Emerging from Hibernation

The path out of lockdown
The exorbitant costs of lockdowns mean they must be wound back as quickly as possible. This is supported by evidence that the benefits of lockdowns are not as clear as assumed. It is also supported by evidence that infection rates are many times higher than official data of confirmed cases indicate, suggesting that the disease is far less deadly than feared in the early stages of the pandemic. In sequencing the easing of restrictions, not only should medical issues be considered but also economic factors - in particular, the scope for a quick demand rebound, the resilience of businesses, and the economic importance of the various sectors. Moreover, there is collateral medical damage from lockdowns. Hence, (advanced) manufacturing and construction should lead the way, along with smaller businesses in the services sector. Should a second wave develop, we argue a return to blanket lockdowns is highly unlikely.

It's all about the recovery
Although the economic damage of the health crisis will not be known until mid-summer at the earliest, the market focus has already moved on to the recovery. We lay out a nomenclature of recovery shapes, and conclude that in most cases an incomplete and lop-sided V-shaped recovery is most likely, with output not returning to the pre-crisis path even in 2022. In short, we expect most economies to experience recoveries that are combination of V and L shapes. Meanwhile, in the US and in most emerging economies we cover, recoveries should be more L-shaped.

Monumental fiscal effort more effective in upswing than in freefall
Fiscal policy has reacted with a public spending blitz, but except where poverty, hunger and homelessness are imminent risks, this will mostly boost the upturn rather than cushion the downswing. The increase in public sector deficits in 2020 look set to far exceed the increases in the first year of the GFC and subsequent Great Recession, but the short-term nature of the fiscal hit and the likely rapid subsequent improvement mean a one-year comparison is inappropriate. Viewed over a slightly longer horizon, we expect deficit expansions to be similar in most places. But in contrast to the post-GFC period, we find several arguments as to why austerity is unlikely, or will be minor, in most economies.

Central banks ride to the rescue once again
Flanking fiscal policy moves, and also reacting to a dramatic freezing of financial markets, central banks have once again come to the rescue, slashing interest rates in just four months by about twice as much as in the whole of 2019, and drastically expanding QE programmes - in many cases for the first time. In most places, the scope for conventional monetary policy easing is now exhausted in our view, as we think negative interest rates are unlikely to be adopted where central banks have resisted them. We consider yield curve control to be a far superior tool, although it is probably impossible in the euro area.

Medical uncertainty calls for alternative scenarios
Given the enormous uncertainty about the progress of the pandemic, we introduced alternative scenarios, one upside and one downside. In the upside scenario (15% probability) an effective treatment and/or a vaccine become(s) available quickly (3Q), whereas in the downside scenario increased outbreaks slow any normalisation of economic activity (30% probability). Broadly speaking, we see the downside to be about twice as large as the upside, which means that the risks to our base-line scenario are heavily skewed to the downside.

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This editorial contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of Societe Generale. This interview is dedicated to institutional and professional investors and is not deemed to be seen and used by retail investors for investment purpose. The viewers shall consult their own financial advisers to make their own appraisal.