Pandemic & Recession: Interview on the State of the Global Economy with Mathieu Savary, Strategist at BCA Research

Monday, April 6, 2020


Aside from the alarming health crisis, we have also witnessed financial markets experiencing large drops, high volatility, and a general sense of uncertainty. How worried should investors be regarding the current situation, and what comparisons can we draw with the financial crisis back in 2008?

The global economy has suffered its worst shock since the Great Financial Crisis (GFC). The capacity of corporations to service their debt will be impaired, which is prompting the largest liquidity crunch since 2008. In our base case, GDP will contract more quickly for two quarters than it did during the GFC, but, the fact that banks and households are in better shape than back then and that fiscal authorities and central banks are responding much more quickly and aggressively than in in 2008 suggests that the economy should bounce back much more quickly, .

What is your assessment on the likelihoods or the severity of a global recession if we assume the virus peaks in the US and Europe in one to two months?

A global recession is now a certainty. The key questions are how deep will it be and how long will it last. On the depth front, it will be very painful. In Q1 and Q2, global growth is likely to be even weaker than at the apex of the GFC. However, because the underlying economy is less vulnerable than in 2008 and because policymakers are responding with every tool at their disposal, the global economy should stabilize in Q3 and rebound very strongly in Q4. The build-up of pent-up demand during the quarantines increases the likelihood of this sharp Q4 rebound.


What are some metrics that we should be watching out for in the coming months to gauge the severity of the economic fallout?

We would focus on the following variables:

  • The length of the quarantines (which will be a function of when the rate of new infections peak in various geographies).
  • The manufacturing and service PMIs.
  • The level of unemployment claims (in the US).
  • Default activity
  • Live trackers such as traffic, restaurant reservations, steel consumption and electricity consumption.


What are your opinions on the current approaches being set out or proposed by the federal government, from the Federal Reserve cutting rates to giving out $1,000 for every adult? What are your thoughts on the best government approach towards containing an economic fallout?

Policymakers around the world have shown their willingness to do “whatever it takes.” But this is exactly what the global economy needs. This is particularly true when it comes to central banks. What they are doing today is upholding the Bagehot principle and acting as lenders of last resort. The global economy and financial system is in the midst of an exceptional liquidity crunch and insatiable demand for USDs. As a result, central banks must fulfil this demand, otherwise, the liquidity crisis will morph into a solvency crisis. Not doing so means that the wave of defaults resulting from the COVID-19 shock will be orders of magnitudes greater, and thus the economy will flirt with a depression, not a recession.

Governments are easing fiscal policy with abandon. This is also needed, especially if any of the officials in place ever want a chance of getting re-elected. Moreover, since this crisis was not the result of households taking on undue financial risks, governments are not seen as bailing out irresponsible individuals.

The biggest risk from the policies recently announced (and that will no doubt continue to be announced over the coming months) is that it can generate inflation in the next 5 to 10-year. If policymakers are not careful and do not remove the punch bowl once the economy has sufficiently recovered, investors, who price in barely any inflation risk over the coming 10 years could be in for a nasty surprise.


How do you foresee the impacts of this crisis playing out in portfolios in terms of asset classes, strategies and geographic plays?

While the short-term outlook remains murky for asset markets, investors with a 12-month or longer investment horizon should begin to move capital into equities at the expense of bonds. Commodities, too, are becoming attractive at current valuations. Industrial metals such as copper will benefit greatly from China’s stimulus. This suggests that industrials will benefit greatly from the post-COVID-19 reflation. Moreover, healthcare stocks will also benefit from a structural tailwind. 



Author: Jerry Xia

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