Coronavirus and economies in 2020

The world is currently going through a new type of economic and health crisis that is putting strong pressure on all businesses. Between business interruptions, trade disruptions and restrictive measures, the international economy is in a state of turmoil.

  • Global GDP growth in the second quarter will hit the bottom of the cycle: a decline of -15% year on year
  • Global GDP forecast for the full year revised down from 2.4% to 0.8%
  • A rise in insolvencies worldwide of +14% in 2020
  • 65 million workers across the EU may need support

Allianz Research experts and the Euler Hermes Economic Research Department have revised their scenarios for the economic outlook for 2020. Since January, the economic effects of the coronavirus Covid-19 epidemic have unfolded in three phases: from a supply shock at the centre, which was China, which triggered seismic waves in world trade and disrupted supply chains, to its spread to financial markets when investors realised a recession was inevitable, to a violent demand shock hitting consumption and investment in China, Europe and the United States.

Economists at Allianz and Euler Hermes expect a sharp global recession in the first half of 2020 in the vast majority of developed and emerging economies, followed by a "U"-shaped recovery. The cost of containing the epidemic could amount, on a monthly basis, to as much as 20-30% of the shock that each economy is currently suffering.

Cost to trade: $722 billion

The Covid-19 epidemic is causing major upheaval in international trade. According to Allianz and Euler Hermes, every quarter of disruption to international trade will cost world trade $722 billion, mainly because of restrictions introduced at the borders of the European Union and the United States.

We have cut our estimate for global GDP growth in 2020 to +0.8% from +2.4% previously. We expect world GDP to contract by -15% year on year in the second quarter, which is as much as in 2008-2009 combined. In this context, we expect GDP growth of +0.5% in the US and a GDP decline of -1.8% in the euro area and Germany, -said Ludovic Subran, Chief Economist at Allianz and Euler Hermes.

Bankruptcies: an increase of +13%

In these unprecedented times, governments and central banks are forced to adopt equally unprecedented support measures. Will they be effective? Will they help countries avoid recession, or will they merely help limit the damage?

Assuming that measures to contain the spread of the disease are successful, Allianz and Euler Hermes expect a recovery in economic activity in the second half of 2020. Coming out of recession will still pose a serious challenge for some companies, especially those that are over-indebted and have little equity, because revenue losses during the crisis will be difficult to make up by the end of the year. The number of corporate bankruptcies worldwide will rise by +13% - estimate economists at Allianz and Euler Hermes.

After the crisis, the world will be a different place. COVID-19 will certainly change our perception: of investment in health and of defining a capitalism that favours social integration; of China's "soft power"; of globalisation; of the fight against climate change - the next sudden, likely collective challenge ahead of us and perhaps also the way we save for various, including unforeseen, life events - believes the Chief Economist of Allianz and Euler Hermes.

Global GDP forecast and the future of marketing budgets

The full study by Allianz Research and the Euler Hermes Economic Research Department can be found here.

Terms from the article

GDP — Gross Domestic Product. The value of all goods and services produced in a country in a given period. Reported in real terms (after subtracting inflation) and nominal terms.

Why it matters: The pace of GDP growth precedes advertising budget decisions by two to three quarters. Companies cut spending when they see a slowdown, not when it has already arrived.

When it is used: When planning the annual budget, sales forecasts, and negotiations over advertising rate cards.

What happens if it is ignored: Without tracking GDP, annual planning is based on last year's results — that is, on a period that has just ended.

Summary

Analysts at Allianz Research and Euler Hermes estimate that global GDP will grow by only +0.8% in 2020, and will contract by -15% year on year in the second quarter — as much as the 2008-2009 crises amounted to in total. Every quarter of disruption to international trade is expected to cost world trade $722 billion. The number of corporate bankruptcies will rise by +13%, and the economic recovery will be U-shaped.

What matters for the marketing industry: it is GDP, not current sales results, that precedes advertising budget decisions by two to three quarters. Companies cut spending when they see a slowdown, not when it has already arrived. The scenario also assumes that after the crisis the world will be "a different place" — with a change in the perception of investment in health and globalisation.