Tuesday, Jun 28

Will COVID 19 trigger a global economic recession?

Will COVID 19 trigger a global economic recession?

The outbreak of the novel Corona Virus (Covid-19) has taken a heavy toll on the global economy, as major cities and economies were locked down, bringing economic activities to a standstill. The virus, which started in Wuhan in December 2019, has now spread to over 200 countries, affecting over 8.5 million people, killing over 450,000.

The increasing spread of the virus caused some countries and cities to completely lockdown, with airlines, restaurants, shops, pubs and night clubs closed down temporarily. Sporting activities were suspended, with conferences, workshops, religious activities, and all forms of social gatherings also suspended.

These measures put in place to control the further spread of the virus weighed heavily on the global economy, as stock markets crushed, with oil prices also falling to its lowest in history. This once-in-a-century pandemic has hit the world economy in a way that has never been seen before.

The United Nations Trade and Development Agency (UNCTAD) reported that aside the tragic human consequences of the COVID-19 virus, the economic uncertainty it has sparked will likely cost the global economy $1 trillion in 2020.

“We envisage a slowdown in the global economy to under two per cent for this year, and that will probably cost in the order of $1 trillion, compared with what people were forecasting back in September,” said Richard Kozul-Wright, Director, Division on Globalization and Development Strategies at UNCTAD. Mr. Kozul-Wright warned that few countries were likely to be left unscathed by the outbreak’s financial ramifications.

UNCTAD's Secretary-General Mukhisa Kituyi, also in a recent video briefing warned that the global economy was in a worse shape than it was during the 2008 financial crisis as the pandemic triggered the complete closure of entire industries in some cases.

Latest data for the first quarter of 2020 also shows a sharp contraction in economies most affected by the COVID-19 pandemic, with the Word Bank predicting a 5.2 percent contraction in global GDP in 2020, stating that the pandemic was likely to plunge most countries into recession. East Asia and the Pacific is expected to grow by 0.5%, with South Asia expected to contract by 2.7%. Sub-Saharan Africa is also expected to contract by 2.8%, Middle East and North Africa by 4.2%, Europe and Central Asia by 4.7%, and Latin America by 7.2%. GDP in China, the United States and France contracted by 9.8%, 4.8% and 5.8% (quarter-on-quarter) in the first quarter of 2020.

According to the latest report of the Bank of Ghana on global economic outlook, the pandemic led to a deterioration in financial market risk sentiments, with the February and March 2020 being characterised by large swings in the stock market, reversal of capital flows to Emerging Market and Developing Economies (EMDEs) and a widening of EMDE sovereign bond spreads. In addition, the weaker global demand and the inability of OPEC and its allies to agree on production cuts led to the collapse of oil prices, and further worsened the financial May 2020.

Threat of economic recession

While it is too early to access the full economic impact of the Covid-19 on the global economy, many experts have warned that a global economic recession seems inevitable if the virus is not curbed as soon as possible.

The global manufacturing industry is currently on its knees as the world’s major economies deliberately shut down. Factories are closing, shops, gyms, bars, schools, colleges, and restaurants shuttering, with early indicators suggesting there would be job losses. Airlines have shut down their operations in some countries, oil prices are falling and international trade is declining. These are clearly early warning signs of an eminent global economic recession.

To help minimize the economic impact of the virus, central banks across the world have responded by cutting down interest rates, with government’s also promising to provide stimulus packages for affected companies. This is expected to minimize the impact of a possible global economic recession as a result of the virus.

Economic situation in China

Data published by the National Bureau of Statistics showed how China's economy was devastated by the outbreak of the virus in the first two months of the year, with data for March expected to be even worse.

The collapse in activity in the World’s second largest economy affected every sector of the its economy. Retail sales plunged by 20.5 percent during January and February, industrial output was down by 13.5 percent, and fixed asset investment fell by nearly 25 percent. China's unemployment rate also shot up to 6.3 percent in February from 5.2 percent in December.

Situation in US

The situation in the US market was no different as the markets nose-dived on March 18, with the Standard & Poor’s 500 index sinking more than 8.3 percent after another forced halt in trading. The equity markets in the US have also slumped by 30 percent, with GDP also expected to decline in the April-June quarter.

These developments have also prompted Goldman Sachs to downgrade its outlook for US GDP, citing a cutback in spending, supply chain disruptions and the impact of local quarantines. The investment bank thinks America's economy will now shrink 5 percent between April and June, after 0 percent growth between January and March. Growth for the year is forecast to come in at just 0.4 percent, down from 1.2percent.

Situation in Europe

Europe has also not been an exception, with the European Commission reporting that the virus would likely push the European economy into recession this year, warning that a possible rebound next year would largely depend on a bold response from member states.

Against this backdrop, Commission President, Ursula von der Leyen said the commission would do whatever is necessary to support the European economy. For the Commission, the priority is to inject liquidity into the European economy to provide all the needed resources to the health sector and struggling companies, especially SMEs.

For that reason, von der Leyen promised the maximum flexibility in the implementation of EU rules for state aid and the Stability and Growth Pact, so member states will not be constrained by the bloc’s rulebook during the crisis. In addition, a total of €8 billion of unspent EU funds held by member states would be redirected to urgent needs related to the pandemic, which could potentially unlock €37 billion.

Maarten Vervey, the Commission’s director-general for economic and financial affairs, has also admitted that the growth forecast was deteriorating very rapidly. Taking into account the economic shocks provoked by the coronavirus and the containment measures, Vervey said it was very likely that growth for the euro area, and EU as a whole, would fall below 0%.

Situation in Africa

Uncertainty regarding the spread of the COVID-19 is high and its impact on Africa is expected to be serious, given the continent’s exposure to China. The worst hit country in Africa, South Africa is already reeling under the economic effects of the virus, with experts predicting that growth will contract by 1.5 percent in the first 3 months, as the virus threatens two of its main sources of income: mining and tourism.

A report issued by a subsidiary of auditing firm Price Waterhouse Coopers, further stresses the Chinese market’s capacity to absorb South African metal production at this moment. Every year South Africa exports the equivalent of 450 million euros worth of iron, manganese and chromium ores to China, however the 1 percent decline in Chinese growth could result in a reduction in demand for South African raw materials, which would adversely affect its economy.

The virus has also resulted in mass production shutdowns and supply chain disruptions due to port closures in China. Economically, the effects have already been felt, as demand for Africa’s raw materials and commodities in China has declined and Africa’s access to industrial components and manufactured goods from the region has been hampered. Importers in China are cancelling orders due to port closures and as a result of reduction in consumption in China. Sellers of commodities in Africa are therefore being forced to offload products elsewhere at a discounted rate.

In Ghana, the Finance Minister, has already disclosed that preliminary analysis undertaken by the ministry showed that the virus would impact negatively on the country’s petroleum receipts due to the collapse of oil prices. He also noted that the country’s custom receipts were likely to fall short, with health expenditure for the year expected to balloon.

Stallion Motors Ghana Ltd has unveiled two new models of one of China’s leading Automobile brands, in addition to its range of SUVs on the Ghanaian market, promising a unique driving experience. Changan is one of the top four automobile brands in China that sells at least 8,500 cars daily across the globe. The Chongqing-based automobile firm introduced the Changan CS95 and CS55 models at a launch at the Movenpick Ambassador Hotel in Accra. Addressing the audience at the launch, Country Director of Stallion Motors, Mr. M...