The U.S. economy is exposed and vulnerable … what’s next?

April 02, 2020 | Kelly Bogdanova


We explore the economic scenarios that could unfold depending on the path the virus takes and the different ways the recovery could play out in 2021.

The onslaught of negative COVID-19 economic data has begun. Nearly 10 million U.S. workers filed for unemployment benefits in the past two weeks. Canada’s manufacturing activity slid to 46.1 in March, deep into contraction territory. This is the tip of the iceberg, as plenty of data will be released in the weeks ahead.

We believe poor economic data is largely reflected in the rapid and deep equity selloff of the past month as COVID-19 infections and deaths climbed in North America and Europe, and “stay at home” orders spread to about half of the world’s population. We think it’s reasonable to assume that equity markets are already factoring in deep (and brief) contractions for the global and developed economies, including the U.S.

But the difficult question is, just how deep and how long will the economic downturns be? The numerous uncertainties are a key reason we recently lowered our equity weighting to Underweight from Market Weight.

From our vantage point, there are more uncertainties during this COVID-19 downturn than there were during the financial crisis, the post-9/11 period, and the bursting of the tech bubble. We think a wide range of economic scenarios are worth evaluating, especially for the world’s largest economy.

2020 downturn: How deep, how long?

The inputs of economic forecasting during this pandemic can change just about as fast as the so-called “models” of the virus that are being used by public health officials.

They are highly dependent on the ever-changing path of the virus and on governments’ related shutdowns of day-to-day life (and, importantly, the extension of shutdowns). They are also dependent on just how quickly the fiscal aid packages and central bank mechanisms will be rolled out and how effective they will be in tiding over households and businesses—open questions at this stage. These and other factors, and the unprecedented nature of this crisis, are why we think it’s prudent to consider a wide range of economic scenarios for 2020.

RBC Global Asset Management has developed a matrix of nine economic scenarios that vary by depth and duration of the COVID-19 downturn. The scenarios evaluate a shallow, medium, and deep economic contraction, and also consider a contraction that is short, medium, and long in duration.

The nine scenarios are shown in the top table. They range from a shallow and short downturn resulting in 2020 GDP growth of 0.9 percent (no recession), all the way to a deep and long-lasting downturn producing a severe 16.5 percent decline in annual GDP growth. And there are various scenarios in between.

COVID-19 crisis: What are the various economic scenarios?

RBC Global Asset Management's U.S. real GDP growth estimates under nine different scenarios that vary by the duration and depth of the COVID-19 economic contraction

Current forecast highlighted: Medium depth and medium duration contraction would result in a 3.2% decline in 2020 GDP growth

2020 GDP growth scenarios
Depth Short
4-week trough
10-week trough
26-week trough
Shallow -5% trough 0.9%



Medium-15% trough

-1.7% -3.2%


Deep-30% trough

-5.5% -8.5%


Current forecast highlighted: Medium depth and medium duration contraction in 2020 would be followed by a 5.6% increase in 2021 GDP growth

2021 GDP growth scenarios
Depth Short
4-week trough
10-week trough

26-week trough

Shallow-5% trough

2.7% 3.2% 4.5%

Medium-15% trough

4.1% 5.6% 9.9%

Deep-30% trough

6.3% 9.6%


Source - RBC Global Asset Management; forecasts as of 3/27/20. Data show average annual percentage change. Assumes a rapid decline into the trough versus a much lengthier recovery period.

At this stage, RBC Global Asset Management Inc. Chief Economist Eric Lascelles’ preferred scenario is right in the middle of the matrix: A downturn that is medium in depth and medium in duration.

He estimates this medium/medium scenario would result in a 3.2 percent decline in U.S. GDP growth in 2020 (this is down from his previous estimate of a 2.8 percent drop, which was penciled in before the virus penetrated deeper into the U.S.). The updated forecast incorporates a sharp and brief peak-to-trough decline in output of 15 percent, followed by stabilization and then improvement. Even though his forecast is in the middle of the matrix, it is a serious hit to output. A 3.2 percent annual decline in GDP growth would be deeper than the financial crisis and the biggest retrenchment since 1946.

In order for one of the better scenarios to occur, we think there would need to be a meaningful decline in infection rates, treatment breakthroughs, or significant progress on vaccines over the near term.

One of the worse economic outcomes could arise if the virus becomes more acute than health models are currently indicating and/or if the infection and shutdown periods last for months rather than weeks.

2021 recovery: What will the way back look like?

We do not believe COVID-19 will cause permanent damage to the U.S. economy or the profits of most companies. We continue to view this as a transitory crisis. Not even the Spanish Flu of 1918—a much more deadly pandemic that killed more than 40 million mostly young adults worldwide with three rounds of mass infection—resulted in enduring damage to global economic growth.

This is why the scenarios for a 2021 economic recovery are just as important to consider as the 2020 downturn scenarios.

In the same matrix format, RBC Global Asset Management has developed nine scenarios for the U.S. economic rebound, which are shown in the bottom table. The scenarios range from a shallow and short downturn producing a 2.7 percent rebound in 2021, to a deep and long downturn generating a massive 19.5 percent economic rebound—and all of the combinations in between. Each 2021 recovery scenario is contingent on the depth and duration of the corresponding downturn in 2020.

Lascelles’ forecast of a medium in depth and medium in duration contraction in 2020 would lead to a 5.6 percent GDP rebound in 2021, he estimates. This is his base-case scenario.


Developments in the coming weeks and months should provide a better indication of the outstanding risks for the U.S. economy. The depth and duration of COVID-19 impacts the depth and duration of the downturn, which in turn should impact the depth and duration of the equity market correction.

As some combination of an easing in the progress of the pandemic and signs the policy responses are having the desired effect begins to materialize, we think the market will regain its composure and permit investors to focus on improving prospects for 2021.

Required disclosures

Research resources

Non-U.S. Analyst Disclosure: Jim Allworth, an employee of RBC Wealth Management USA’s foreign affiliate RBC Dominion Securities Inc. contributed to the preparation of this publication. This individual is not registered with or qualified as a research analyst with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since he is not an associated person of RBC Wealth Management, may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts.

In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.


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