COVID-19: Downside Scenarios

As the re-acceleration of COVID-19 infections gains momentum in several countries, the likelihood of renewed containment measures is rising. This heightens the risk of a steeper economic slowdown in Q4 2020 and Q1 2021 than previously anticipated in our central case forecasts.

In our illustrative risk scenario, renewed nationwide lockdowns in Europe, state-level lockdowns in the United States, and more cautious consumer behavior in Japan could reverse growth in these economies during Q4. Although the contraction may be less severe than the dramatic decline seen in the spring, it is likely to prompt another wave of policy stimulus.

Pessimistic Scenario: Accelerated Contagion

Our central case already factors in significant challenges posed by COVID-19, but a further acceleration of global infections combined with stricter containment measures would likely lead to renewed GDP contractions. Most economies could experience a Q4 slowdown, though less extreme than in the spring. The weaker starting point and prolonged uncertainty could increase the probability and extent of long-term economic damage. Cross-country disparities in recovery could widen, exacerbating existing divergences based on healthcare capacity, policy responses, and economic resilience.

Silver Lining: Policy Responses

A resurgence of the virus would likely trigger enhanced fiscal and monetary measures to mitigate the economic impact:

• Fiscal Policies: Governments could extend employment and income support schemes, accelerate previously announced stimulus packages, and introduce new fiscal initiatives.

• Monetary Stimulus: Central banks, including the US Federal Reserve and the European Central Bank (ECB), are likely to increase the pace and scale of asset purchases. This would create additional fiscal space for countries with weaker balance sheets and improve the effectiveness of coordinated fiscal efforts.

• China’s Resilience: While a resurgence in China appears less likely, its economy could still face marginal impacts due to external shocks and a stronger yuan.

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Managing the ‘Second Wave’

The flattening of the epidemic curve during the summer brought a sense of relief, with confidence bolstered by public health measures such as social distancing, face coverings, and enhanced hygiene practices. However, the emergence of a second wave earlier than anticipated suggests that the winter months could present significant challenges:

1. Increased Indoor Transmission: Colder weather will drive more activities indoors, increasing the risk of contagion.

2. Healthcare Strains: Seasonal illnesses such as influenza could compound the pressure on healthcare systems.

3. Behavioral Fatigue: Public compliance with restrictions may wane as the pandemic persists.

Base Case Outlook

Our base case remains that while the virus’s resurgence may necessitate localized restrictions, governments are unlikely to reintroduce nationwide lockdowns, driven in part by political and economic considerations.

• Localized Restrictions: Measures are likely to be targeted, reflecting variations in infection rates, healthcare system capacities, and political priorities across countries.

• Consumer Confidence: Household behavior and confidence may continue to be affected, potentially dampening economic activity even in the absence of national lockdowns.

Risks and Uncertainty

The risk of widespread containment measures, while not our base case, has increased. Countries may opt for stricter nationwide measures if infection rates rise significantly. However, the nature, duration, and intensity of such restrictions will vary based on local circumstances, creating a highly uncertain outlook for Q4 2020 and beyond.

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