Global economy could lose $5.5trn – more than the GDP of Japan

Markets enjoyed a happier Easter than the real economy. US equities staged their biggest weekly rally in 45 years with a 12% gain last week. Global stocks delivered their best weekly gains since 2008. The FTSE 100 rose by nearly 8%. Stockmarkets have recouped half of their losses since the slump began in February.

Financial markets appear “positively sanguine that a revival is near,” writes Randall Forsyth in Barron’s. The rebound implies a short recession followed by a quick recovery. Yet we are living through a “collapse of historic proportions”. Nearly 17 million Americans have lost their jobs in the past three weeks. 

At the more “horrifying” end of the spectrum, JP Morgan analysts predict a 40% annualised hit to US GDP in the second quarter. Globally, the bank thinks cumulative GDP losses to the end of 2021 could reach $5.5trn, more than the entire GDP of Japan.

After the lockdown

Optimism is evidenced by the fact that cyclical stocks have started outperforming defensives, a hallmark of bull markets, says Jon Sindreu in The Wall Street Journal. Growing confidence that an end to lockdowns is in sight has answered one question for financial markets. Yet there remains enormous uncertainty about a second crucial question: how difficult will the recovery be? Global convalescence after the financial crisis was grindingly slow, but “this is not a re-run” of 2008, says Tom Stevenson of Fidelity International in The Daily Telegraph. 

With central banks throwing the kitchen sink at markets there are hopes that the “rebound may yet surprise us”. For all the comparisons with war or natural disasters, factories and businesses have been mothballed, not destroyed, and are ready to get back to work as soon as shutdowns end. 

Recoveries come eventually, but there are usually false dawns along the way, says Michael Mackenzie in the Financial Times. The worst pandemic in a century has already brought rising unemployment, falling business investment and tighter financial conditions that could weigh on growth for years to come, says Andrea Cicione of TS Lombard. There is also a real risk of a second wave of infections later in the year.

The unprecedented circumstances mean that forecasts are “no more than guestimates” at present, says Garry White in The Daily Telegraph. Making informed investment decisions is nearly impossible until more data is in, starting with quarterly earnings reports over the coming weeks. Sadly, evidence from Wuhan suggests that people remain cautious about spending and travel even after lockdowns are eased, so the “crisis at many of the world’s businesses has only just begun… The chances of a new low remain high”.