The pandemic has inflicted an enormous human cost across the globe. The response, which has involved governments’ imposing a range of necessary measures designed to combat the spread of the disease, has inevitably had a major impact on global economic activity. The most recent Organisation for Economic Co-operation and Development (OECD) outlook, warned, “The crisis will cast a long shadow over the world”. While IMF projections do suggest the global economy is likely to bounce back in 2021 as economic activity hopefully normalises, the uncertainty caused by the pandemic is clearly placing huge pressure on economies all around the world.
The IMF’s economic assessment, published before Q1 GDP figures had been released, paints a bleak picture of economic prospects. The baseline projection, which suggests the world economy will contract 3% during 2020, assumes that in most countries, outbreaks peak during the second quarter before fading across the second half of the year, with business closures and other containment measures gradually easing. However, the IMF also suggested that a longer pandemic lasting into Q3, could cause a further 3% contraction during 2020.
The IMF subsequently indicated a potential downward revision to its forecast after Q1 economic data for many countries came in below their already pessimistic assumptions. IMF Managing Director, Kristalina Georgieva, commented: “With no immediate medical solutions, more adverse scenarios might unfortunately materialise for some economies. It is the unknown about the behaviour of this virus that is clouding the horizon for projections.”
Major benchmarks have rebounded from the lows reached in March as the pandemic tightened its grip. As lockdowns ease in some regions, economies tentatively begin to reopen. Governmental stimulus measures have provided some much-needed support. Markets largely shrugged off concerns over renewed tensions between the US and China, however, bleak economic data releases are still coming in.
IMF data for the 19-country Eurozone, revealed growth across the whole bloc contracted by a record 3.8% in Q1. Both France and Italy, the second and third largest Eurozone economies, were plunged into recession, recording quarterly contractions of 5.8% and 4.7%, respectively.
While the German economy performed less badly, it also fell into recession with growth in the January–March period declining by 2.2%. European markets have rallied as lockdown measures have been eased. The European Commission has proposed a colossal €750bn ‘Recovery Fund’.
In April, the manufacturing and services PMI (Purchasing Managers’ Index) fell to record lows as business activity and demand evaporated. The unemployment rate climbed and exports dropped in April on narrow external demand. In the middle of May, a second phase of the easing lockdown measures were implemented, with a further lifting of domestic restrictions in June and the reopening of international borders in mid-June.
The economy is expected to shrink this year as reduced incomes and unemployment suppress consumer spending. Government spending should lessen the extent of the downturn.
Data from ONS (Office for National Statistics), shows the UK economy contracted by just over a fifth (20.4%) in April – the largest monthly contraction on record. The OECD data highlighted that the UK is likely to be one of the hardest hit major economies, due to its service-based nature.
This news understandably subdued UK markets, with the focus now turning to the Bank of England, to see what fiscal measures they may choose to implement. In the UK, optimism is high as elements of the economy start to reopen. The Bank of England Governor, Andrew Bailey recently said that recovery would not be normal and there would be some permanent scarring, but “we see evidence of elements of that recovery starting.” Last month the Bank said that the economy could shrink by 14% this year but may bounce back with growth of 15% in 2021.
As concerns about a second spike of infection surfaced in the US in early June, many global stock markets suffered their worst day since mid-March. Steven Mnuchin, US Treasury Secretary, ruled out shutting down the US economy again. Jerome Powell, Federal Reserve Chair, said the pandemic could result in permanent economic damage, indicating further stimulus efforts could be deployed. The Fed expects to hold interest rates near zero and to maintain its current rate of bond-buying. As consumer spending has reduced, job losses have mounted at pace.
GDP figures released by the Bureau of Economic Analysis showed that output in the US declined during Q1 2020. According to preliminary estimates, the world’s largest economy shrank at an annualised rate of 4.8%, the lowest recorded GDP figure since the nadir of the financial crisis in the final quarter of 2008. This contraction ended the US economy’s record expansion streak which had stretched right back to Q2 2014.
Asia and emerging market equities
Output in China contracted during the first three months of the year, with the economy shrinking at an annualised rate of 6.8%. This was the first recorded contraction in the world’s second-largest economy since at least 1992, when official quarterly growth statistics were first published. The Chinese authorities have announced they will not be setting a specific growth goal for this year but will instead focus on stabilising employment and ensuring living standards. This appears to be an acknowledgement of the significant challenges the country now faces with a struggling economy and rising international hostility due to the fallout from the outbreak.
The Japanese economy, the world’s third-largest economy contracted at an annualised rate of 3.4% in the opening three months of this year; a second successive quarterly decline, thereby meeting the technical definition of a recession. Exports in the first quarter suffered their largest decline since the country’s devastating 2011 earthquake as worldwide lockdowns and supply chain disruptions severely hit shipments of Japanese goods.
Asian equity market performances have been mixed as US-China tensions re-escalated. Emerging Markets equity markets have been supported by stimulus efforts from governments, with interest rates cut in several countries, including Brazil, India and South Africa.
Gold is currently trading at around $1,717 a troy ounce. The price has been supported by growing US-China tensions, buoyed more recently by fears of a second wave of infections. Brent Crude is currently trading at around $32 per barrel. The price has previously been supported by growing confidence that producers are observing commitments to cut supplies and as fuel demand picks up as restrictions ease, but more recently fears of a second wave have weighed.
Continuing uncertainties surrounding the future spread of the virus and the success of efforts to develop a vaccine and therapies to counter it, make it extremely challenging to predict the most likely path for the global economy over the coming year or so.
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