As the Covid-19 pandemic rages on, the current lockdown in global production is predicted to induce a global recession.
Nothing so severe has been experienced since the Great Depression of 1929, and nothing comparable has been witnessed by the global economy over the past 100 years.
Stock prices and bond yields have dropped, and the markets have taken a steep plunge, with the New York Dow Jones Industrial Average sinking by 24.54 per cent in March, reaching its lowest ever level since the Great Depression of 1929 and the S&P 500 witnessing its worst day since October 1987 in the weeks building up to the Great Recession of 2008.
The Organisation for Economic Cooperation and Development (OECD) has downgraded its growth reports for all economies, saying that “restrictions on the movement of people, goods and services, and containment measures such as factory closures have cut manufacturing and domestic demand sharply in China” with growing negative impacts on business travel and tourism, supply chains, and commodities.
The US investment bank JP Morgan predicts that what has been “the longest global expansion on record.... will end in 2020 with recession.” It says that China’s economy will shrink by 40 per cent compared to the previous quarter between January and March 2020, signaling the biggest contraction over the past 50 years, with expected impacts reverberating across the Asian economies.
The bank also predicts that US GDP will shrink at an annualised rate of 14 per cent in the second quarter. This is worse than the fourth quarter of 2008, when US GDP plunged to its lowest rate then seen during a steep recession. JP Morgan also predicts that the Eurozone’s economy will shrink by 22 per cent in the second quarter of 2020 and the UK’s economy by 30 per cent.
Parallels have been drawn between the current situation and the global recession of 2008, also known as the Great Recession, which began with the subprime mortgage crisis in the US. That had been triggered by a spate of home loans granted to borrowers with poor credit histories in the US. It was the worst financial crisis since the Great Depression and was only resolved through a massive bailout of US banks, along with a wide-ranging fiscal stimulus programme.
The difference between the 2008 Great Recession and the ongoing global economic slowdown, however, is that unprecedented production shutdowns have hit virtually all sectors across the globe. These have been coupled with border closures and the almost complete halting across borders of commerce and travel, having compounding effects on affiliated sectors such as industrial production, aviation, trade and tourism.
But the factor that makes the current global outlook even more precarious is the fact that the duration of the ongoing global economic shut-down remains unknown, like the ability to contain it. Meanwhile, the world’s governments and central banks are scrambling to deploy massive fiscal packages aimed at averting economic collapse.
Central banks have lowered interest rates and are pumping liquidity into banking systems worldwide, with the US Federal Reserve providing dollars to central banks by means of liquidity swap lines. The aim is to improve liquidity conditions in global financial markets as they undergo a steep downturn.
Governments across the board are also implementing credit assistance and tax deferrals as well as tax relief to companies and industries in a bid to alleviate the crisis. Direct allocations are being made to vulnerable groups such as workers hit by shutdowns.
The European Central Bank (ECB) predicts that an economic rebound could happen in the second half of 2020, with world economies regaining their growth. This, however, will remain contingent on the world’s ability to contain the outbreak of the new coronavirus and halt its paralysing impact on the global supply and demand chain.
Until this happens, the measures undertaken to provide fiscal stimulus and economic support will remain palliative and will not reverse the slowing down of economies in which both supply and demand are reaching an unprecedented standstill.
The last great pandemic that the world witnessed was the Spanish Flu pandemic of 1918 that also brought about a shutdown of economic activity much like what the world is currently witnessing. The 2003 SARS and 2009 influenza outbreaks, although not on the same scale, also negatively affected world economies and trade.
In all these cases, the global economy rebounded once the disease was brought under control. The same principle should apply to the current Covid-19 pandemic and its debilitating impact on the world’s economies.
The novel factor this time round, however, is that the new coronavirus pandemic of 2020 is also bound to enforce a re-thinking of economic and social priorities, where national health sectors and preventive measures take precedence in national budgets.
This has been brought painfully home by the potent obstructions that the virus has caused in the global economic system by means of its ability to almost totally halt the wheels of production.
*A version of this article appears in print in the 26 March, 2020 edition of Al-Ahram Weekly