If we wanted to characterise the contraction and recovery pattern, we would probably describe it as a ‘long U-shaped’ recovery; in other words, as a gradual normalisation which will take some time before seeing a return to pre-crisis levels. In Italy, the government is estimating an 8% GDP contraction this year, followed by a 4.7% YoY rebound in 2021. In our analysis, we consider two possible reference scenarios for 2020 growth: -8.0% YoY (as per the government scenario) and -12.0% YoY.
Two major drivers are shaping the landscape for EM countries: Covid-19 and oil dynamics. We are mindful that current events will have very significant negative effects on the economic outlook for EM this year, leading many countries into recession.
In our latest analysis released at the beginning of the year, we had laid out our medium-term outlook as a correction of the business cycle, including an economic slowdown, yield curve inversion, a return to lower bound policy rates, and subdued inflation prints. The global shocks resulting from the eruption of the coronavirus pandemic have significantly altered the sequence of economic and financial phases, shortened the timeframe and expanded the scale of the ripple effect.