The great compression - a simple model to map GDP scenarios and roadways to recovery

We devise a simple model to flesh out three scenarios with five roadmaps to recovery, reflecting interplay among the pandemic; public health and macro policies; and private behaviour on domestic spending.

• Rapid, widespread COVID-19 lockdowns were imposed in Q1-2, precipitating a global Great Compression, the most abrupt, deliberate downturn on record – very different from past recessions or depressions.
• We expect continued diversity and unevenness in economic recovery across countries, regions, sectors, due to variations in economic features, policy support, lockdown successes or premature re-opening.
• Further outbreaks, lockdowns and confidence, labour market or financial challenges could slow the recovery, unless a vaccine or cure becomes widely available, or general immunity is achieved.
• Any major domestic or international policy change would affect both cyclical and trend growth, via spending on public health, social safety nets, trade/investment rules, capex and consumption.
• We devise a simple model to flesh out three scenarios with five roadmaps to recovery, reflecting interplay among the pandemic; public health and macro policies; and private behaviour on domestic spending:
- Bull – two rapid routes: a best-case V, rapid vaccine development and hence better than usual recovery; a good-case U with a somewhat slower return to normality;
- Bear – two treacherous routes: a bad-case, L-shaped, a long recession with weak confidence holding back recovery; and worst-case, a W with secondary waves, extensive lockdowns and doubledip depression, even financial crises;
- Mid-way with a swoosh: recovery is slow but steady and sustained;
- An assigned probability-weighted “square-root” path: a sharp fall, a re-opening rebound that levels off due to debt and demand constraints, and long-run change in major economies and the international system.
• The road ahead as well as potential roadblocks or accidents will matter – new lockdowns or financial crises? – and likely affect bond yields, currencies, commodity prices, labour income and corporate earnings.
• We expect regional and sectoral diversity to increase the value of country, sector and asset selection. We would expect even greater dispersion across asset classes if more bullish or bearish scenarios materialize.

Learn more in our in-depth assessment.