March 31, 2020

Deutsche Bank Research updates outlook on the fallout from the Covid-19 crisis

In their baseline scenario, the economists expect a sharp economic decline in the second quarter, but also a significant rebound in the third quarter

Deutsche Bank Research economists have updated their forecast for the global economy, reflecting the impact of the coronavirus pandemic. In their report, the analysts led by Deutsche Bank’s Chief Economist David Folkerts-Landau come to the conclusion that the increasingly stringent lock-down measures to combat Covid-19 in Europe and the US are heavily depressing the levels of consumer and business spending. Deutsche Bank Research expects the peak-to-trough decline in euro area and US GDP to be probably more than double that during the more prolonged Global Financial Crisis in 2008/2009.

The economists’' baseline scenario assumes that the lock-down slows the spread of the virus significantly in Italy by mid-April, a week later in the rest of the euro area, a week after that in the UK, and by early May in the US. Economies would then gradually reopen, like in Asia.

In their baseline scenario, Deutsche Bank Research expects GDP to shrink by 9.5% in the US and by 11.4% in the euro area during the second quarter. This would be followed by a significant rebound in the third quarter, so full-year GDP growth rates would be -4.2% for the US and -6.9% for the euro area. In this scenario, the level of GDP in the transatlantic economy (US and EU, a total of almost 40 trillion dollars) at the end of 2020 will be about 2 trillion US dollars below what Deutsche Bank Research was expecting pre-virus. At the end of 2021, the level will still be 1 trillion US dollars below the pre-virus expectation.

The downside risk would be a more protracted pandemic, with the virus persisting well into the second half of 2020 before being managed or controlled. In such a scenario, US GDP is expected to shrink by 7.8% this year. In the euro area the economy would shrink by as much as 13.3%.

The economists highlight that their outlook would be much worse were it not for timely and aggressive monetary and fiscal policy easing: “Policymakers have learned important lessons from the failures of the Great Depression and from dealing with the Global Financial Crisis”, they state in the report. In their view, the Fed and ECB were quick to pull out all the stops to inject liquidity and confidence into financial markets, and the scale of fiscal easing on both sides of the Atlantic has already exceeded the early days of the Global Financial Crisis. The economists acknowledge that policy will buffer the impact of virus shock on economies significantly, but expect there will be lasting ramifications.

Deutsche Bank Research clients can find the full report on our Research portal.