Home Business News Four COVID-19 Scenarios: What might happen next?

Four COVID-19 Scenarios: What might happen next?

by LLB Editor
27th May 20 12:04 pm

Financial markets partially recovered from their late-March lows, but the U.S. equity market was still 15% below the mid-February pre-COVID-19 peak, as of May 19.

What economic scenario do markets currently reflect? MSCI explored four potential financial-market outcomes based on International Monetary Fund (IMF) scenarios for GDP growth, ranging from a swift V-shaped recovery to a pessimistic L-shaped scenario, in which outbreaks recur and lockdowns return well into 2021.

MSCI’s analysis suggested that, based on the May 19 level, the U.S. equity market is closest to our most optimistic V-shaped scenario. Under the most pessimistic L-shaped scenario, equity markets could lose another 24% compared to May 19 levels.

With the gradual release of fresh economic data and revised growth projections, it has become clear that the COVID-19 pandemic and its resulting lockdowns will have a significant impact on this year’s GDP numbers.

What is not necessarily clear, though, is what the medium- to long-term implications will be. Will real economic output revert to pre-COVID levels, or could more persistent changes impact trend growth for the years to come? The reality is it depends to a large extent on how the public-health crisis evolves, and there is significant uncertainty around that.

MSCI proposes four financial-market scenarios with varying degrees of severity, based on those proposed by the IMF.

The first, V-shaped scenario assumes an annualized 2.15-percentage-point contraction in the U.S. economy over the next two years but no persistent impact.

On the other end of the spectrum is a pessimistic L-shaped scenario in which outbreaks and lockdowns occur well into 2021; this scenario assumes not only a severe short-term contraction, but persistent effects — with annualized growth five years from now 1.6 percentage points lower than the pre-COVID baseline. In between these two extremes, MSCI also modeled U-shaped and swoosh-shaped scenarios.

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