International Finance
Economy Magazine

The coronavirus is a disaster for global economy

The International Monetary Fund expects the global economy to shrink by more than 3 percent in 2020

When the coronavirus outbreak was first detected in the Chinese city of Wuhan last December, nobody reasoned it would impact the global economy in the way it has today. The International Monetary Fund expects the global economy to shrink by more than 3 percent in 2020 — pointing to the fact that it is the steepest slowdown since the Great Depression of the 1930s.

Earlier estimates observed that should coronavirus become a pandemic, economies will lose at least 2.4 percent of their GDP value in 2020, forcing economists to reduce their estimate from 3 percent. Even global stock markets are experiencing dramatic declines — and the Dow Jones has reported its most significant single day fall of nearly 3,000 points on March 16, 2020. This beat its previous record of 2,400 which took place four days earlier.

Experts have warned about the high possibility of global conditions worsening on the back of the protracted coronavirus pandemic. In fact, Kristalina Georgieva, managing director of International Monetary Fund, explained a ‘global recession at least as bad as during the Global Financial Crisis or worse’. Even Bloomberg Economics has warned that the ‘full-year GDP growth could fall to zero in a worse-case pandemic scenario’.

The protracted pandemic has deeply hurt several economies across the world forcing them to impose lockdowns to flatten the curve of the infection.

Whenever a pandemic takes place, economic contraction is never far behind. To second that, the World Bank said that the pandemic is expected to push most economies into recession this year, with per capita income contracting in a significant capacity globally since 1870. It further stated that “The crisis highlights the need for urgent action to cushion the pandemic’s health and economic consequences, protect vulnerable populations and set the stage for a lasting recovery. For emerging markets and developing countries, many of which face daunting vulnerabilities, it is critical to strengthen public health systems, address the challenges posed by informality, and implement reforms that will support strong and sustainable growth once the health crisis abates.”

This year, the US, Japan, the UK, Germany, France, Italy and Spain are expected to shrink by 5.9, 5.2, 6.5, 7, 7.2, 9.1 and 8 percent respectively, observed the International Monetary Fund. More specifically, developed countries have been hit harder by the pandemic — meaning their growth rate is by -6 percent in 2020. Developing countries are expected to shrink by -1 percent.

China’s declining economic growth rate affects other countries
For China, the growth rate is disturbing. The country’s GDP dropped by 36.6 percent in the first quarter of 2020, while South Korea’s GDP fell by 5.5 percent. It appears that South Korea did not impose a lockdown but followed a strict regime of testing, contact tracing and quarantining.

It is worth noting that the downside effects of the pandemic on businesses in China will further impact other countries from around the world because the mainland is globalised and interconnected on so many levels. As Diane Swonk, chief economist at the Advisory Firm Grant Thornton, points out that several countries have multinational companies operating in different parts of the world because their economies are global. This points to China again. The mainland has established its presence in most economies because of its global supply chain over many years. With that, a company’s production shutdown in China will force it to implement the same actions in its US plant as well.

To make matters worse, China recently lifted restrictions on lockdown resulting in a second wave of infection. India, China, Indonesia, Japan, Singapore and South Korea account for 85 percent of coronavirus cases in Asia.

What will happen to the troubled oil and gas industry?
The adverse effects of coronavirus have spread far beyond China’s supply chain. The problem is that it has hurt powerful industries such as oil and natural gas which is experiencing its third shock in 12 years — and experts believe that this time is different.

The reason it might be different is because the pandemic has caused a major imbalance in supply and demand forcing the Opec and its allies to cut production. Also, the pandemic has lowered gas demand by 5 percent to 10 percent against growth projections. It is even anticipated that regional gas prices could drop lower than in the previous episodes. A report published by McKinsey shows that demand for refined products has reduced by at least 20 percent — and the recovery will not take place before two years at least. On the bright side, oil could recover in 2021 or 2022 to precrisis levels ranging from $50/bbl to $60/bbl.

Suggested measures to cope with the pandemic
The World Economic Forum in its assessment observed that small and medium size enterprises are vital to maintain employment and financial stability. For that reason, many developed countries have introduced support packages.

Japan has rolled out its economic stimulus package which is 21.1 percent of its GDP. This is followed by the US with a stimulus package of 13 percent, Sweden at 12 percent, Germany at 10.7 percent, India at 10 percent, France at 9.3 percent Spain at 7.3 percent and Italy at 5.7 percent.

In this context, the World Economic Forum noted that “there is concern that the size of packages may prove insufficient for the duration of the crisis; that disbursement may be slower than is needed; that not all firms in need would be targeted; and that such programmes may be overly reliant on debt financing.”

Against this background, Kristalina Georgieva informed the media about four measures that need to be taken to curb the spread of the infection and minimise losses for the greater good. First: Countries should continue with essential containment zones and support health systems. Second: Protect people and companies hurt by the pandemic with timely fiscal and financial support. Third: Lower stress on the financial system. Fourth: Plan for recovery and minimise residual effects of the crisis through robust policy action.

The International Monetary Fund’s recent report titled World Economic Outlook said “Where lockdowns are required, economic policy should continue to cushion household income losses with sizable, well-targeted measures as well as provide support to firms suffering the consequences of mandated restrictions on activity. Where economies are reopening, targeted support should be gradually unwound as the recovery gets underway, and policies should provide stimulus to lift demand and ease and incentivize the reallocation of resources away from sectors likely to emerge persistently smaller after the pandemic.” According to it, companies will slowly begin hiring people and expanding their payroll on the back of output uncertainties in the future. It is clear that broad monetary and fiscal stimuli will help economies to accelerate their recovery process.

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