Our main views are:

1. GDP contractions around 15% peak-to-trough are likely in most economies including Australia.
2. Fiscal and monetary policy responses will be key, but business closures may limit the impact.
3. Closely watch unemployment, supply chain constraints and behavioural changes for clues on the strength of the eventual rebound

Travel and leisure sectors could take -80% hits

We have put together our projections by applying sector-level impact estimates to each nation’s economic composition. We believe sectors tied to travel and leisure will be particularly hard hit (Figure 1). Elsewhere, growing restrictions on nonessential work will likely mean most sectors will face some negative impact, particularly where activity cannot be conducted remotely.

We expect sectors such as construction and manufacturing will face both labour constraints and potential supply chain disruptions, although we believe the impact will be less severe declines than with restaurants.

Our views on the hardest-hit sectors are largely supported by high frequency data. For example, OpenTable suggests that sit-down restaurant activity has fallen by more than 90% in the United States, Germany, and Ireland. It also expects more regions to follow suit.

Similarly, US cinema box office receipts in the week ended March 19 were $58m, the lowest weekly level since at least 1998 and down 70% from the average week in 2019. As more theatres are forced to close worldwide, receipts would be expected to fall further.

At this early stage, we need to emphasise these forecasts have unavoidably wide margins of error as we cannot yet know how successful each nation’s lockdown strategies will be or how long the authorities will pursue them.

Labour markets are under pressure as a result

In the US, Google searches for “unemployment” have risen nine-fold compared to a month ago. In the UK, the factor is 2.5 and in France, 14. There has been little change in Germany, however, which has a unique labour market stabilisation mechanism. In the US, preliminary state-level data from Ohio and Connecticut point to a ten-fold increase in initial jobless claims in the third week of March.

Policy response will be a key factor – but business closures limit the stimulus impact

The implementation of fiscal policy in each country will be the key determinant of the extent labour market issues will be contained and in determining the strength of the eventual economic recovery.

Unlike in a typical recession, fiscal and monetary policy is limited in its ability to mitigate the economic contraction. Even where an element of ‘helicopter money’ is being considered (such as the US), discretionary consumption is limited by social distancing policies and business closures.

These measures are therefore more aimed towards providing enough liquidity to businesses, individuals, and markets to ride-out the downturn and facilitate a sharp rebound in activity.

Double-digit GDP growth declines are likely

The varying nature of each nation’s service sector and trade balances will likely lead to somewhat different economic outcomes. However, we expect double-digit declines in GDP peak-to-trough, with the US falling slightly less due to a smaller restaurant sector and trade deficit. Due to unknowns around the duration and effectiveness of containment measures, there is much higher uncertainty to these forecasts than during normal economic times.

Policy response will be substantial

Monetary policy will likely be highly accommodative for over 12 months while fiscal policy will need to be loose to ensure firms and individuals have the necessary liquidity to withstand the downturn.

Should authorities be able to contain the virus, this stimulus will likely set the scene for growth to run well-above trend. In most regions, we expect it will take more than 12 months to return to pre-virus levels of activity.

Three things to watch for the eventual rebound

1) Unemployment

While helicopter money combined with standard safety net benefits can help displaced workers, they will need to return to the labour market to maintain consumption eventually.

But how quickly workers are rehired at restaurants, hotels or airports, is a key question. The greater the initial rise in unemployment or corporate bankruptcy filings, the greater the risk of lingering unemployment is to the economy.

2) Supply chain constraints

These will likely delay the return to full capacity. In China this has been a multi-week process even as virus restrictions are removed. In all likelihood, not all countries will remove restrictions concurrently. With the global nature of the supply chain, production may not return as quickly as demand, prolonging the recovering in output.

3) Behavioural changes

The key question here is how long will it take (if ever) for consumers to be as willing to eat out, go to large sporting events, fly and / or travel as before? These preferences can be quickly tracked via real-time data like film tickets, restaurant reservations, as well as information on weekly oil demand and number of flights. But the potential longer-term psychological behavioural impact of this event also needs to be considered. Will businesses and individuals want to maintain less leverage or hold more liquidity, which could increase the savings rate, lower consumption, or defer business investment? These changes may take more time to become clear.

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