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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.



The uncertainty stemming from the US-China trade war, Brexit, and crisis in the Persian Gulf are among the foremost drivers of the weak global economic outlook in Q4.

Already, The International Monetary Fund, on July 23rd, cut its 2019 global growth forecast from 3.3% to 3.2%. The IMF pointed to the escalating US-China Trade War as the main risk to the worldwide economy.

Frustrated by China’s foot-dragging, the United States imposed 15% tariffs on more than $125 billion worth of Chinese imports. In response, China allowed the Yuan to weaken past 7 Yuan to 1 U.S. Dollar for the first time since the 2008 global financial crisis. Also, China imposed 15% tariffs on $75 billion worth of U.S. goods. Part of the taxes includes a duty of 5% on U.S. crude. In retaliation to the Yuan devaluation, the U.S. Treasury declared China a currency manipulator.

With attacks on oil tankers and Riyadh oil complex, in July & September, Iran demonstrated its capability to disrupt global oil supplies.

Under these tense economic conditions, a dovish upsurge swept across the global economy, during Q3. Consequently, Central Banks in both advanced and emerging economies slashed rates to stimulate growth.

The US-China Trade war will still be front and center for the global economy

So far, the United States has hit tariffs on $550 billion worth of Chinese products. China, in turn, has set tariffs on $185 billion worth of U.S. goods.

The world’s two largest economies have been embroiled in a trade war since 2018 that have shaken the global markets and threatens global growth.

China, in September, concluded deals to buy U.S. soybeans and pork. The agreement follows Beijing’s decision to lift retaliatory tariffs on soybeans, China’s most significant import from the United States. In return, China may request for Washington lift some restrictions on Huawei and withhold imposing new tariffs. With President Trump under pressure from U.S. Farmers in Iowa, he may ease Huawei export restrictions. In exchange, Trump may push for additional purchase of U.S. agricultural products, Crude Oil, and LNG.

However, deep uncertainty will prevail in Q4, given Beijing’s constant hardline position regarding intellectual property, Cyber theft, Yuan manipulation, and subsidies for state-owned enterprises.

The United States hasn’t changed its demands. Regarding intellectual property rights, the U.S. seeks to halt China’s coercive request for technology transfer from U.S. firms. As for the Yuan, the U.S. wants to end the persistent devaluation of the Yuan against the U.S. Dollar that makes Chinese exports to the United States cheaper, and U.S. exports to China more expensive. Concerning cyber theft, Washington demands a halt to cyber-espionage against U.S. companies by Beijing.

The United States laments that these unfair trade practices have increased its trade deficit with China from $347 billion in 2016 to $376 billion in 2018, to a record $420 billion in 2018.

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As the U.S. economy remains reasonably stable and the Chinese economy slumps, President Trump will be enticed to escalate the trade war. Beijing, indeed, will retaliate and might resolve to hold out on additional concessions until the 2020 election.

With President Xi facing intense economic pressure and President Trump under pressure to deliver results from the trade war, both must break the standoff. Already, the global economy is deteriorating, and recession now looms large in Europe, Japan and throughout East Asia.

With the global economy still deteriorating, expect major central banks, in Q4, to cut rates further to stimulate economic growth

Already, the Reserve Bank of Australia, on October 1st, slashed rate by 0.25% to a record low of 0.75%. The RBA’s cut marked the third reduction in five months in a bid to spur growth.

Amid falling export orders due to the US-China trade row, Emerging Markets like the Philippines, Indonesia, Malaysia, and South Korea will lower interest rates even further in Q4. Previously, the Central Banks of these economies lowered rates during the third quarter.

In the Philippines, the Central Bank of the Philippines cut rates by 0.25% to 4.0% on September 26th. In Indonesia, Bank Indonesia, on September 19th, cut its rate by 0.25% point to 5.25%. Also, the Bank Negara of Malaysia cut its policy rate by 0.25% to 3%, on May 7th, due to deteriorating foreign demand amid the U.S.-China trade row. Furthermore, the Bank of Korea, in South Korea, slashed rates to 1.50%. South Korea’s economy is in a hard spot due to the US-China trade war and its own trade war with Japan. Exports, which account for about 40% of its GDP fell for 10 straight months.

Advanced economies like Japan, Eurozone, Hong Kong, Britain, China, and the United States may slash rates as well.

Japan is considering lowering rate, presently at -0.1%, even further into negative territory as global economic outlook weakens and the likely impact from the VAT tax hike.

In Hong Kong, months of anti-government riots and the fallout from the U.S.-China trade war have begun to take a toll on its economy. As such, Hong Kong’s central bank, the Hong Kong Monetary Authority, might cut rate again. Earlier, the central bank lowered interest rates twice in August (by 0.25% to 2.50 %) and in September (by 0.25% to 2.25 %).

In addition, the Bank of England may cut interest rates even if a no-deal Brexit is avoided on October 31st. Interest rates have been on hold at 0.75% since August 2018.

The US Federal Reserve has cut rates twice this year in response to weak economic outlook. Nevertheless, if President Trump decides to escalate the trade war with China, the Federal Reserve may cut rate by another 0.25% to protect the US economy.

As growth in Eurozone stagnates, the European Central Bank has relaunched a stimulus program to inject over €20 billion monthly into the Eurozone’s financial markets. Given that the Eurozone economy, especially Germany, is heading towards a possible recession in Q4, the ECB might cut rate further during the quarter. Germany’s economy has weakened due to the US-China trade row and the uncertainty regarding to Britain’s exit from the European Union.

Finally, China’s Central Bank, the People’s Bank of China, has also cut rates to 4.20% to cope with economic pressure due to its trade war with the United States. Nevertheless, if the trade war intensifies considerably in Q4, Beijing may further devalue the Yuan or slash rate by another 0.25%.

As the trade war morphed into a currency war in Q3, expect a raise to the bottom, in Q4, by Central Banks to cut their policy rates to boost economic growth in the various economies. The US-China trade conflict has hit manufacturing, with export orders shrinking in many economies.

With attacks on oil tankers along the Strait of Hormuz and on Riyadh’s oil facilities, in Q3, Iran has demonstrated its capability to disrupt global oil exports

On September 14th, a volley of cruise missiles and drone strikes damaged the Abqaiq and Khurais crude processing facilities belonging to Saudi Aramco. The Abqaiq plant and Khurais plant handle over 7 million and 1.45 million barrels per day of crude oil respectively. The attack shut off 7% of the global daily oil supply.Image B

Luckily, the incident occurred when oil stockpiles were higher due to reduced demand. Saudi Arabia had about 180 million barrels of crude oil in inventories in Egypt, the Netherlands, and Japan.

Also, the U.S. commercial crude oil inventories were at 417.1 million barrels. Besides, the Strategic Petroleum Reserve was almost 645 million barrels.

Furthermore, the Organization for Economic Cooperation and Development members had over 2.9 billion barrels in stockpiles.

Although Brent Price jumped from $61.25 per barrel to $68.42 per barrel on September 16th, the price ultimately settled at $58 per barrel by October 1st.

Low demand due to weak economic conditions has diminished the impact of supply disruptions from the Persian Gulf. Unfortunately, additional attacks on Saudi oil facilities or tankers along the Strait of Hormuz may occur.

Moreover, if an oil tanker is unable to transit through the Strait of Hormuz, it can lead to higher shipping costs and significant supply delays. Consequently, oil prices will soar.

Finally, the European Union, in Q4, faces three serious risks; Brexit, potential U.S. auto tariffs, and possible Eurozone recession

Brexit will reach its Zenith as the October 31st deadline for Britain’s exit from the European Union draws near. A hard Brexit will likely be avoided. The British Prime Minister, Boris Johnson’s, threat of a hard Brexit could result in concessions between the E.U. and the United Kingdom on the Irish backstop. If no agreement is reached, the United Kingdom may ask the European Union to extend Brexit for a couple of months.

Growth in the Eurozone will be mild as usual, in Q4, amid the Brexit uncertainty, and the escalating US-China Trade war. Germany, Eurozone’s largest economy, is on the verge of recession. It is deeply reliant on manufacturing cars and other industrial goods to drive its economy.

Unfortunately, it will get worse. The United States, following a WTO victory, is set to impose punitive tariffs on E.U. products in retaliation for illegal subsidies granted to Airbus. In response, Brussels will impose tariffs on U.S. goods. This may push President Trump to impose auto tariffs at a time Germany’s economy is plunging towards a possible recession. President Trump may as well target French products over France’s new digital tax policy. The European Union, indeed, will retaliate against U.S. tariffs. With the Eurozone’s economy stagnating, and the United States’ economy relatively stable, any tit for tat tariff is sure to plunge the EU further into economic crisis.

The intense economic pressure piling up in the European Union has pushed the European Central Bank to reintroduce stimulus measures. the Bank, beginning in November, will inject €20 billion monthly into its financial markets.

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