The IMF yesterday forecast that the “Great Lockdown” will see the global economy contract by 3% in 2020; the steepest decline since the 1930’s Great Depression and down from January’s expectations of a 3.3% expansion. The estimates are quite dire, with the likes of the US expected to fall by 5.9% this year while the Eurozone forecasts are far worse. The good news is that the Fund expects growth to bounce by a predicted 5.8% next year, with the caveat of “extreme uncertainty”. The forecasts assume the virus outbreak will peak during this quarter, with an unwinding of the current lockdown status in the second half of the year. On this assumption, the IMF estimates global output will fall by USD9tn over two years; larger than the combined GDP of Germany and Japan.
We believe it is very difficult to estimate the extent of economic damage in the wake of the coronavirus outbreak. In fact, the Federal reserve last month purposely did not publish its quarterly economic forecasts for this precise reason. As the Fed’s Chair Powell very aptly put it: “The economic outlook is evolving on a daily basis,” adding, “It really is depending heavily on the spread of the virus, and the measures taken to affect it, and how long that goes on.”... “And that’s just not something that’s knowable. So, actually writing down a forecast in that circumstance didn’t seem to be useful. And in fact, it could have been more of an obstacle to clear communication than a help.”
What was of interest was the IMF’s concerns if a prolonged shutdown takes place. In its Global Financial Stability Report the IMF notes: “A further tightening of financial conditions may expose more ‘cracks’ in global financial markets and test the resilience of financial institutions”. We therefore remain comfortable with our current positioning in high-grade, liquid bonds issued by “wealthy” sovereigns and quasi-sovereigns, as well as AAA/AA corporates, in our global mandates.