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21 Apr 2020 – Insights

“It all depends on the duration of lockdowns”


Will economies rebound in the third quarter as economies open up or will we see new waves of infections and new lockdowns? The long-term economic damage of COVID-19 all depend on that question.

As COVID-19 infection rates have peaked in many parts of the world and as economies are approaching gradual re-opening and easing of lock-down measures, there is still significant risk that the economic and financial repercussions will last much longer with high unemployment, bankruptcies and even sovereign debt defaults, says Global Head of Macro, Fixed Income and Currency Research at Danske Bank, Thomas Harr. 

“If economies open up over the coming month, we will see an economic rebound in the third quarter but there is the risk of new lock-downs and a risk that unemployment rates will remain high for a prolonged period, and that we will see as wave of bankruptcies, sovereign debt defaults as well a sharp drop in credit growth and increased savings rates, says Thomas Harr. 


Only so much central banks can do
Extraordinary relief packages and stimuli measures from governments and central banks reduce the risk of a year-long downturn like the economic depression in much of the world during the 1930s, says Thomas Harr, but there is only so much central banks and policy makers can do. 

“Governments and central banks cannot change the fact that people are not spending and companies are not producing. Even when economies open up, precautionary savings and investment uncertainty will imply that government debt levels and central banks’ balance sheets would be elevated for a long time, constraining long-term growth prospects. When countries reopen, there is a risk that the current liquidity crisis that companies face turns into a solvency crisis”, says Thomas Harr.
 

If economies open up over the coming month, we will see an economic rebound in the third quarter but there is the risk of new lock-downs and a risk that unemployment rates will remain high for a prolonged period ...

Thomas Harr

Global Head of Macro, Fixed Income & Currency Research, Danske Bank


All hit at the same time
The great unknown is the duration of the current lockdowns, which is the most important factor determining the length of the crisis, says Thomas Harr. He has had recent calls with IMF staff who stress that the length of the lockdowns will determine long-term growth prospects and debt sustainability for many countries. And unlike during the financial crisis in 2008 and 2009, when a huge construction boom in China helped drag large parts of the global economy out of the slump – particularly commodity exporting emerging markets, this time we are all in the same boat. 

“I am worried about industries that had weak profitability before the crisis, such as the German car and the US energy industries. I fear also for emerging and frontier markets. The combination of lockdowns, collapsing trade, substantial portfolio outflows and currency depreciations, and rapid private and official debt accumulations in US dollars pose extraordinary challenges for non-industrialised countries. I cannot remember a time when emerging and frontier markets were all hit so hard at the same time and, in contrast to 2008-09, China will not help them, says Thomas Harr.

A game changer  
But amid the risk and the uncertainty, there is also reason for optimism, says Thomas Harr. Last week saw promising trial results from a drug called Remdesivir, which cannot help to offset the current wave of infections but could help health care authorities to fight new wave of infections without resorting to renewed lockdowns. That drug, according to Thomas Harr, could be a game changer.