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Scenarios

Possible economic recovery scenarios

The speed and strength of global economic recovery will depend in large part on the success of public health measures and economic policies.

A COVID-19 briefing note issued on 25 March 2020 by McKinsey & Company modelled 9 different scenarios based on the success of three different health interventions and three different governmental economic interventions.

We have portrayed two of these Economic Recovery Scenarios* as examples of potential economic conditions for leaders to consider and as context for making operational, financial and strategic decisions.

Scenario 1 – virus contained

In this scenario all countries would experience sharp GDP declines in Q2. However, effective health and economic interventions means that by Q1 2021 the Eurozone returns to pre-crisis levels.

In this scenario, the virus in Europe and the United States would be controlled effectively with between two to three months of economic shutdown. Monetary and fiscal policy would mitigate some of the economic damage with some delays in transmission, so that a strong rebound could begin after the virus was contained at the end of Q2 2020.

Consumer spending in most advanced economies accounts for roughly two-thirds of the economy, and about half of that is consumer discretionary spending. During the downturn, spending on durable goods including automobiles could fall as much as 50 to 70 percent; spending on airlines flights and transportation could fall by about 70 percent; and spending on services such as restaurants could decline by 50 to 90 percent. Overall consumer discretionary spending could abruptly fall by as much as 50 percent in areas subject to shutdowns.

Scenario two – Muted recovery

Of course, it is entirely possible that countries are less effective in controlling the virus, or in mitigating the economic damage that results from efforts to control the virus spread.

In this case economic outcomes in 2020 and beyond would be more severe. In this more pessimistic scenario, China would recover more slowly and would perhaps need to clamp down on regional recurrences of the virus. It would also be hurt by falling exports to the rest of the world. Its economy could face a potentially unparalleled contraction.

The United States and Europe could also face more dire outcomes in this scenario. They could fail to contain the virus within one quarter and be forced to implement some form of physical distancing and quarantines throughout the summer. This could end up producing a decline in GDP at an annualised pace of 35 to 40 percent in Q2, with major economies in Europe registering similar performance.

Economic policy would fail to prevent a huge spike in unemployment and business closures, creating a far slower recovery even after the virus is contained. In this darker scenario, it could take more than two years before GDP recovers to its pre-virus level.

 

 

 

Contacts

Simon Gallagher, Partner, Head of Advisory

SIMON GALLAGHER

Partner, Head of Advisory

BDO London

020 7334 9191

[email protected]

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Tim Foster, Partner <br>Head of Risk and Advisory Services, Midlands

TIM FOSTER

Partner, Head of Risk and Advisory Services, Midlands

0121 352 6200

[email protected]

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Mark Sykes, Partner, BDODrive

MARK SYKES

Partner, BDODrive

BDO Manchester

+ 44 (0) 7791 397544

[email protected]

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