- Vinay Nair
It’s Official, we are facing a Recession
Updated: Mar 30, 2020
The outbreak of coronavirus has been nothing short of a wrecking ball for the world, sending towns, cities and countries into lockdown and dealing sharp blows to the global economy.
As World Health Organisation (WHO) doubles down on efforts to find a cure, the International Monetary Fund (IMF) has gone on record to state that we have already entered a period of recession and at its worst.
Managing Director Kristalina Georgieva, IMF told reporters
We have reassessed the prospects for growth for 2020 and 2021. It is now clear that we have entered a recession as bad or worse than in 2009.
We do project recovery in 2021.
She also mentioned that the recovery is only possible if the international community succeeds in containing the virus everywhere and prevents liquidity problems from becoming a solvency issue.
Needless to say, that does not exactly come as breaking news to anyone with the slightest inkling of recent turmoils that have rocked the world of finance. It is true that stock market crashes don't always coincide with recessionary trends. However, considering the massive turbulence we have witnessed in global stock markets recently, it would perhaps be overly optimistic to hope that we could escape a recession.
It seems more like a chicken and egg situation, given that containment is the major factor affecting the economy to a standstill and subsequently leaving us in a period of recession, but it's also the very containment that is necessary at the moment to come out of this phase and move towards recovery.
Global GDP in a State of Decline
The recessionary tendency comes as a bolt from the blue for the global economy, singlehandedly caused by the insidious coronavirus spreading through the world.
In fact, recent data from just about a month ago reveals that internal economic indicators have been fairly healthy for a while. However, with the viral outbreak halting global supply chains and disrupting demand, the market sentiment has taken a turn for the worse. Every form of economic activity, from exports to local commerce, have been adversely affected by this sudden cessation, and the global indicators have begun to reflect ominous signs of a recession.
The pandemic has triggered intense panic among consumers and investors, causing a sharp fall in demand and market sentiments. Even as consumers have been scrambling to collect and hoard everyday essentials and somewhat inexplicably, toilet paper, they have naturally been in no mood to purchase heavy consumer durables. If anything, they have tightened their purse strings further, in apprehension for the unknown hardships to follow.
China, the epicentre of the outbreak, has seen its GDP decline steadily as the government was forced to close down economic activity in a frenzied attempt to stop the outbreak from spreading any further. However, even as Chinese towns resume economic activity slowly, the country’s GDP prospects have fallen significantly.
Recently, Fitch, a firm that specialises in market analysis, approximated that China’s GDP in the first quarter of 2020 would fall to about 4%. With the strongest economy of Asia in shambles, there is little hope for the emerging economies of the region, as they try to fight a public health emergency and make up for lost commerce at the same time.
It seems the strongest economy of the world is also bracing for a fall.
Goldman Sachs and Morgan Stanley estimated that the GDP of the United States is set to fall by as much as 30.1% by the second quarter of 2020.
Goldman Sachs has also projected that the global economy may experience a contraction of about 1% year-on-year as a result of the economic impact caused by this severe pandemic. Interestingly, and perhaps somewhat frightfully, this projected rate of contraction is higher than the percentage decline in global GDP that had been caused by the terrible slump of 2008-09.
Clearly with both the supply and demand sides of the economy in absolute disarray, the world’s gross domestic product seems to be in a downward spiral.
Rising Unemployment Across the World
With daily wage labourers going out of work, and small and medium enterprises struggling to manage their finances or keep people on their payroll, unemployment figures have skyrocketed all around the world. In many emerging economies like India, the coronavirus outbreak and urgent need for isolation has placed many workers in an impossible dilemma.
For many workers in the informal, and unorganised sectors of domestic economies, regular contracts and tasks are essential to maintain a steady flow of income. However, with governments directing people to quarantine themselves, many of these workers have found themselves struggling with joblessness for an indefinite period.
The rapid increase in unemployment figures have not been restricted to the emerging economies alone. Even the United States, the Goliath of our world economy, has been struggling to manage the rising unemployment within the country in the wake of this pandemic. The country’s Labour Department has received a record number of applications, a whopping 3.28 million of them, for unemployment benefits. It has been predicted that the US unemployment rate will rise to 12.8% in the coming months.
Worldwide Stock Market Crashes
As Paul Samuelson, an economic expert, once quipped,
The stock market has predicted nine of the last five recessions.
Diehard optimists would possibly remind you at this point that a few stock market crashes in the recent past not necessarily coincided with a worldwide recession.
However, the devastating impact of the coronavirus has had a nearly unprecedented effect on investor sentiments. The Dow Jones index, which has been in a bull run for the last 11 years, has finally plummeted in the wake of a tiny microorganism wrecking havoc around the globe. Major global indices have taken a major step back, nearly reversing all the advances they had experienced in the last 4 to 5 years. Lower circuits have recently been hit several times in both S&P and Dow Jones indices, indicating a major decline in market sentiment. Even though the system of lower circuits was improved substantially to reduce panic selling after the recession of 2008-09, Dow Jones and S&P have been in free fall for a while. Moreover, the derivative market has also seen a drastic fall in trade volume. The slump in trading volume has surprisingly come during the Futures and Options expiry week, suggesting the extent of the damage and bearish sentiments among investors.
Clearly, even if a curative treatment or vaccine is discovered for COVID-19, it would take a while for the economies around the world to recover from this kind of massive derailment.
Fiscal Measures to Contain the Corona Effect
The US Senate recently approved a $2 trillion fiscal package to contain the effects of this crisis. Countries like India and Malaysia have also unveiled plans of infusing their domestic economies with billions of dollars. Even though these fiscal measures may provide short term relief or at least support for the tender situation of economies, many experts are quite worried about the asymmetry in interest rates of various countries. This inequality in rates can lead the central banks and governments of different countries to incorporate divergent strategies in their respective monetary policies.
Even though such modifications do not constitute currency manipulation in the strict sense of the term, these tactics can lead to sharp alterations in the movements observed in the world’s foreign exchange market.
Opportunities and Pain Points
The road to recovery will entirely depend on the trajectory followed by this unique viral outbreak, and the speed with which an effective vaccine can be developed. Considering how rapidly the coronavirus is mutating in human bodies at present, it is almost impossible to predict how soon a vaccine may become available. In my opinion, it would take at least a year, and the continued slump during this period can make the road towards recovery a much steeper path. Essentially, once the lockdown ends and people rejoin the workforce, they are likely to work for the same firms and draw the same salary checks.
Yet, it may be awhile before economic activity truly picks up again.
A major opportunity that stakeholders of the economy can leverage is the enthusiasm among the public for greater spending once the lockdown is lifted. However, it is also important to acknowledge that until and unless an extremely effective vaccine is discovered, people will remain perpetually wary of visiting malls, theatres and restaurants, and going on vacations to exotic locations. This hesitation towards leisure activities that involve being in crowded places can have a long-term impact on economic activity.
A worse situation may be encountered if the outbreak continues for over a year, and the linkages between supply chains, corporations and their human resources begin to crumble because of this strain. All efforts towards a recovery will have to be aligned with public health policies, seeking a clear timeline of events so that governments can understand when they can expect economic activities to gradually resume again. Till a well-structured public health policy is formulated and implemented, especially in the most economically powerful nations of the world, it will be impossible to analyse the level of fiscal stimulus needed or the degree of liquidity required within domestic markets, Therefore, it is imperative for governments around the world to strategize effectively in order to navigate this public health crisis, and devise economic policies based on the initial health management framework.
Clearly, the uncontrolled spread of the coronavirus has given rise to a set of apparently insurmountable challenges for the global economy. However, all is not lost yet. After all, this is a recession caused by an external enemy rather than internal issues. Therefore, it is still likely that managing health systems effectively can contain the key to gradually picking up the pieces on the global economic front as well.
Will we be able to navigate the pain points and make the best of opportunities headed our way?
Only time will tell!