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●   A severe and unusual emergency: The coronavirus pandemic and the lockdowns to contain it affect supply and demand in the various sectors of the economy in unusual and different ways. The likely impact ranges from sudden stops (long-distance travel) to significant losses (parts of manufacturing), to small losses (water and energy supply) and even to significant increases (healthcare, online shopping).

●   Lessons from the past: In this report, we compare the onset of previous recessions to the pre-coronavirus starting situation and the unusual nature of the current shock. As long as monetary, fiscal and regulatory policies remain in “whatever it takes” mode, we believe that the risks of second-round effects such as those of a follow-up financial crisis can be contained. Once the pandemic is sufficiently under control and lockdowns can be eased, economies will start to rebound.

●   Our base case: We assume a severe lockdown of about eight weeks that will be eased step by step from late May onwards. Many activities that had to be switched off can then be switched on again step by step, but some activities such as long-distance travel will be restrained for much longer. The fiscal stimulus will partly offset some hesitation by consumers and companies to spend.

●   The tick mark recovery: The sharp downturn will be followed by a slightly flatter upturn that ultimately goes beyond the pre-coronavirus level of GDP. Details will vary by country, depending on policies, the medical situation and the non-coronavirus trends in demand and supply. By and large, we expect GDP to surpass its late-2019 level roughly two years after the trough.

●   A long-term drag? An event on the scale of the coronavirus pandemic and recession will almost certainly have profound economic, financial and political effects that will be felt for a long time. In manufacturing, companies will shorten and diversify supply chains and raise inventories. The need for fiscal repair and more social and healthcare spending can turn into a drag on gains in global supply.

●   A crisis can be the mother of invention: The coronavirus shock is likely to spur innovation in many fields ranging from a more efficient use of labour and communications technology to increased use of 3D printing. In the long run, the resulting jolt to productivity may be stronger than the drags unless economic policies turn away too much from market-based models.

Holger Schmieding

Chief Economist

+44 7771 920377

holger.schmieding@berenberg.com

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

Disclosures

This material is intended as commentary on political, economic or market conditions for institutional investors or market professionals only and does not constitute a financial analysis or a research report as defined by applicable regulation. See the "Disclaimers" section of this report.

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