What next?
March 2020
What consequences can we expect from the global spread of coronavirus?
The coronavirus outbreak has developed into a pandemic. Drastic steps such as movement restrictions and lockdowns have been implemented to reduce the risk of transmission, but economic life has largely stalled as a result. Global recession seems inevitable for 2020. Packages of monetary and fiscal policy measures on an undreamt-of scale are intended in particular to limit the number of company failures and jobs lost. We have to have confidence that our medical researchers will find a way to control COVID-19 in the medium term, but by then the world will be a rather different place. National debt is going to increase significantly. National governments may choose to exert greater control over economic affairs and suppress market forces, depending on the length of the crisis and the time for which the measures implemented in response remain in force.
What will happen if the US re-elects the incumbent president?
The world is going to have to adapt to a much more inclement climate in international trade even after the restrictions on trade introduced on medical grounds due to coronavirus are lifted, which we have to hope will happen sooner rather than later. The effects of the pandemic in the US are most likely to have the greatest negative impact in the second quarter. Donald Trump, who aims to win re-election in November, will have to decide whether he wants to present himself as a protectionist or as the great man of business. He has shown a preference for the former in the past, suggesting that other countries were threatening American jobs. More than once recently he has used the phrase "Chinese virus" to underline the perceived external threat. He has also made a point in the past of using economic growth and the state of the stock market as a barometer of his success, however, so his re-election campaign needs a strong economy – and hence also dynamic global trade. This indicates that he is probably more likely to adopt an open stance to the world, at least until the votes have been cast. If he wins though, it is perfectly possible he might then return to his old protectionist approach. It should not be overlooked, moreover, that the Democrats too are no great enthusiasts for free trade.
What will happen to the residential real estate market if Germany falls into recession?
We expect German aggregate output to shrink by at least 4 percent in 2020, bringing to an end what has been a very long recovery. Residential real estate prices will stop rising for the time being and will probably begin to fall in a few particularly highly valued segments. Key interest rates are going to remain extremely low for even longer because of the pandemic, but the sharp increase in government spending will tend to push up the cost of borrowing in the capital market. Bond purchasing by the ECB could ameliorate this effect somewhat, but it is to be expected that Germany too will have to pay a risk premium. If short-time working arrangements prevent any dramatic increase in unemployment and if the number of insolvencies can be kept within limits, demand for real estate will not remain subdued for long. Here too, however, it has to be said that our politicians are increasingly looking to regulation rather than competition – although the action taken to date has not succeeded in closing the gap between supply and demand.
What happens if no agreement is reached on the future relationship between the UK and the EU after Brexit?
The risk exists that border controls could be introduced abruptly at the end of 2020 if, despite expectations to the contrary, the British are unable to reach agreement with the EU. The organisational and legal difficulties this would create seem almost bound to throw foreign trade into turmoil at first. The British economy would suffer and the EU too, especially Germany, would be faced with a downturn in exports. A no-deal Brexit could therefore have a noticeable impact on the economy, especially if the world is fighting to recover from the coronavirus recession at the same time.
Dr. Gertrud R. Traud
Dr Gertrud R. Traud has been Helaba's Chief Economist for 15 years and one of the very few woman to hold such a post in Germany. Dr Traud and her research team produce numerous publications every year including the Markets and Trends report, which presents the annual economic and capital market outlook based on a variety of global economic scenarios developed for the purpose. Published every autumn, Markets and Trends always has a subtitle appropriate to the report's predictions. The primary scenario for 2020, for example, is "Curtain up! Melodrama – next act." The forecasts thus far have proven to be extremely accurate.
Additional topics
The coronavirus pandemic is convulsing the economy and financial markets. Learn more about the effects in our Capital Markets Briefly.