Easing lockdowns: New COVID-19 scenarios

Discover the latest UBS Global Risk Radar.

02 Jun 2020

At a glance

We have updated our COVID-19 scenarios for the next six to 12 months. We now expect a sustained economic recovery starting the third quarter of this year and a return to "normal" social activity in the first half of 2021. Minor restrictions will likely remain in place for the remainder of 2020. In the upside scenario, we would expect a return to "normal" as early as the second half of this year. A major second wave of the coronavirus remains our main downside scenario. In this edition, we map out our upside, central, and downside scenarios and suggest three possible paths for the global economy and markets going forward.

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When will the COVID-19 vaccine reach the market?

Based on the evidence we have so far, major developed economies should be able to cope with future reaccelerations of the virus without having to enter another lockdown. New hot spots of infection remain a distinct possibility, as evidenced by recent events in South Korea and China. However, the pandemic can likely be managed with a combination of testing and contact tracing measures, increased ICU capacities, and reasonably effective antiviral treatment. We believe initial supplies of at least one vaccine for COVID-19 could reach the market by the end of this year, with more widespread availability by mid-2021.

As public support for economic lockdown continues to decline, countries will likely continue to ease lockdown measures over the summer. However, softer policy restrictions, such as physical distancing guidelines and limits on public gatherings, are likely to remain in place until a vaccine becomes widely available. The same applies to limits on international travel, given that outbreaks are still prevalent in many parts of the world, including Latin America and India.

Many sources of uncertainty remain. For example, the likely size of future waves of infection is still unclear, and so is the manufacturing capacity for both antiviral treatments and vaccines. In our view, these uncertainties point to three potential scenarios.

Central scenario

In our central scenario, we project the start of a sustained economic recovery in the second half of this year, and a return to normality in the first half of 2021.

Developed countries should be able to gradually lift major economic restrictions throughout the summer, but softer restrictions will likely remain in place until year-end to reduce the number of new infections and avoid another lockdown. Social activity (as measured by Google Community Mobility Trends) should stabilize around 20% below prepandemic levels in the meantime.

Our expectation is that the first doses of a reasonably effective vaccine could be made available to medical staff and critical workers around the end of this year. With more and more doses coming online, remaining restrictions could then be lifted in the first half of 2021, at which point social activity should return to pre-pandemic levels and economic recovery could start in full.

Upside scenario

In our upside scenario, we see a complete return to normality around the third or fourth quarter of this year.

This can happen for several reasons:

  • Virus reproduction numbers do not pick up meaningfully after restrictions are eased, possibly implying that the herd immunity threshold has already been reached in some countries.
  • Sophisticated testing and tracing methods help contain future outbreaks.
  • A highly effective vaccine becomes widely available earlier than we expect, and manufacturing capacity exceeds our estimates.

Any of these developments would allow governments to fully reopen their economies earlier than our central scenario would suggest. A full economic recovery could start as early as the second half of this year.

Downside scenario

In our downside scenario, the global economy would not return to normality until at least the second half of next year.

The main underlying driver would be a major second wave of the virus, with even the most advanced healthcare systems failing to cope with the inflow of new patients. Lockdowns would have to be reimposed, dealing another severe blow to an already fragile global economy.


Investment implications

Governments continue to support the economic recovery and asset prices via an unprecedented amount of liquidity and fiscal stimulus. This allows for risk assets to continue to perform well, despite troubling corporate fundamentals such as falling earnings and rising defaults through 2020.

Overall, we continue to see attractive risk-reward in credit and currently like US investment grade corporate bonds, US high yield credit, USD emerging market sovereign bonds, and green bonds. We expect long-term opportunities, including sustainability, to perform well in our central scenario. Furthermore, volatility remains elevated, and we recommend that investors take advantage of that situation.

Easing lockdowns: New COVID-19 scenarios

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