The unique nature of the coronavirus lockdown means the concept of ‘recession’ is not applicable to its inevitable economic fallout, according to BlackRock strategists. 
Around one-third of the globe’s population has been placed under some form of lockdown to slow the spread of the coronavirus, causing economic activity to plummet.
Economic data is already starting to show the impact of this voluntary slowdown and the global economy is set to contract, with the only debate about whether a V-, W-, U- or L-shaped recovery will eventually emerge.
The International Monetary Fund recently predicted that the ‘Great Lockdown’ will cause the worst economic downturn since the Great Depression of the 1930s.
IMF Great Lockdown forecast vs 2008 financial crisis
Source: IMF World Economic Outlook – Apr 2020
However, BlackRock Investment Institute head Jean Boivin pointed out that the traditional concept of a recession might not apply to the coronavirus downturn and argued that its ultimate impact could be less than that of the global financial crisis.
“The pandemic has triggered an abrupt, deliberate stop to economic activity. We believe the concept of ‘recession’ doesn’t apply here because this is not resulting from the evolution of a usual business cycle,” he said.
“The current shock is more akin to a large-scale natural disaster that severely disrupts near-term activity, but eventually results in an economic recovery.
“The large and immediate loss of income needs to be addressed with a comprehensive policy response, including a new suite of policy measures designed to help bridge cash flow pressures by backstopping household incomes and small businesses – without which the economy could suffer permanent damage. We have seen these measures – both monetary and fiscal – coming together quickly and on unprecedented scale, especially in key developed economies.”
Boivin noted a recent poll of economists and strategists by Reuters on the estimated cumulative shortfall of GDP in the US and eurozone as a share of 2019 GDP levels, which suggested the economy could hold up relatively well in this unique scenario.
The results are shown below, although the BlackRock Investment Institute head added that these hypothetical scenarios are subject to “significant limitations” given the uncertainties surrounding the pandemic.
Estimated cumulative GDP shortfalls from virus shock vs financial crisis
Source: BlackRock Investment Institute with data from Reuters, Apr 2020
“A banking crisis and overextended household balance sheets led to a ‘lost decade’ of deleveraging after the global financial crisis,” Boivin said.
“This time, the immediate shock is much deeper, but the financial system is not in crisis for the moment. The propagation of the shock is directly linked to the evolution of the virus and the duration of containment measures, in our view.”
He added that even the most pessimistic estimates of the long-term impact of coronavirus suggest that it will be “much less severe” than the financial crisis. The cumulative GDP shortfall in the years following the financial crisis was equivalent to 50 per cent of the US’ 2007 GDP.
“For the current shock to be on a similar scale, it would have to morph into a financial crisis, in our view,” Boivin said. “For now, we see the much swifter and greater fiscal and monetary response this time stemming this risk.”
However, this also means that policy execution is the biggest risk to BlackRock’s view that the downturn could be milder than 2008’s.
There have already been examples that illustrate the difficulty of delivering aid to those in need. Boivin highlighted the $350bn loan package for distressed small businesses in the US, which quickly reached its limit and appeared to be very difficult for the smallest businesses to access.
In addition, he warned that there is the permanent economic damage could be caused if coronavirus causes activity to be frozen for a long period of time, especially if policy support starts to lose momentum.
This could mean that the Great Lockdown might morph into a financial crisis, should a large number of corporate insolvencies put the banking system under pressure.
Boivin concluded: “The initial risk asset response in 2020 – with equities down 30-40 per cent across the world – has been on an order of magnitude similar to the financial crisis. We see the lasting impact of the current economic shock as less severe given much greater fiscal and monetary support this time around.
“Yet effective implementation of such policy support is critical and we remain cautious over a tactical horizon due to the substantial near-term uncertainty on the evolution of the virus and containment measures.”
Given this, BlackRock is mainly sticking to benchmark holdings on an asset class level, with a general preference for credit over equities. When it comes to stocks, it is overweight quality for its resilience while being underweight value.