With more than 100 countries in lockdown, accounting for more than half of global GDP, economic forecasts are currently so bad they are almost meaningless.
The global economy is expected to set negative records in nearly every respect, as the coronavirus pandemic is hitting demand and supply factors in equal measure.
Lockdown measures, negative consumer and business sentiment, and rising unemployment will suppress demand, while factory closures and supply chain disruptions strangle supply.
Amid the lockdown, retail sales of anything other than food will see record monthly and quarterly falls in many developed countries. In the US and parts of Europe, industrial output is likely to record the biggest monthly declines since the end of World War II.
The World Trade Organization expects trade to decrease by between 13% and 32% this year. And the Internatioanal Energy Agency forecasts demand for oil to drop by 9%, or 9 million barrels per day, in 2020. April is set to record the lowest demand for oil in 25 years.
Recession unavoidable
Meanwhile, the International Monetary Fund states global economic growth is going to turn “sharply negative”, triggering the worst decline since the Great Depression of the 1930s.
Kristalina Georgieva, the head of the IMF, said the crisis will hit emerging and developing economies the hardest.
If the pandemic can be controlled in the second half of the year, there could be a partial recovery in 2021, she said last week. But the situation could also deteriorate further.
“I stress there is tremendous uncertainty about the outlook: it could get worse depending on many variable factors, including the duration of the pandemic,” Georgieva said.
The Economist Intelligence Unit calculated in its second quarter economic forecast that global output could contract by 2.5% this year – a deeper contraction than after the global financial crisis in 2008.
Although a modest rebound in global output could occur in the second half of 2020, this is again dependent on globally containing the spread of coronavirus without any second or third waves of the pandemic.
In any case, the EIU predicts the impact on confidence and demand to be long lasting. With a rise in uncertainty, households are more inclined to save and businesses more likely to delay investments.
For export-focussed manufacturing countries like Germany, this means output could contract by 10% in the second quarter on a quarterly basis, and by 6% overall this year, the EIU report said.
For the US, the report noted, that “the US administration’s initial response to the coronavirus outbreak was particularly poor and haphazard, allowing the virus to spread quickly”.
Once the measures needed to contain the virus, the steep jump in jobless claims in late March and sluggish progress in accelerating testing for coronavirus are factored in, US real GDP is expected to contract by 2.9% in 2020.
Others, like RBC Global Asset Management chief economist Eric Lascelles, have lowered the base-case forecast for 2020 US GDP growth even further, to -7.7%. Although the origins of the shock are exogenous, he believes the likely duration of the downturn will still cause real economic damage.
Call for international cooperation
World Trade Organization director-general Roberto Azevedo said in a statement that projected trade figures are “ugly” and references to the financial crisis and even the Great Depression were inevitable. However, compared to previous crises, banks were well capitalised and the world’s economic engine was working.
“The pandemic cut the fuel line to the engine. If the fuel line is reconnected properly, a rapid and vigorous rebound is possible,” he said.
The WTO said global trade could rebound in 2021 by between 21% and 24%, depending on the conditions of the pandemic.
For that to happen, countries would need to work together to see a faster recovery than if they are acting on their own. Monetary, fiscal and trade policy would all need to go into the same direction.
More protectionism would just create new shocks, Azevedo said.
However, the uncertainties around international cooperation are just as enormous as public health concerns. Global trade had already declined by 0.1% last year, mainly as a result of trade tensions between the US and China.
New ‘Marshall Plan’
An analysis by the Organisation for Economic Cooperation and Development concluded that for each month of containment, there will be a loss of two percentage points in annual GDP growth. The tourism sector alone faces an output decrease as high as 70%.
“Our analysis further underpins the need for sharper action to absorb the shock, and a more coordinated response by governments to maintain a lifeline to people and a private sector that will emerge in a very fragile state when the health crisis is past,” said Angel Gurria, OECD secretary general.
He called for “a level of ambition similar to that of the Marshall Plan and a vision akin to that of the New Deal, but now at the global level”.
The OECD said governments should ensure more international cooperation in responding to the health challenge. Regulatory agencies in the US, Europe and elsewhere should work together to remove regulatory hurdles for vaccines and treatments.
For the moment, this level of cooperation is wishful thinking as the US has cut its funding of the World Health Organization.
The OECD said governments should advance joint policies, rather than adopting them in an uncoordinated way. They should finance an immediate buffer to economies to cushion the negative impact and speed up the recovery.
In healthcare, funds should be spent on extensive COVID-19 testing, treatment for all patients – regardless of whether they are insured or not – and more personal protective equipment.
And in the economy, governments should fund short-term employment schemes, lower requirements for unemployment insurance, transfer cash to the self-employed and support the most vulnerable.
Governments should further defer tax payments and other charges, temporarily reduce VAT and create working capital credit lines for companies through state guarantees and support packages for small businesses.
But while countries have implemented many of the suggested measures at a national level, there is so far very little notable international coordination.
Relief measures
Last week, the European Union agreed on a US$540 billion rescue package for European countries hit hardest by the crisis. The plan involves the EU’s bailout fund, the European Stability Mechanism, which will make EUR240 billion available to guarantee spending by indebted countries under pressure.
In addition, EU finance ministers agreed on other measures, including EUR200 billion in guarantees from the European Investment Bank and a European Commission project for national short-time working schemes.
But many EU members will rather remember the protracted wrangling over the deal and the ongoing refusal by northern European countries to issue debt instruments jointly with their southern neighbours.
The G20 at least offered a small glimmer of hope for the world’s 76 poorest countries by announcing a debt-relief programme this week. The suspension of bilateral debt-service payments by poor countries is set to run from 1 May through 31 Dec., with an option for renewal in 2021.
It is still possible that the global pandemic will reverse the recent trend of less international cooperation, evidenced by the Trump presidency and Brexit. But it is just as likely that deteriorating economic indicators could trigger governments’ nationalistic reflexes.
Rising government debt levels around the world will both fuel the requests for international support and the reluctance to provide it.
The Economist Intelligence Unit argues that efforts to contain the pandemic will drain fiscal revenues and drastically increase public expenses across developed countries, which in a worst-case scenario, could lead to new sovereign debt crises.
In this context, the IMF projects the US will run a budget deficit of 15.4% of GDP this year. For developed economies as a whole, budget deficits will run at 10.7% of economic output. And emerging markets are expected to face on average annual fiscal deficits of 9.1%.
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