Global Economy Today – An Analysis
Owing to prolonged trade disputes and wide ranging policy uncertainties, the global economy has suffered a significant slowdown. Economic risks remain high considering political polarization (divergence of political attitude to ideological extremes) and doubt over the benefits accrued from multilateralism (alliance of countries to pursue a common goal).
Added to the disputes, policy uncertainties and ideological differences comes the threat of Novel Coronavirus or COVID 19. With more than 38.1 million confirmed cases and 1.09 Million deaths worldwide , the COVID 19 Pandemic shows no signs of subsiding. To avoid spread of the virus, nationwide lockdowns have been imposed in some of the countries bringing economic activities to a standstill. This lockdown is pushing major economies down the lane.
COVID 19 is a demand, supply and market shock to the world economy. The global economy was already experiencing a slowdown in 2019. The risk of a global recession is extremely high considering that some nations have abandoned economic activities and put lockdowns and restrictions in place to avoid the spread of the virus. A severe demand shock is expected due to loss of jobs which will lead decrease in income or the purchasing power parity.
The outbreak of the virus has disrupted the manufacturing supply chains and has slashed down the commodity demand in the market. Initially expected to be a manufacturing only recession, is now even engulfing the service sector into its paradigm.
Government’s efforts to extend credit terms for households and businesses may not be on time to avoid the debt defaults expected to happen. The higher the debt levels, the higher is the damage to the economy due to social distancing and lockdowns.
There is also an estimation of shock to the world economy from China, because it makes up about 16 percent of Global Gross Domestic Product. China’s influence over the world economy can be estimated by its connectivity to the world and prominent position in supply Chain and shipping and transport linkages. China will try to ease the liquidity constraints but this will increase the debt of an already highly indebted economy further contributing in taking the economy downhill.
April World Economic Outlook projects global growth to fall to -3 per cent in 2020. This is fall of 6.3 percentage points from January 2020, which makes it a major and disruptive change in a very small period of time. Cumulative loss to the Global Gross Domestic Product is expected to be around 9 trillion dollars in FY 2020-2021 due to the pandemic.
FOREIGN CURRENCIES: A rush to safe haven assets like US Dollar, Yen and Euro has weakened the other currencies. Commodity exporters who engaged in dollar funding are at risk due to decline in the demand of the commodities. About 3 trillion USD of loan is outstanding which was issued by non US based business and corporations. Countries like Hong Kong, Singapore, Turkey borrowed significant amount of debt in US Dollars in relation to their Gross Domestic Product. Depreciation in their currencies and decline in demand of commodities will make it more difficult to pay off the debt.
STOCK MARKET: Global Shares have also been hit hard due to the pandemic. FTSE, Dow Jones Industrial Average, Nikkei have witnessed the sharpest decline since 1982. Investors fear that the spread of novel coronavirus will hamper economic growth. In response to this fear, the central banks reduced their interest rates. This slashing down of the interest rates made borrowing cheaper and encouraged to give a boost to the economy.
UNEMPLOYMENT: Employment levels have also been severely affected due to the pandemic. USA, one of the world’s largest economies, witnessed around 38 million people filing for unemployment in 6 weeks. Around 1 million people filed for unemployment in UK alone. International Labor Organization predicts massive damage to the livelihoods of 1.6 billion people. COVID-19 might claim 305 million full time jobs in the second half of 2020.
OIL PRICES: Oil is considered to be a geopolitical game and such a geopolitical game always comes with a geopolitical undercurrent. Among the row between the major oil powers like OPEC, Russia and Saudi Arabia, OPEC producers tried to call for a production cut amid concerns of COVID- 19 impacting demand. Russia staged a walk out from these meetings, whereas Saudi Arabia responded by cutting down oil prices by $6-$8 per barrel. However, a month later, when COVID-19 was officially declared a pandemic, all of them decided to reconcile, but it was too late as prices of oil already crashed and fell about 60% from the high price of February.
GDP GROWTH RATE: IMF also has revised its global GDP growth estimate to 3% from 3.3%, something which has not been seen since the Great Depression. The world economy is expected to lose about 8.5 trillion USD in 2020 and 2021, which will completely absolve it of the gains of 2016-2019. World GDP is expected to plunge by 3.9% in 2020, which definitely means an unprecedented recession. This recession is believed to be twice more severe and disruptive than the 2009 recession. It has happened for the first time since the Great Depression that the advanced economies as well as emerging markets are facing recession. Growth rate in advanced economies is projected to be at -6.1% and for emerging markets at -1.0%.
GLOBAL POVERTY: COVID- 19 will make an estimated 34.3 million people to fall below the extreme poverty line in the year 2020. Global economic output is believed to drop steeply by 4.9% in FY 2020-2021. There is an estimated increase of 420 million people in the category of extreme poverty.
WORLD TRADE: Some of the most prosperous trade zones of the world are expected to face a double digit decline in the volumes of the trade. Trade is believed to be hit the hardest in North America and Asia with loss of about – 41% and -32% in the pessimistic scenario with the world loss in volume of trade expected to be at -32%. In the optimistic scenario, world trade is expected to fall by -13% in volume.
The global economy already suffered a slowdown which aggravated due to the global pandemic. China’s strong influence over the world economy, policy uncertainties, rampant unemployment, and tiff between the major oil powers indicate a recession more disruptive and severe than the 2009 recession.
