of world trade. Companies will not want to rely on complex supply chains. Governments will not accept having to import key products, such as pharmaceuticals. We don’t know how big it will be but there will be a move to produce more at home and buy less from abroad.

Pull this together and what does it say? Clearly the key to underpinning the recovery will be to minimise the damage to the industries most severely hit. At a broad macro-economic level, the money pumped in will pull things up. But the key to a sustained and strong recovery will be getting the detail right, and that is tricky. We need a return of confidence, and that will not come until the case numbers start to turn down. A gritty few weeks are in store.