Roaring Into Recession

From Goldman Sachs Research, this is Allison Nathan. Welcome to Top of Mind, a podcast that explores macroeconomic issues on the minds of our clients. In this episode, we're taking a look at the ongoing economic and market implications of the coronavirus outbreak, which has now pushed the global economy into a recession of historic proportions and abruptly halted the longest equity bull market in history. As infection spread globally, economic activity collapses, markets recoil and policymakers snap into action, the depth and duration of the economic and market downturn is top of mind. I first

think it's going to be a pretty severe recession. For 2020 as a whole, our forecast for global GDP right now is about minus 1.2%, which would be about a percentage point below what you saw in the year following the global financial crisis two thousand and nine. That's one measure of the severity. If you look at higher frequency measures, you get even more severe numbers. The first quarter in China, for example, by our estimates saw a 42% quarter on quarter annualized contraction. And for the second quarter in The U. S. Or the Euro Area, we're looking for numbers in the 20% to 40% range. Again,

So the current recession looks as severe as the global financial crisis. Will it be as long?

The good news is that we don't think it's going to last as long as the global financial crisis. This, of course, depends on the medical news and the responses to that medical news. But the key difference between this downturn and the global financial crisis is that the global financial crisis was really the culmination of a decade or more of financial imbalances that have built up in the economy and over investment in certain sectors of the economy and most obviously housing that then took a long time to be unwound starting in 02/2007, 02/2008, but lasting for several years after that. So you

So will the recovery most likely be L, U or V shaped?

I think the terminology of Ls, Us and Versus is problematic because the answer depends so much on whether you're talking about the level of activity or the rate of change. As far as the level of activity is concerned, I think you could say that our forecast is U shaped. We see a sharp downturn in the short term, then only a gradual recovery in terms of getting back to the sort of GDP level that we would have been on in the absence of the virus. So for example, of the nearly ten percent hit that we expect to the level of GDP as of April, roughly half unwinds through the end of twenty twenty and

I then spoke to Jason Furman, Chair of the Council of Economic Advisors during the Obama administration. He agrees with Jan that the recession is likely to be severe and is unconvinced by the prospect of a rapid recovery given the potential extent of the harm to businesses and the labor market.

I think the world is heading for the most predictable recession we've ever had. Never before has there been such an abrupt synchronized, and global shutdown of so much economic activity?

You think it will be more severe than the global financial crisis?