Coronavirus puts economy on hold

The world of business has come to a halt amid the coronavirus pandemic: For most people, life is currently taking place almost exclusively within their own four walls. Nearly all leisure activities have been banned and even trips to the supermarket are undertaken only when absolutely necessary. Many companies have reduced their employees’ working hours or furloughed staff. The measures implemented to contain the spread of coronavirus are changing people’s everyday life and social interactions. But they have also caused a severe slump in economic activity – not just in Germany, but globally.

Central banks and governments around the world have introduced huge support packages to counteract this: In the US, the Federal Reserve lowered interest rates to virtually zero and launched an unlimited asset purchase programme for US government bonds and securitised real-estate loans. Before that, US President Donald Trump had already declared a national state of emergency. This move alone released federal funding of up to US$ 50 billion for the fight against coronavirus. The legislature, meanwhile, adopted a fiscal stimulus package of around US$ 2 trillion aimed at containing the impact of the pandemic. The stock markets rallied briefly in light of these measures but proved unable to hold on to the gains for long.

Billions from the ECB

Extensive action was also taken in Europe. At its meeting on 12 March, the ECB announced its first comprehensive package of measures designed to support European companies in this difficult situation. The bank kept its key interest rates for the eurozone unchanged but ramped up its bond-buying programme. Initially, the ECB said it was intending to make additional purchases of up to €120 billion in the bond market by the end of the year. But just one week later, it unexpectedly announced a further expansion of the scheme. An additional purchasing volume of €750 billion is planned under the new Pandemic Emergency Purchase Programme (PEPP), which is scheduled to run at least until the end of 2020. The ECB also explicitly emphasised its commitment to “playing its role in supporting all citizens of the euro area through this extremely challenging time”. It would therefore ensure that families, firms, banks and governments can benefit from supportive financing conditions that enable them to absorb this shock. Liquidity support measures for banks had already been adopted by the ECB at its meeting in the preceding week. The German government has announced unlimited loan facilities for domestic companies and the implementation of a fiscal stimulus package as and when necessary. An economic stabilisation fund with a volume of €400 billion was set up for the purpose of guaranteeing company loans.

The huge scale of the adopted support measures has contributed to a stabilisation in the capital markets. But it is still not enough in the long run. For as long as economic activity remains suspended, monetary and fiscal policy measures will only have a limited effect. First, the pandemic must be brought under control. We believe that only then will it be possible for the economy to gradually revive and pick up momentum.

Forecasts adjusted

The economists at Union Investment have significantly lowered their global growth forecasts as a result of the coronavirus pandemic. The revised figures are based on the assumption that public life will remain suspended for longer than originally anticipated, i.e. until mid-April in Europe and until the end of April across large parts of the US. The estimates also assume that these measures will succeed in bringing the virus under control. It is important to note that if the lockdown remains in place beyond the assumed timelines, Union Investment’s economists would anticipate an additional contraction in gross domestic product (GDP) of 0.7–1 per cent per week of extension.

Forecasts in detail

The GDP of the eurozone is expected to decline by 4.6 per cent in 2020. Italy will probably be particularly hard hit, but the experts believe that Germany will also slip into recession. The German economy is expected to contract by 4.5 per cent in 2020. The US economy will also be severely affected by the coronavirus crisis. Union Investment’s experts predict that a recession in the corporate sector will unfold over the further course of the crisis, accompanied by weak investment activity and rising unemployment. For the year as a whole, US economic output is expected to decline by 4.2 per cent.

All in all, economies thus appear set to contract sharply in the first and second quarters of 2020, after which they should gradually begin to stabilise. The aforementioned monetary and fiscal support measures will play a key part in this process. However, a sustained recovery is unlikely to set in before mid-2021 at the earliest. Our economists thus foresee a return to positive growth rates for both the eurozone and the US in 2021.

Prices should go up again in the medium to long term

For the capital markets, this scenario means that volatility will remain high in the near term. Any trend reversal on the stock markets seems unlikely until the rate of new infections starts to fall. But the medium to long-term prospects are more positive. Once the economy returns to its original growth path, previous investment trends (e.g. the low-interest-rate environment) should continue to apply. On this basis, we regard it as advisable not to make rash adjustments to long-term investment strategies, despite the current market conditions.


As at 2 April 2020