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Longer lockdowns would wipe out substantially more economic activity

This report provides an outlook for the global economy in the midst of COVID-19 and is produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide an unparalleled ability to forecast economic trends.

  • The downside risks are far larger than the plausible upside
  • A financial crisis would destroy up to 10% of global GDP
  • The length of lockdowns and policymakers’ support are vital for the outlook
The risks around baseline economic forecasts are currently especially large and driven by factors, such as the speed with which a vaccine can be found, which are themselves highly uncertain. In the near term the risks centre around the speed at which lockdown restrictions are eased and the risk of a second virus wave. But there is also a high degree of uncertainty over the medium-term costs of the outbreak, reflecting some of the uncertainties highlighted in the previous section. Even if the economic losses from the crisis turn out to be smaller than expected, the level of GDP is unlikely to go above the levels that would have been reached had the COVID-19 pandemic not taken place. In the remainder of the section, we set out plausible upside and downside scenarios.

Downside scenario: Lockdowns persist and irreversibly damage household confidence

In Oxford Economics’ downside scenario, they assume that stringent lockdown restrictions remain in place for a more prolonged period in order to bring the pandemic under control, or that an initial loosening of restrictions results in a second wave of infections that forces lockdown measures to be reinstated. This leads the global economy to contract in Q3 as well as Q4, causing GDP to fall by 8.9% in 2020, compared to a baseline forecast of a 4.7% drop.

The longer lockdown triggers an even bigger increase in precautionary savings, leading to a weaker recovery and the COVID-19-driven recession exacerbates long-standing structural vulnerabilities, such as overvalued asset prices and high levels of corporate debt. This results in a financial crisis that amplifies de-leveraging in the private sector. As public and private investment fall, productivity growth slows, and potential output diverges from previous trends. By the end of 2024, world GDP levels are 10% below the pre-coronavirus baseline.

Upside scenario: Medical advances speed up lockdown easing

In an upside scenario, there is also a possibility that activity can restart more quickly than Oxford Economics anticipates, leading to a faster recovery and less long-term economic damage. It is possible that medical advances – such as increased testing capacity, enhanced therapeutics, and the discovery of a vaccine in the second half of 2020 – lessen business and consumer fear. This would facilitate quicker easing of restrictions and therefore allow activity to resume faster than Oxford Economics’ baseline assumes.

Alternatively, using technology, businesses and individuals could find more innovative ways to carry out activities that on the face of it are difficult to do with social distancing in place. This would reduce the burden of ongoing restrictions on economic activity and result in a faster recovery.

In this scenario, private spending and business activity in Q3 2020 would begin to accelerate. However, this process would still be relatively gradual as it will be impossible to completely remove the possibility of infection, even if the risk of serious illness from the virus is reduced. In Oxford Economics’ upside scenario, global GDP still contracts by 2.9% in 2020, but the recovery in 2021 is stronger with growth at 7.3%.

This would ultimately imply lower precautionary savings in the medium term. The level of global GDP by the end of 2024 would be 9% higher than in the downside scenario, which illustrates the wide range of plausible outlooks for the world economy.