The coronavirus (Covid-19) pandemic is a game-changer for the global economy; 2020 and 2021 will be lost years in terms of growth. We only expect the global economy to recover to pre-coronavirus levels in 2022. China is an outlier, as its GDP will not contract this year. Other Asian economies will recover the fastest, with some (including India and South Korea) returning to pre-coronavirus real GDP levels in 2021. G7 economies will recover more slowly. GDP will be back to 2019 levels in 2022 (Canada, Germany, the US), 2023 (the UK) or 2024 (France, Italy). Japan will be an outlier among G7 countries, with real GDP only returning to pre-pandemic levels in 2026.

The US economy will contract by 4.8% this year

We have revised down our US real GDP forecast for 2020, to a contraction of 4.8% (from 4% previously). The bulk of the economic pain will be felt in the second quarter; lockdown measures severely curtailed economic activity in April, sending unemployment to an all-time high of 14.7% in April. Most of these early job losses were temporary, and about 2.5m temporary job cuts were reversed in May as some businesses reopened. Government spending on unemployment benefits is helping to prop up household incomes. Monetary stimulus from the Federal Reserve (the US central bank) is supporting asset prices. Despite this support, the household savings ratio surged to 33% in April, from 8.2% in February. In the second half of 2020 we expect a partial recovery in consumer spending, which accounts for 70% of GDP, as the economic outlook remains uncertain and the coronavirus continues to pose a major health threat.

Europe’s output will drop by 7.4% in 2020

Europe is heading for a historic recession. We expect the deepest contractions in Western Europe to be in Italy and Spain, given their heavy caseloads and comparatively long and strict lockdowns. We forecast a bounce-back from the third quarter, but this will reflect base effects rather than a robust return of economic activity. Global supply chains will remain disrupted, unemployment and business failures will continue to rise, and consumers will remain cautious. Southern Europe, which depends on tourism, will struggle for longer, as quarantines and weak confidence will hold back holidaymakers. Growth rates will pick up in 2021, but the recovery will be only partial; we forecast that GDP in Western Europe will not return to its 2019 level until 2023. Variations across the bloc will be determined by fiscal starting positions. Germany has presented the largest fiscal assistance plans in the EU, and also accounts for almost half of emergency state aid packages in the bloc.

China is ahead of the coronavirus epidemic curve

The coronavirus pandemic is at different stages in Asia. Economies that were the first hit, including China, Hong Kong, Japan, Singapore, South Korea and Taiwan, managed to contain their initial outbreaks in January and February through a combination of lockdowns, large-scale testing and contact tracing. The situation is now broadly under control, although some are facing a second wave of cases imported from new global hotspots, and in some instances have had to implement fresh restrictions on movement and business. Despite country-based variations, the Asia region will be the fastest to recover from the pandemic, with many economies back to pre-coronavirus GDP levels in 2021. This will accelerate the ongoing economic shift away from traditional, Western growth engines towards China and other emerging Asian economies.

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