Coronavirus is causing unprecedented economic rollercoaster

Economic opinion

The corona crisis is taking a high human toll, but clearly also has a significant impact on the economy. At the explicit request of our clients, KBC Economics offers this update of the economic outlook. We are aware that this numerical estimate, even more than in normal times, is uncertain. Nevertheless, we want to provide new economic insights. They take into account the latest developments in the spread and medical impact of the covid-19 virus and policy responses to mitigate the impact on public health and the economy. In our analysis we take several possible scenarios into account. Here we explain our basic scenario. We currently assign a probability of 50% to this. We also discuss some risk factors, both positive and negative.

Base scenario

Our base case scenario assumes that the current quarantine measures will continue in almost all European countries and in the US. The high human toll of the covid-19 virus makes it unlikely that governments will quickly relax precautionary measures. After all, the search for large-scale tests to identify sick people is still in its infancy. Moreover, the search for a vaccine will most likely take much longer. For the time being, we also notice that society accepts government decisions at least in Europe, which are being clearly and openly advised by medical specialists. For these reasons, it seems to us necessary, but also plausible, that quarantine measures will continue for some time to come. However, the experience of some Asian countries suggest that with sufficient testing responsible easing can be implemented gradually. 

These assumptions about prevention policy have economic implications. The drastic decline in economic activity due to business closures, a sharp rise in (temporary) unemployment and disruptions in international and domestic production chains will continue for at least several more weeks. Specifically, our simulations assume that economic activity will not recover until the third quarter. As a result, the corona crisis will lead to a very severe recession in the first half of the year, much stronger than we and other economists had predicted until recently. But at the same time, we are also aware that the quarantine measures cannot last forever. We assume that a period of three months (one quarter) will suffice to sufficiently control the epidemic and thus to restart the economic engine. Thanks to far-reaching government measures, we expect the recovery to be very strong. Nevertheless, we are seeing differences across countries. The recession will affect all countries, but the speed of recovery will vary greatly. Countries with stronger fiscal clout, more automatic stabilisers (such as a strong social security system) and more active crisis policies will see a more pronounced recovery. 

On the basis of these assumptions, a combination of micro-economic analyses and econometric simulations allows us to sketch a picture of the business cycle in various countries. Table 1 shows that the decline in 2020 is historically strong. For the eurozone, we expect a contraction of 11.3%. For different European countries figures range between -5% and -17%.

In the US, we expect growth to contract 7.5% in 2020. On the one hand, the policy response in terms of slowing the spread of the virus in the US has been particularly slow, with uncoordinated decisions related to quarantine measures being taken at the local rather than federal level. On the other hand, US policymakers have rapidly introduced enormous economic measures that should also contribute to a stronger recovery. 

In China, the economy took a clear hit during February, when almost 90% of the country in GDP terms had orders to close businesses. The economy outside of Hubei started to reopen after about four weeks, while within Hubei the resumption of the economy is only just beginning. Given that the economy is restarting, and that the Chinese government still has room to introduce further stimulus, we expect that the Chinese economy contracted severely in Q1 but will recover thereafter, with annual growth reaching 1.6% in 2020 under the baseline scenario. 


The fact that the corona crisis provokes a severe recession, followed by a strong recovery, is an important insight. This implies that the lasting economic impact of the corona crisis will be relatively moderate, at least for economies that can survive the temporary crisis. It may be a different story for financially weaker companies, but also for families and individuals. The corona crisis will therefore strike hard, but selectively. Government measures should primarily be aimed at bridging the crisis period, which will obviously be more effective (and cheaper) for those with a stronger financial-economic basis. 

In this scenario, we assume that central banks will provide maximum support to the economy through low interest rates, quantitative easing, massive liquidity provision and (de facto) monetary financing of government deficits. Specifically, we expect the ECB to maintain policy interest rates at the current negative level. As recently announced, it will, like the Federal Reserve, buy up unlimited bonds. As a result, the ECB controls de facto the entire yield curve and the interest rate differentials between the Eurozone member states. As a result, long-term interest rates will also remain low, which will facilitate the financing of governments and companies. Policy makers have clearly drawn lessons from the Great Recession of ten years ago (see: Economic Opinion of 24 March 2020).

This baseline scenario is subject to upside and downside risks. If solutions become available to reduce quarantine measures faster and more drastically, the economic damage will be less severe, but still substantial. But fundamentally, the recession and recovery follow the same pattern as in our baseline scenario. In such a scenario, the decline in the euro area will be 6% in 2020, with a recovery of 6.5% in 2021. The lesson to be learned from these simulations is therefore that the longer-term economic impact is fairly similar, regardless of the depth of the corona recession. However, the ability or inability to responsibly lift quarantine measures, especially in the short term, can make a world of difference to the economy. 

Nevertheless, we must not be blind to the risk of insufficient control of the coronavirus and insufficient measures to initiate a normalisation of economic activity. Some specialists have floated the idea of an on-off lockdown system where countries alternate periods with and without quarantine measures. This will keep the pressure on the health system under control, but the economic consequences will be felt in the longer term. In such a scenario, we get a large fluctuation of economic dynamics but at a low level. This will continue until a suitable vaccine against the covid-19 virus is found, probably within 1.5 years at the earliest, according to the specialists. In such a scenario, we expect the euro zone to contract 14% this year and 3.2% next year. For the US, growth would contract 9.5% in 2020 and 2.7% in 2021. 

Disclaimer:

Any opinion expressed in this KBC Economic Opinions represents the personal opinion by the author(s). Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. Any forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice. Sustainability is part of the overall business strategy of KBC Group NV (see https://www.kbc.com/en/corporate-sustainability.html). We take this strategy into account when choosing topics for our publications, but a thorough analysis of economic and financial developments requires discussing a wider variety of topics. This publication cannot be considered as ‘investment research’ as described in the law and regulations concerning the markets for financial instruments. Any transfer, distribution or reproduction in any form or means of information is prohibited without the express prior written consent of KBC Group NV. KBC cannot be held responsible for the accuracy or completeness of this information.

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