Published: April 28th, 2020
Last week, a series of events happened that hinted that the shrinking economic activity may be a lot bigger and more devastating than had been earlier envisioned. First, the USD ended the week weaker. The EUR, by far the worst performer, fell even lower on the backdrop of the European Union Manufacturing PMI estimates for April. Overall, all major currencies bled. The fall came even as discussion raged about a €2 trillion rescue package. Elsewhere in Asia, reports showed that Japan and Singapore may bleed more than any other Asian country.
The global economy may shrink by as much as 4% following the coronavirus pandemic. An estimate contained in a report by Bloomberg Economics says that these figures factor the assumption that a revival begins no later than June.
According to Jaime Rush and Tom Orlik who authored the report, the global economy has descended into a downturn in a speed never witnessed before. As a result, the cost of the lost global turnover would be more than $6 trillion relative to the expectations that the various economies predicted going into the year, they add. These figures are indicative of the scenarios playing out everywhere on the globe.
Despite the grim nature of the report by Bloomberg Economic, it is emerging that the situation may get a lot worse once the world rids itself of the clutches of the pandemic.
The governor of the European Central Bank (ECB) Christine Lagarde is warning that the EU economy could contract by 15% if the slow decision-making nature of its leaders continues. Her remarks came as the representatives of the economic block struggled to agree on an additional €2 trillion rescue package meant to prop the block against the harsh effects of the coronavirus pandemic.
Compared to Lagarde’s prediction, the 8.1% foreseen by Bloomberg Economics for the same block seems conservative.
The stark news from the EU comes on the backdrop of findings that Japan and Singapore may emerge as the worst-hit Asian economies because of the health crisis. According to Steve Cochrane, the head of Asia Pacific economics at Moody Analytics, this prediction should not come as a surprise considering the two countries were already struggling before the spread of the virus worsened.
Cochrane says that the stricter lockdown measures that various countries have imposed to help curb the spread of the virus will exacerbate the economic troubles of the two Asian countries.
Japan was already in recession coming into the health crisis, and Singapore has posted unimpressive growth data in Q1 of 2020. The cited report indicates that Japan’s growth shrunk by 6.3% year-over-year in Q4 of 2019 while Singapore’s GDP slipped by 2.2% in the first quarter of 2020.
Cochrane thinks that Q2 will be rough for both countries considering that it extended the lockdown restrictions last week when the coronavirus cases in the country jumped to over 6,000.
The same fate may befall Japan, Cochrane adds, especially if the disease spreads further. The country is currently imposing a soft lockdown but experts warn that that may change if situations degenerate.
The two Asian countries were among the earliest to detect coronavirus cases. Together, they have reported some 13,000 cases, which are among the leading figures in the continent. Unlike China, which has not recorded any new cases in the past ten days, Singapore and Japan seem to be experiencing a surge of COVID-19 cases.
The shrink in the global economies in the magnitude witnessed in the recent past is only subject to optimistic assumptions that the world will curb the spread of coronavirus within the year. The grim stats, as such, point out the huge challenges that policymakers the world over face and must surmount to protect the global economy against the coming effects of the pandemic.
Under the same optimistic scenarios, the U.S. will decline by about 7% while the Eurozone will shed off some 8%. Japan is expected to shrink by 4% while China, the presumed point of origin of coronavirus, will witness the slowest growth rate ever recorded.
Rush and Orlik said that downside risks associated with the health crisis are significant. The first danger comes from the possibility of a second wave of infections that may arise as governments start easing the national lockdowns they have imposed. With experts asserting that second wave infections may be disastrous, governments must now make comprehensive preparations and invest adequately in healthcare infrastructure.
According to the two, the real outlook depends on the stimulus packages that the governments make available. If it is not sufficient, then their projected slip could almost double to 7.2%.
The report also shows that advanced economies are at greater risk and will slump worse than their less-developed counterparts. The two financial market experts are basing their argument on the fact that the current economic turmoil is nothing like the Asian crisis witnessed in 1997 or the global recession that followed a couple of years in 2009.
The current shock, according to the report, is not a result of either or both financial or economic imbalances. It, therefore, follows that countries that have or will mobilize adequate stimulus to stand in the place of lost income will experience a relatively quick recovery.
The economists conclude that governments should not worry about setting aside too much stimulus. Instead, they should worry about the cost of doing too little in the end since the cost of inadequate action will be a lot costlier.
The ongoing health crisis has created a mess of huge proportions; the kind that has not been witnessed since the great depression. The likely outcome is the substantial decline of the global economy. The World Bank predicts that the world’s GDP may shrink 3%. It is emerging that the Bretton Woods institution may have been conservative. Several surveys estimate that the actual contraction may be as much as 4% and that is only if the stimulus packages that countries are marshaling will be adequate to prop the global economy.