The spread of COVID-19 has led to drastic measures all over the world, which are instantly having a major impact on the employment-intensive service sector. There is no doubt that global growth will decline in the first half of this year, as bankruptcies and unemployment increase rapidly. As the restrictions are eased, demand will recover, but there is a risk of setbacks, and Handelsbanken analysts expect unemployment to remain high for the next few years. Many central banks have quickly cut their policy rates to their minimum level, and analysts do not expect any hikes in the next few years. At the same time, public debt is rising across the board, in step with major packages of support and stimulus measures to mitigate the economic effects. Global lockdown Last year was marked with a synchronized downturn in global economic growth. Global trade decreased for the first time since 2009. The US-China trade conflict, a slowdown in auto production, and the risk of a no-deal Brexit subdued global trading and the rate of investment. These issues have been completely overshadowed by the COVID-19 pandemic and the measures that are being taken to curb the spread of the infection. The direct impact of border controls, quarantine measures and bans on public gatherings is brutal for parts of the service sector, such as the transport industry, hotels and restaurants, cultural and sporting events, and retail trade. At the same time, industrial production, which was already burdened, is now also struggling with problems in delivery chains and component shortages, owing to factory closures in China and other countries.The purchasing managers index (PMI) for the service sector has dropped sharply globally pointing to a recession in the first six months of this year. There has been less of a decline for the manufacturing industry, but the indicator is being buoyed by the fact that companies have low inventories, which in this context indicates a shortage of input goods rather than strong demand. The view of new orders is dropping sharply.Up until now, the global fiscal response to the pandemic has focused on reducing the economic impact of lockdowns on households and business. Governments have announced major fiscal stimulus packages. These include public consumption, broader liquidity measures such as government subsidized loans, financial guarantees, tax deferrals, direct support to households and companies, and various types of labor market support. The coronavirus pandemic leaves higher public debt in large parts of the world, which will take time to manage and that could create new risks.Handelsbanken’s main scenario assumes that restrictions in the West will gradually ease by the summer. For each day that households are prevented from consuming, companies lose production and the risk of bankruptcies increases. The longer the spread of the infection continues and countries remain closed, the greater the economic knock-on effects to other sectors of business life will be, and the more long-term the impact on the labor market will be. Analysts foresee greater economic effects in the Eurozone and the US than in China, as the lockdown phase will probably be more prolonged there, and thus the fall in global demand will exacerbate the decline. Handelsbanken expects global economy to decline 3.5% this year, before increasing 5.2% and 3.5% in the following two years. The unemployment rate in many countries will soar into double-digits and remain at a higher level than previously for the next few years. Recovery began in China The recovery in the Chinese economy looks to have commenced. Activity bottomed out in March and Chinese industry appears to have started up in earnest. However, the service sector is lagging far behind.However, as China opens up, global demand is weakening, which means that the recovery will take even longer. As the international value chains have been damaged this could, in the longer term, mean that foreign companies reduce their dependence on China. In all probability, this will mean that it will be a while before industrial activity is back at its previous levels. Exports represent a high proportion of Chinese GDP, and this will decrease markedly this year. As regards to the domestic side of the Chinese economy, the Communist Party regime will do all it can to maintain growth. The most important instrument for maintaining activity is the granting of credit, and it is here that most of the stimulus measures will be implemented. Fiscal policy measures will also be required, in the form of increases in direct expenditure in the state budget. Handelsbanken analysts believe that the Chinese economy is better equipped to cope with a global recession than most of the rest of the world. For this year, however, they only expect growth to reach 2%, which is well below the long-term trend. For next year, they expect stronger growth, as the recovery also picks up in the rest of the world. Eurozone hit hard The eurozone, particularly Italy and Spain, has been hit hard by COVID-19. Total lockdown has been imposed in more than half of the member states, with border controls implemented, schools and stores closed, and events cancelled. The Eurozone PMI fell well below the levels seen during the 2008/09 financial crisis, with the decline in the service sector being particularly acute.The key to a recovery lies in fiscal policy and in member states’ ability to find a way to share the burden of the pandemic. Most countries have announced major packages of support and stimulus measures in order to mitigate the economic effects of COVID-19, but in the particularly hard hit countries of Italy and Spain, the scope for fiscal policy is limited. Handelsbanken believes that the lack of fiscal policy options in Italy and Spain will lead to more long-term effects on enterprises and the labor market and open the door to economic risks that lie beyond their forecast horizon. At the same time, analysts take a relatively brighter view of the economies of countries such as Germany, France and the Netherlands.There are early signs of restrictions starting to be lifted in several countries, but analysts expect the restrictions to generally remain in place until the summer. This will mean a sharp decline in Q2 this year, with a gradual recovery beginning in Q3. Handelsbanken forecasts that GDP will fall by around 8% this year, and then increase by 3.7% in 2021. The eurozone unemployment rate is likely to increase to 11.9% in 2020, before dropping back to 10.8% in 2021. Analysts also see deflation of just below zero in 2020, with only modest inflation of 0.5% in 2021. The US has a long way to go The coronavirus outbreak came later in the US than in many other developed countries, and the US shows the highest infection and mortality figures in the world. More than half of all states have introduced some form of quarantine measures, which apply to around three-quarters of all Americans. The nosedive in the second quarter is expected to be the steepest in post-war history. The US economy will be hit hard by the pandemic. The number of layoffs has soared, indicating that unemployment may have climbed by 10 percentage points in only a few weeks. The US Congress has acted much more speedily than normal, and announced a number of fiscal policy measures to mitigate the effects. There is a package of around USD 2 trillion (or approximately 10% of US GDP), including cheques worth USD 1,200 apiece, which have been sent to households. The size of the support packages comfortably exceeds those announced during the financial crisis, and together with measures by the Federal Reserve, the US has presented a major overall package. However, when comparing the measures currently implemented, the US seems less focused on actually stopping the pandemic than many other countries, including Europe.Handelsbanken analysts expect a drastic fall in GDP in Q2 this year and a discouraging Q3, as they believe that the measures implemented indicate a more long-term spread. Not until Q4 will the economy pick up more tangibly, indicating that for 2020, GDP will decline by around 7%, while unemployment will rise to 11%. Next year, they expect a clearer recovery in growth of 6%, but unemployment will remain much higher than before, throughout the forecast period.How will the recovery look like? Handelsbanken’s main scenario is that the restrictions will be eased by the summer, and that the recovery will begin in the second half of 2020. However, given the exceptionally high uncertainty, analysts also sketch out two possible alternative scenarios. Both scenarios include a global recession with sharply rising unemployment, but the two recessions are different depths with different length recoveries. Alternative scenario 1: V-shaped recovery In this scenario, analysts assume that the global economy will recover from the effects of the COVID-19 outbreak considerably quicker than in the main scenario. The progression is the same as in the main scenario during the “closedown phase”, but when the restrictions are gradually phased out in the summer, the recovery is much quicker. This scenario is based on there not being any setbacks in the spread of the infection, that the uncertainty among households and companies eases quickly, and that governments across the world implement packages of stimulus measures to kick-start the economy once the pandemic peters out. At the same time, analysts assume central banks will support the recovery by pursuing a very expansionary monetary policy in the next few years. In addition, they assume that the crisis measures from governments and central banks across the globe will be effective, enabling the great majority of companies to survive the period of sharply declining demand without going bankrupt or making widespread redundancies. This paves the way for production and employment to increase rapidly as demand picks up. In this scenario, global GDP drops by 1.5% in 2020 and grows by no less than 6.5% in 2021. The US and eurozone recover quickly, with vigorous growth and a sharp decrease in unemployment in 2021 and 2022. However, even at the end of 2022, unemployment in the US and eurozone is slightly higher than before the outbreak of COVID-19. Alternative scenario 2: L-shaped recovery This scenario is based on most restrictions across the world remaining in place throughout 2020, to curb the spread of COVID-19. In addition, economic activity is restrained by nervous households and companies preferring to wait before investing and purchasing durable goods. The risks of a deep depression also spread to the financial markets, with declining stock markets and tighter financial conditions as a result. The prolonged closure of the global economy means that many companies go bankrupt and unemployment soars. This will in turn impede the recovery when it finally occurs. Governments all over the world are forced to extend their crisis measures, causing public debt to increase to untenable levels in several countries. At the same time, their options in terms of monetary policy are virtually used up. Many countries thus have little scope to stimulate their economies when the pandemic peters out. As a result, the recovery is sluggish, and the coronavirus crisis has much greater permanent effects on the global economy than in the main scenario. In this scenario, global GDP drops by 5.5% in 2020 and increases by only 2% in 2021. The recovery in the US and eurozone will be slow, with subdued growth in both 2021 and 2022. This means that unemployment persists at a historically high level for the next few years, and there is a clear risk that, in the long term, the unemployment rate will remain higher than before the coronavirus outbreak.