One month ago we introduced our crisis roadmap as our framework to think about the evolution of the global economy, financial markets and the path of the virus over the next several months. At the time, we reckoned we were in the transition between phase 1 and phase 2. Since then the US stock market has gained 18% and some countries have ended their lockdowns; however, others are battling a renewed surge in cases. Today we mark-to-market our view.
A powerful policymaker backstop has been behind the risk rally – and was exactly one of the criteria we identified for a false dawn. Another of those criteria was optimism about a potential vaccine. The recent news that clinical trials for remdesivir are less successful than first rumoured means this optimism needs to be tempered. We have written a lot about the dichotomy between a policymaker-induced rally and the likely earnings collapse this year: see 7 reasons the rally won’t last.
Passing a virus peak does not signal an end to that risk. Besides the conditions we lay out above, other necessary preconditions for a sustainable recovery are, first, a peak in the fatality and infection rates and, second, a Korean-style test-and-track process in place to minimize the risk of a second wave.
The fatality rate appears to be peaking in most major countries, but the spike in Japanese and Singaporean case counts shows that there is no “end” to the crisis until a vaccine is found. Both Japan and Singapore had relaxed some lockdown measures and were entering phase 3 of our roadmap; but now they are back to the middle of phase 2, as economic data will take longer to improve from here onwards.
Where are we now on the road map? It depends on the country. In the western hemisphere, the answer to that question is “in the middle of phase 2”. European countries are further advanced through the virus peak but may have more economic pain in store (see our GDP growth forecasts above). The US is likely just past its peak, but financial markets are still fragile (especially with big tech earnings due this week) and the political risk is of an uncoordinated loosening of lockdown too soon. The best-placed countries are in east Asia, specifically Korea. With its test-and-track system now the blueprint for other countries’ approaches and having not had to impose any nationwide lockdown at all, the damage to the Korean economy has been minimized (our Asia economist Rory Green will look at the east Asian example in more detail in Wednesday’s Daily Note.) By contrast, other EMs are only just entering phase 2 of the virus from already weak positions, and our EM GDP forecasts are for a very poor 2020.