Will COVID-19 Cause A Global Economic Recession?

The novel coronavirus pandemic (COVID-19) has brought the global economy to a standstill. This global economic catastrophe has brought an abrupt and long halt to almost everything. 

Schools are closed. Universities are closed. The aviation and tourism industries have been the worst sufferers. World leaders are asking people to cease going to stores, to workplaces, to restaurants. All in all, we are literally forcing a recession or perhaps a depression to slow down the pandemic.

At present, the risk of further infections increases rapidly because of the growing scale of human infection with Coronavirus SARS-Cov-2 causing COVID-19 disease. The worst thing is that the number of people diagnosed with COVID-19 continues to grow at a rapid pace despite new and big preventive measures becoming the norm. It is very much likely that the novel coronavirus will make a big majority of transport and tourist companies go bankrupt. 

Many companies providing services related to catering, travel, tourism, entertainment, cinema, etc. will have serious financial problems ahead of them in the coming weeks and months.

With over 13,48,628 confirmed cases and 74,816 deaths globally, the epidemic has stunned the world and drawn comparisons with painful periods such as the 1918 Spanish flu, the World War II, and the 2008 financial crisis. 

However, the worst is yet to happen before our eyes. There will be a huge panic in the market when the markets start to see some of the data on corporate earnings and economic growth contracting and unemployment rising. The S&P 500 US:SPX was at 2,488.65 as of Friday’s close, down 26.5 percent from its record closing high of February 18. Market analysts are of the view that the index could justifiably fall to 1,500 over time if the realization of the economic devastation of the pathogen and woeful corporate earnings sets in.

On Friday, the US Labor Department reported that as many as 701,000 workers lost their jobs last month, representing the worst monthly labor-market reading in 11 years and far exceeding estimates for around 83,000. On Friday, all three stock indexes, including the S&P 500, the Dow Jones Industrial Average US:DJIA and the Nasdaq Composite Index US:COMP finished lower. The gross domestic product for the United States is expected to contract well over 10 percent in the near future. 

Sources: US Employment and Training Administration, David Choi, Goldman Sachs

A new forecast by GlobalData that was published on March 24 suggests that retail sales in the United Kingdom are set to dramatically plunge in 2020 because of the novel coronavirus. It was forecasted that the overall UK retail industry will see a loss of £12.6bn this year with clothing and footwear brands predicted to suffer the most. France, which has been at the brunt of COVID-19, has experienced an especially severe year-on-year decline in sales in the fashion sector.

Morgan Stanley has expressed fears that a deep global recession is very much likely in the first half of 2020 on the back of massive disruptions to the demand and supply sides of global economies following the COVID-19 outbreak. In the first half of 2020, growth is likely to contract by 2.3 percent over the previous year. 

Chetan Ahya, chief economist and global head of economics at Morgan Stanley, wrote in a note dated March 29 that global growth for full-year 2020 will still see a decline of 0.6 percent year-on-year, which would be the weakest pace of growth during peacetime since the 1930s. Ahya also remarked that the outbreak at its core represents a substantial shock to incomes, and the impact on aggregate demand will finally create renewed disinflationary pressures.

In 2008, it was common to hear economists say that nothing had changed in the real economy. For instance, the United States still had just as many factories, machines, and workers. Economic behavior changed due to the collapse in capital markets that made businesses fearful to invest and hire, and families were reluctant or unable to spend.

IMF Managing Director Kristalina Georgieva remarked that a recession at least as bad as during the global financial crisis or worse is expected. Georgieva added a recovery was expected in 2021 but world economies need to prioritize containment and strengthen health systems to reach it. 

Georgieva added that more than 90 countries – nearly half the IMF’s 189 members – have asked for emergency funding from the International Monetary Fund to respond to the COVID-19 pandemic. Since the start of the crisis, investors have already removed $83bn from emerging markets in the largest capital outflow ever recorded.

This isn’t 2008. It’s worse. The recession is clearly ahead of us.