$6 Trillion Contraction Could Be “Too Optimistic”, Economists Warn Eyeing Second COVID-19 Wave

Bloomberg Economics estimates that the global economy will contract 4% in 2020 due to coronavirus lockdowns. However, these estimates are overly "optimistic," assuming a V-shaped economic recovery would be seen in the back half of the year. 

The narrative of a V-shaped recovery before the November election has been recently drummed up by the Trump administration. Wall Street has bid stocks up in the last 24 sessions with high hopes that stimulus will stabilize asset prices, and lockdowns will be lifted across many states that would enable the economy to soar. MSCI All World has seen a near 25% gain in price on these hopes.

While optimism of stimulus, virus curve flattening, vaccines, and lifting lockdown restrictions in many regions across the world have aided in the idea that a second-half recovery is a sure bet, many are ignoring the unfolding economic depression and several other scenarios that could derail the economic rebound. 

Bloomberg’s Tom Orlik and Jamie Rush offer this reality check: 

"The economy has entered a downturn of unprecedented speed and severity, with most advanced economies facing their weakest performance since the Great Depression," they said in a report, adding that, "relative to expectations at the start of the year, the cost of lost output is more than $6 trillion." 

Their global $6 trillion estimates are based on "optimistic assumptions about both the outbreak and the recovery." In this scenario, the US GDP will plunge 6.4%, Euro Area GDP -8.1%, and Japan -4%, while China’s rate of economic growth will be the slowest on record. 

The economists said, "downside risks are significant" and derailment of the second-half recovery is indeed possible:  

They warned about the risks of a second coronavirus wave that would prevent a global economic rebound.

They said a deeper contraction of 5.6% would then be possible, and if stimulus proved ineffective, a worst-case scenario of a 7.2% decline would be seen. 

"But unlike the Asian crisis in 1997 and the global recession in 2009, the current shock isn’t caused by fundamental economic and financial imbalances. This means that countries that have mobilized enough stimulus to compensate for the lost income could stage a swift recovery," the economists wrote.

"Governments should err on the side of doing too much stimulus. In the end, the cost of doing too little would be higher."

As central bank stimulus is flooding financial markets, the Organization for Economic Cooperation and Development warned in early April that their leading indicators detected a turning point in the global economy, suggesting a crash has been underway in all major economies.

China managed to flatten the pandemic curve in late February. Months later, Beijing is closing movie theaters and imposing travel restrictions on certain regions as the dreaded second wave could be materializing. If so, this would mean, since China created at least half of the world’s credit in the last decade, that the economic rebound forecasted for the second half of 2020 is pure fiction.