(FX Street) Analysts at UBS examine how the interplay of health, monetary, and fiscal policy impact markets.
They are assessing three scenarios: upside, central, and downside, each determined by the answers to how quickly economic activity can normalize, and how much policy responses can limit corporate bankruptcies and job losses.
“In an upside scenario, virus infections in the major economies in Europe and the US follow the path of China and peak by early-April, allowing measures to be gradually relaxed from early-May onward. Government stimulus is sufficient to avoid lasting damage to the economy, and allow growth to begin a V-shaped recovery in the third and fourth quarters.”
“In our central scenario, new cases of the virus generally peak by mid-April, allowing the most severe restrictions to be lifted from mid-May. A coordinated monetary and fiscal response eventually provides the necessary funding to backstop affected businesses and industries, but it arrives too late to protect all. A U-shaped economic recovery takes hold around the fourth quarter.”
“In a downside scenario, containment measures do not prove sufficient to halt the spread of the virus, and new cases continue to rise in Europe and the US into May/June. We also see the virus spread again in China, requiring renewed restrictions there. Government policy would not meaningfully offset the lengthy demand shock, leading to a sharp rise in bankruptcies and joblessness. Economic growth would have an L-shaped profile through 2020.”