Virus containment protocols have cut global growth by 16%, Goldman says, in a new note.
The figure is derived from the statistical relationship between GDP and the bank’s “lockdown index”, which is itself a combination of official restrictions and data on social distancing.
Europe has suffered the most, while declines in Asia are smaller. As you can see from the visual in the right pane (which is actually pretty helpful, as far as these things go), the effect on China is waning.
(Goldman)
The good news is that even as the level of global GDP has collapsed by more than 15% since January, there’s a light at the end of the tunnel. Or at least according to the bank’s Jan Hatzius.
In addition to the fact that major western economies are starting to ease lockdown protocols, Goldman sounds a cautiously optimistic tone on a post-COVID reality, which, while surreal, could find humans adapting enough to make economic activity possible on a reasonably robust level.
“We expect GDP to grow more quickly than implied by the effective lockdown index alone, as firms and households learn to combine higher economic activity with continued virus control via a range of adjustment mechanisms including mask and glove wearing, frequent cleanings of workplaces, lower office and retail occupancy, and improved testing and contact tracing”, Hatzius writes.
Again, it all has a disconcertingly dystopian feel to it – workers wandering sparsely populated offices wearing masks and gloves, and hazmat-clad after-hours cleaning crews wielding disinfectant power sprayers as opposed to the feather dusters and windex seen during the pre-COVID era.
I jest. But only a little.
For Goldman, evidence from China suggests the recovery will indeed be “V-shaped” on a QoQ basis, but “U-shaped” on year.
“Even if the West manages only a very partial repeat of [China’s] performance, that would imply brisk sequential activity growth in the remainder of Q2”, the bank says, adding that “on a quarterly basis, we continue to forecast a recovery that looks U-shaped in year-on-year terms but V-shaped in sequential terms, with quarter-on-quarter annualized GDP growth rates averaging -32% in Q2, +16% in Q3, and +13% in Q4 across the advanced economies”.
(Goldman)
This is all supported by historically generous stimulus, both from monetary and fiscal policymakers. Goldman’s financial conditions index is 150bps tighter than January but notably, it’s now easier than its long-term average and the level seen this time last year. Take a moment to let that sink in: Even after a shock of apocalyptic proportions, financial conditions are easier than they were this time last year.
Of course, that could change quickly in the event there’s a repeat of the May 2019 experience as it relates to spiraling tensions between Washington and Beijing. Although last year’s two down months (see the figure below) pale in comparison to the COVID crash, don’t let it be totally lost on you that last May was bad. It really was. The Huawei blacklisting was a game-changing geopolitical event that still echoes today, and would likely still be making headlines were it not for the coronavirus.
You might also recall that Goldman sees government support (both from the Fed and Congress) largely offsetting the drag on personal and corporate “earnings” (and the scare quotes are there for a reason).
We’re living in a “simulation” at this point, and on some estimates, that will work – for a while, at least. You can read more on that in the linked post below.
Oh, and if you’re wondering whether Goldman thinks inflation is going to be a problem, the answer is no.
“As the global economy recovers, we are likely to hear louder voices warning that a failure to normalize monetary and fiscal policy risks much higher inflation or even currency debasement, so it is probably worth noting preemptively that we do not share these concerns”, Hatzius says.
He goes on to remind you that “much of the unprecedented easing of fiscal policy is effectively bridge financing that will automatically unwind when it is no longer needed [and] even under a reasonably optimistic growth forecast, it will take several years to put people back to work and fill empty offices and storefronts”.
Even if you don’t agree that stimulus unwind will be “automatic”, you’d be hard pressed to argue with that latter bit from Hatzius.
Read more: In ‘Simulated’ Economy, 3/4 Of Laid-Off Workers Get Benefits Exceeding Their Former Wage
