The economic impact of coronavirus across the globe
Discover the effects of the coronavirus pandemic on the world’s economy so far, and hear what top economists have to say on the possibility of a global recession in 2020 and the likely shape of the recovery.
The Covid-19 pandemic has plunged the world into economic crisis, with the World Bank projecting a 5.2% decline in global gross domestic profit (GDP) in 2020.1 This would be the deepest recession since World War Two, and nearly three times as bad as the one caused by the global financial crisis of 2008-2009.1
However, the bank’s outlook for different regions varies. It expects GDP to drop more significantly in advanced economies such as the US, UK and eurozone – with these forecast to fall by an average of 7% this year.1 Emerging markets and developing countries, on the other hand, are forecast to fall by around 2.5% on average.1
The impact of the coronavirus on the global economy in 2020 so far
Governments around the world have implemented lockdowns to stem the spread of coronavirus, with this unprecedented action having far-reaching consequences for their economies. Sectors such as hospitality, retail, transport and construction have been particularly badly hit, as people have been forced to change their working practices and minimise social contact. This, in turn, has led to job cuts and a reduction in spending across the global economy.
According to the International Labour Organization (ILO), over 93% of workers live in countries with some form of workplace closure in place.4 As a result, 5.4% of global working hours were lost in the first quarter of 2020, rising to an estimated 14.0% in the second.4 This was equivalent to 155 million full-time jobs in Q1 and as many as 400 million in Q2.4
The initial effect on spending can be seen in indices pricing. For example, the S&P 500 – often seen as a benchmark for global economic health – suffered one of its worst falls on record over the first 100 days of the crisis, as investors priced in a reduction in both consumer spending and international trade.
Where next for the world’s economy in 2020?
The World Bank forecasts that 92.9% of countries will fall into recession this year, with the figure dropping back below 20% in 2021.1 However, any recovery will depend on how quickly governments can ease lockdown restrictions and increase spending, which may prove difficult if there is a second wave of coronavirus.
Illustrative of this, China’s CSI 300 Index has recovered relatively quickly as its government has moved to ease lockdown measures and increased spending to stimulate the economy. By contrast, the UK’s FTSE 100, Australia’s ASX 200 and Singapore’s Straits Times Index have yet to recover fully – with lockdowns extended and exports yet to return to pre-crisis levels.
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Similarly, the International Labour Organization has given a range for working-hour losses later in the year, stating that they will likely fall between 4.9 and 11.9% in Q4 (equivalent to 140 million to 340 million full-time jobs).4 The final figure will depend on the transmission of Covid-19 over the autumn and winter, and the extent of lockdown measures.
With so much uncertainty surrounding the global economy, IG’s Victoria Scholar has been talking to a range of economists about the outlook for the global economy and individual countries.
Daniel Lacalle on the global economy
Recorded on 24 June 2020
Daniel Lacalle, chief economist at Tressis, is predicting an L-shaped recovery for the global economy in 2021. This is because he expects growth in capital expenditure, job creation and consumption to be subdued, given the high rates of unemployment around the world.
However, at a regional level, he believes that growth will vary significantly. He states that the US likely to recover more quickly than the eurozone because it has a greater reliance on technology and intellectual property than the EU, which is more heavily dependent on financial services. The US is also likely to benefit from more favourable demographics, while the effects of the EU’s subsidised scheme for jobless issues could weigh on its economy.
Looking to Asia, Lacalle expects growth to depend on whether or not there is a second outbreak. However, he believes that the region is likely to fare quite well regardless, given generally high levels of preparedness and a willingness to take strong measures to mitigate the risks of transmission.
Steve Hanke on the global economy
Recorded on 2 July 2020
Steve Hanke, professor of applied economics at the Johns Hopkins University, is predicting a V-shaped recovery globally as economies begin to open up. This is because most countries have largely ignored economic concerns when implementing lockdowns, meaning there is room for rapid growth as they ease. However, he says we shouldn’t expect real GDP to return to pre-virus levels until at least 2022.
One area of particular concern is the US, where supply chains have faced significant disruption and may struggle to get back up to speed quickly. This means that recovery in the country could be significantly slower than it was following the 2008 crisis.
Emerging economies including Argentina and Venezuela, meanwhile, are likely to struggle as a result of volatile currencies and high levels of inflation. However, he believes that one potential solution would be to replace their respective currencies with the US dollar or new currencies that are pegged to it.
Gerard Lyons on the UK’s economy
Recorded on 19 June 2020
Gerard Lyons, chief economic strategist at Netwealth, is expecting a U-shaped recovery for the UK economy. He predicts that the country will come out of recession in the second half of 2020 as the lockdown eases, but says that we shouldn’t expect to reach pre-crisis levels until the end of next year.
The biggest issue weighing on the economy is unemployment, which he believes is only going to get worse over the next few months – particularly if the furlough scheme ends. This, he says, could result in employment figures taking longer to get back to pre-crisis levels.
However, Lyons believes that the economy could recover relatively quickly if the government is able to make tax cuts and relax social distancing. While the latter poses challenges, he believes it would be possible provided localised outbreaks can be contained quickly.
Holger Schmieding on the eurozone’s economy
Recorded on 23 June 2020
Dr Holger Schmieding, chief economist at Berenberg, is expecting the eurozone’s economic recovery to resemble a tick mark. He says that this is based on the shape of the recovery to date, with the economy falling sharply in March and April, then rising relatively quickly as supply was switched on in May and June.
However, while Schmieding is optimistic about Europe’s recovery, he expects the US to outpace it in terms of growth. This is because the US economy has been propped up by generous fiscal policy and pay for furloughed workers, which has resulted in a shallower recession that the one seen in the eurozone.
Having said that, Schmieding is clear that the real heavy lifting has already been done in Europe, with the European Central Bank (ECB) signalling that it is prepared to do whatever it takes to support the eurozone’s recovery. If the economy underperforms, then the ECB may need to add extra funds to its pandemic emergency purchase programme but, for now, nothing more is needed as a recovery is already underway.
Andrés Velasco on Latin America’s economy
Recorded on 23 June 2020
Andrés Velasco, dean of the School of Public Policy at the London School of Economics and former finance minister of Chile, says that we could see a V-shaped recovery if a vaccine is made available relatively soon.
Otherwise, he believes that we are on the brink of a global depression, which would have mixed effects in Latin America. Countries like Argentina, Ecuador and Venezuela would be particularly badly hit, as they have been unable to implement wide-ranging fiscal policies to support families who have lost their income. However, other countries, such as Peru and Chile could fare well, as they have relatively little debt and have been able to deploy their resources to support economic recovery.
However, Velasco warns that global equity markets are quite likely overvalued at the moment, believing that they have been propped up by governments’ fiscal policies and that market participants have failed to price in how long-lived the crisis is likely to be. He expects capital to flow out of equity markets as the long-term effects of the pandemic become apparent, with the outflows from Latin American countries being particularly pronounced.
What would a global recession mean for the markets?
The potential for a global recession in 2020 has already brought a great deal of volatility to the markets. The prices of many indices, stocks and commodities fell when countries introduced lockdowns to combat coronavirus, as investors moved their capital in anticipation of a reduction in economic activity.
While many of these markets have already started to recover as restrictions have been eased, the shape of their recovery will depend on how quickly economies can return to full employment and whether there are any further outbreaks that require government intervention.
1. World Bank. 2020. Global Economic Prospects, June 2020. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-1553-9. License: Creative Commons Attribution CC BY 3.0 IGO.
2 World Bank, 2020. License: Creative Commons Attribution CC BY 4.0.
3 Estimated GDP figures for 2020 and 2021 were calculated using the global percentage growth forecasts from source one and the 2019 GDP estimate from source two.
4 International Labour Organisation, 2020.
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