Since its emergence, the novel coronavirus has impacted life in ways unimaginable since the turn of the year. Thousands have lost their lives, governments have been compelled to put entire nations into lockdown, and businesses have been shuttered. Clearly, while the social ramifications of Covid-19 cannot be ignored, its economic consequences could well be that of a global recession, the likes of which we haven’t seen in many a decade.
China: cause for concern
Workers are worried about job furloughs, investors fear debt defaults, companies are having to reimagine entire business models, and governments are coming to term with the social and economic cost of the pandemic. China’s tough measures have curtailed the spread of the virus within their borders, but at a hefty economic price. Industrial value added plunged by 13.5% on a year-on-year basis in January and February combined, while the 20.5% fall in retail sales over the same period was worse still*, and the transition towards normalcy seems a gradual one.
China’s weak numbers are cause for concern, and given the Dragon’s aggressive containment measures that have contributed to this weak data, it is clear that the shutdowns we are witnessing across the world will have economic implications.
Italy will perhaps be hit hardest of all European nations, with two consecutive contractions in GDP of over 2% in Q1 and Q2*. Global GDP figures will likely look grim in Q1 and Q2 as other advanced economies are expected to suffer likewise, with a collective global economic weakness tempering China’s expected recovery to normalcy by Q2.
Singapore, one of the world’s most open economies and often considered a barometer of global trade health of global trade, suffered its worst economic contraction since the 2009 financial crisis, shrinking 2.2 percent on-year in January-March. South Korea, hailed as one of the nation’s at the forefront of containing the virus, suffered economic scalding as well, with the country’s tourism sector expected to see a loss of around 2.9 trillion South Korean won in Q1 2020, with foreign tourists expected to decrease by two million.
Just to drive home the point, the Bank of America lowered global growth projections to zero, saying the world has already plunged into recession in a mirror of the gloom and doom scenarios seen previously in 1982 and 2009. They expect GDP to drop dramatically at the height of the shutdowns, including a 30 percent or more decline in the first quarter Chinese growth, while the US has already begun its descent with a record 12 percent sequential drop in second quarter. That is merely the tip of the iceberg; J.P. Morgan economists forecast the Chinese economy to drop more than 40% this quarter and the U.S. economy to shrink 14% in the next.
Europe, which has emerged as the main battlefront in the pandemic, will likely see its GDP contract at a rate similar to US over the first two quarters since the systemic shocks were felt earlier. Emerging economies such as Brazil, India, and Mexico were hit late by the pandemic, but we can expect a similar shock to be seen in the coming quarters, with possible double-digit percent GDP declines in the second quarter. It would appear that a global economic bloodbath is imminent, with some economists likening it to the great depression of the ‘30s that took years to grow out of.
Markets are clearly spooked by the pandemic, and the market inference of business and global disruptions holds true. However, historically speaking, bear markets and recessions need not be conflated. The severe shocks of Covid-19 can spur contractions, but historically it has been seen as normal for GDP levels to dip below expectations in the short term and rebound over the following quarters. Luckily, any impending recession can be assumed to be transient, as they have not been brought on by grave policy errors or structural challenges that take longer to rectify.
History bears this out. Empirically speaking, V-shaped recovery paths typifying eventual rebounds be seen across prior epidemics, such as SARS, the 1968 H3N2 (“Hong Kong”) flu, 1958 H2N2 (“Asian”) flu, and 1918 Spanish flu.**
Of course, any rebound could be undermined by systemic vulnerabilities unveiled by the coronavirus, such as cash-flow tightening leading to corporate bankruptcy. However, this will likely be offset by the economic upside of a return to full industrial activity and the end of lockdowns.