The COVID-19 global outbreak that started in early January represents an exogenous shock to the global growth cycle, at a time when the world economy was on the cusp of a new synchronized cyclical recovery. Driven by this shock, our macro framework moved into a global contraction regime in February (i.e., global growth expected to be below trend and decelerate).
This regime remains in place today and is broad-based across regions (Exhibit 1). Furthermore, given the increased severity of the lockdown and quarantine measures undertaken by governments around the world, it is highly likely that most, if not all, countries and regions will experience a significant recession in the first half of 2020. Therefore, we expect the economic data to deteriorate meaningfully over the next few months.
At this stage it is difficult to determine how long this macro environment will persist. Historically, contraction regimes in our framework have lasted on average six months with wide dispersions, ranging between two and 15 months across all episodes since the 1970s. We will continue to follow the data and the framework as it runs its course, but it is nonetheless valuable to compare the current downturn to recent episodes of financial turmoil, despite meaningful differences in the source of the shock and market imbalances.
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