Wednesday, Jun 23
Global Macro Lens: The Worst Is Behind Us, But Uneven Variations Exist

Global Macro Lens: The Worst Is Behind Us, But Uneven Variations Exist

In what seemed like a ‘lost decade’ for the global economy in 2020, the story is quickly changing as global growth prospects are fast improving in the beginning of the new decade. The prolonged spread of COVID infections and pockets of resurgence in most parts of the world prompted analysts to forecast global growth to register its worst decline in years in 2020.

Despite the almost unanimous forecasts among analysts, actual GDP figures rather trended above forecasts- less severe than expected. According to the IMF, the contraction of the global economy was revised from 4.9% to 3.5% in 2020. The ensuing outcome is partly due to the better management of the pandemic among countries, governments and citizens. Likewise, the slight rebound in economic activity was triggered by hopes of the availability of vaccines (Pfizer, Moderna, Oxford’s Astrazeneca, Sputnik V) towards the end of the year.

This notwithstanding, a stronger than expected recovery is emerging in Q2 2021, underpinned by improved health conditions as well as policy support. The injection of a massive stimulus package of US$ 1.9 trillion American Relief Plan was the biggest news in the first quarter of 2021. Most countries, both developed and emerging markets have largely avoided austerity measures compared to periods of the global financial crisis.

Elsewhere, fiscal policies remain expansionary, although debt burden issues are beginning to surface as economies build back. Central Banks are signaling that until the recovery becomes well entrenched and unemployment falls to pre-pandemic levels, they will continue to maintain current policy stances.

The global economy is expected to grow by 5.6% in 2021, however, there are upside risks to this forecast that could see growth rise to 6% on a global basis. Consequently, emerging markets (EM) will once again outperform, growing by about 7% this year while developed markets (DM) will grow by 4.5%. For emerging markets, Asia will outperform peers, growing by about 9% while sub-Saharan Africa will underperform with a modest rebound of about 2.9%, based on data by Fitch Solutions.

However, the IMF has projected sub-Saharan Africa to grow by 3.4%, with the growth rate to trend along the pattern of the global recovery. Accordingly, this growth trajectory will be buoyed by the robust growth of the global economy, higher commodity prices, and a resumption of capital inflows into the region. However, rising debt burden levels as well as slower vaccination of African economies remain concerns plaguing the region.

Global chart13x Global chart23x

Source: Fitch Solutions
UNEVEN ECONOMIC RECOVERY AHEAD

On the contrary, the recovery will be more uneven across both developed and emerging markets, given a country by country perspective. Larger developed markets like the US experienced a less severe contraction in relative terms last year and are expected to rebound much stronger this year, with growth rate of about 5.9%.

The outlook has been generally positive for the US in recent months and this is likely to extend into the coming quarters. This is underpinned by a faster pace of US vaccinations, a quicker reopening of the US economy, and the $1.9 trillion fiscal stimulus in addition to the $900 billion in December 2020.

Likewise, the Eurozone and Japan had relatively larger contraction last year and are expected to rebound rather modestly this year with growth rates of about 4.1% and 2.2% respectively. This notwithstanding, a slow start to vaccinations alongside renewed calls for lockdowns, have dimmed a rather stronger growth outlook for 2021. This is likely to improve gradually, but not as robust as that of the US.

Among the larger emerging markets: China will experience the strongest growth, reflecting a growth rate of 10%. However, India which was projected to grow in tandem with China may likely suffer a lower growth considering an upsurge in COVID cases. Also, countries such as Brazil, Saudi Arabia, Russia, and South Africa will see much slower recoveries.

While this is so, the availability and quicker-than-expected rollout of vaccines combined with fiscal support underpin the stronger growth outlook. Meanwhile, the uneven deployment of vaccines in other jurisdictions alongside country-specific risks in emerging markets such as Brazil and Russia provide downside risks to the region’s growth outlook. But this is likely to improve as fiscal stimulus and vaccine rollouts progress.

In Sub-Saharan Africa, growth performance varies across countries. According to the World Bank, the region is projected to see real GDP growth improve to 3.4%. On a country-by-country basis, economies that are non-resource-intensive such as Kenya, Cote d’Ivoire, and mining dependent economies including Botswana and Guinea are expected to experience robust growth emanating from increase in exports.

Regionally, Western and Central Africa sub-region is projected to grow by 2.1% in 2021. This is against the backdrop that, the region’s largest Economy, Nigeria sees a stronger expansion in growth. Also, Eastern and Southern Africa is projected to grow 2.6% in 2021, excluding Angola and South Africa.

However, available data from the African Development Bank projects East Africa to grow at 3.0%, with top performers including Djibouti, Kenya, Tanzania and Rwanda. Furthemore, Southern Africa is projected to grow at 3.2%, West Africa’s real GDP is also forecast at 2.8%, Central Africa is projected to grow at 3.2% and North Africa to experience a robust recovery of 4.0%.

IN FOCUS: DRIVERS TO GLOBAL GROWTH IN 2021

The unfolding of the global recovery narrative is driven by improved management of the pandemic situation and supported by ample fiscal and monetary policy measures. The extent of return to normality should mimic the manner in which the global economy builds back and how quickly convergence is reached.

VACCINATION CAMPAIGNS ONGOING, BUT UNEVEN

Signals of a third wave of the pandemic, surfaced in January, as countries such as France, Germany, Belgium recorded new cases of the virus and began planned lockdowns. However, these numbers peaked and have since taken a nose dive. Available data signals that the worst is behind us, as warmer weather and the ongoing vaccination campaigns have triggered a sense of hope for the reopening of economies.

However, this is not without risks, as the vaccination campaigns have been rather slow with significant divergence between countries and regions globally. The US is doing quite well in terms of vaccination rates, whereas Europe is lagging behind, with vaccinations non-existent in some countries.

This divergence in the pace of vaccination campaigns will also affect the pace of reopening. While countries such as the US and Israel have started easing restrictions, countries such as France recently announced further lockdowns and Italy are tightening restrictions.

For emerging markets, Brazil is tightening restrictions as it faces significant rise in COVID-19 cases, countries such as Mexico and South Africa are easing restrictions although vaccination rates are at their early stages in those economies. The overwhelming surge in COVID-19 cases in India, recently, with close to 347,000 new cases in just a day presents downside risks to the global recovery. India now faces an unprecedented rate of infections with hospitals unable to contain the pressure and deaths have climbed up to a record high of 2, 624 a single day. Currently, some States have begun imposing new lock downs to curb the spread. This remains yet a big and sudden blow to the region. This new development has the tendency to shrink the region’s economic recovery.

For sub-Saharan Africa, vaccination programmes have been slower as compared to much of the advanced economies. With just about 15 percent of the global population, less than 2 percent of all Covid vaccines are administered in sub-Saharan African countries. Meanwhile, countries such as Mauritius have begun imposing restrictions as they experience a second wave of the pandemic while others such as Ghana, Nigeria, Cote d’Ivoire have eased restrictions.
While a few countries have administered vaccine doses to their populations, there are still a lot more that still lag behind. The situation has become precarious, as most of Africa’s economies that depend on the supplies of AstraZeneca vaccines under the COVAX facility may have by now exhausted their supplies, considering the spike in COVID cases in India and the shortage therewith.

On aggregate, however, the ongoing vaccinations among countries and the ease of restrictions are fueling the reopening of economies, but there is clear evidence of divergence across regions and individual economies.

Global chart33xSource: Fitch Solutions 

FISCAL POLICY AND MONETARY POLICY TO REMAIN ACCOMMODATIVE

Furthermore, the recovery in growth will be underpinned by significant amount of fiscal as well as monetary policy support. Although fiscal deficit will trend downwards rather sharply compared to that of last year, it will continue to remain above pre-pandemic levels. Fiscal policy for developed markets will broadly remain loose as compared to emerging markets.

Governments spending in developed markets will be well above that of emerging markets in the coming years as compared to pre-Covid years since, developed markets have generally fewer spending constraints as compared to frontier and emerging markets. More so, it will be politically difficult to unwind high levels of spending over the coming years, especially where parts of the economy still struggle. For instance, where there are high levels of unemployment or where income inequality remains elevated, governments will increase spending towards such areas.
In addition, monetary policy will remain accommodative. Most Central Banks have considered staying policy rate at current levels and only a handful of Central Banks will hike interest rates this year. Thus, interest rates will generally be kept low.

Also, most central banks will remain very active in expanding their balance sheets in order to keep financial conditions eased and suppress bond yields. Despite this, there is evidence of rising yields in advanced economies, such as in the United States. Central Banks, mainly in developed markets adopted quantitative easing during the onset of the pandemic and are likely to maintain such a policy this year.

The COVID-19 pandemic has re-aligned behaviors, tastes, preferences and priorities, and as such, does not necessarily indicate an immediate return to an exact replica of a ‘2019 world’. This ‘new world’ may be a lot stronger than before, and it all depends on the aforementioned actions championed on a global scale.

Covid-19 resurgence; A worry for Global Economic Recovery

Covid-19 resurgence; A worry for Global Economic Recovery

With just some few days left to end the year, and since the outbreak of the Covid-19 virus, available data reflects a grim outlook for the global economy. More than one million lives, and still counting, have been lost to the grip of the pandemic and the global economy is estimated to contract by 4.4 percent in 2020. Millions of jobs have already been lost, another millions of livelihoods at risk of collapse and an estimated 130 million more people likely to plunge into extreme poverty levels should the virus persist.

In no uncertain terms, the coronavirus pandemic has woken us all up to the realities pertaining to the frailties of human life, and the associated mammoth pandemic-induced economic fallout. However, world economic powers such as the US, Germany, France, UK, and Least Developed Countries (LDC) alike are experiencing new and quicker-than-expected resurgence of Covid-19 cases at alarming rates and, for many, the nightmares of imminent lockdowns and shutdowns are an unwelcomed reality.

Prior to another surge of the coronavirus cases in recent times, several episodes of relaxed restrictive measures in advanced economies and emerging markets- U.S, Germany, Japan, China meant that Global GDP growth was going to rebound due to the upscale of economic activities in the third quarter.  

However, the resurgence of the virus threatens this fragile recovery and has the tendency to ascent the negative outcomes the spread of the virus and harsh control measures have on the global economy. As a consequence, economic growth projections, which have frequently been revised downwards in 2020, including 2021 are likely to change the more in coming months.

Analysis of the global economic outturn pre-Covid resurgence

Early this year, in January 2020, the IMF projected global growth to rise from an estimated 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent in 2021.

In a broader sense, the issues that culminated in an uptick in the growth projection included improvements in market sentiments, coupled with quite low manufacturing activity and global trade, a broad-based shift towards accommodative monetary policy, favorable outcome from the US-China trade negotiations, and a decline in fears of a no-deal Brexit, among others.

Furthermore, U.S GDP was expected to fall by 0.3 percentage points and further decline in 2021 to 1.7 percent. The Euro area was projected to pick up by 0.1 percentage points and reach a high of 1.4 percent in 2021. China’s growth was also forecasted to fall to 6.0 percent from 6.1 percent, and that of Japan was predicted to decline to 0.7 percent from 1 percent in 2019.

In the April update of the World Economic Outlook (WEO), the IMF projected the global economy to contract sharply by 3 percent, a figure much higher than the 2008/2009 financial crisis. At this time, uncertainties about the nature of the novel coronavirus and the emerging high costs of the treatment of large numbers of infected people in developed economies and emerging markets like U.S., France, Spain, UK, and China constituted this projection.

Consequently, lockdowns and shutdowns of economic activities, closure of borders, among various other measures were introduced in most economies around the globe to contain the spread of the virus. Baseline forecasts of the global economic growth were projected at 5.8 percent in 2021, as it was assumed that by then, the pandemic would have begun fading out in the second half of 2020 and containment efforts could be gradually relaxed.

In June, however, the growth forecast for the global economy was -4.9 percent in 2020, 1.9 percentage points below the April 2020 projection. This refraction from the target anticipated was due to the escalation in the spread and negative impact of the pandemic on economic activity in the first half of 2020 as well as high level of uncertainties.

The net effect of these conditions was an adverse impact on the incomes and livelihood of households, job losses among, and reduced capabilities of vulnerable groups and the poor. Thus, the IMF pegged global growth at 5.4 percent in 2021.

This notwithstanding, in economies with declining infection rates, a slower recovery path of GDP was anticipated as businesses were going to begin operations observing social distancing rules, supply-chain breakages were going to relink gradually, although not fully- low productivity and vice versa.

This turn of events had a heavy toll on individual economies in a varied sense. For instance, the GDP of advanced economies was forecasted to contract by 8.0 percent in 2020; the U.S experienced a downturn of 8.0 percent; Japan grew by -5.8 percent; the United Kingdom (-10.2%), Germany (-7.8 %); France (-12.5 %).

For emerging markets and developing economies, the decline in growth was revised to 3.0 percent, which is 2.8 percentage points higher than the revision for advanced economies (1.8 percentage points).

 Resurgence expected to further slowdown short-to-medium term economic gains

According to the IMF, global growth was projected at 5.2 percent in 2021, a little lower than in June 2020. New projections as of October 2020, however, predict a 0.6 percentage points improvement in that of June 2020, but behind the 2021 projection by 0.8 percentage points. Owing to the gradual ease of restrictions and return to the new normal business environment,

“The revision reflects better-than-anticipated second quarter GDP outturns, mostly in advanced economies, where activity began to improve sooner than expected after lockdowns were scaled back in May and June, as well as indicators of a stronger recovery in the third quarter.”- IMF

However, a more recent data from UNCTAD for November 2020, hints that global GDP will decline at around 4.3 percent in 2020 which is 0.1 percentage point lower than IMF’s projection for October, with an expected global recovery of 4.1 percent in 2021. Growth projections for developed economies is projected at -5.8 percent in 2020, 2.3 percentage points above that of the second quarter.

Essentially, developed economies are likely to be more affected in 2020 than developing economies, which are expected to end the year with a growth of -2.1 percent, which is less than that of the developed economies. A much weaker recovery is expected in 2021 at 3.1 percent as compared to a positive growth of 5.7 percent, the report highlights.

Furthermore, an outlook of global growth in the medium term is projected to slow down to about 3.5 percent, after 2021. This forecast implies only little progress toward achieving the 2020 to 2025 path of economic activity projected before the pandemic for both advanced and emerging markets and developing economies.

Unsurprisingly, there are regional disparities in growth trends. With the exception of China and the Republic of South Korea who are both forecasted to make a positive outturn, albeit weak growth in 2020 at 1.3 percent and 0.1 percent, respectively, the other Asian economies will be experiencing negative growth rate. The U.S. is expected to experience significant negative growth at (-5.4) percent, Germany at -4.9 percent, UK and Northern Ireland at -9.9 percent.

 Prolonged duration of Domestic and External Shocks

The economic fallout from the Covid-19 pandemic is characterized by large domestic and external shocks that affects the global economy. From the domestic side, these shocks may include restrictive measures (lockdown) to contain the virus; the scare of contracting the virus may also dampen consumer demand; decline in consumers’ purchasing power; loss of income (eg. loss of jobs); uncertainties about the evolution of pandemic.

More so, changes in consumer behavior or preferences due to restrictions imposed might hit certain sectors of economy real hard, such as the tourism and Micro, Small and Medium Sized entreprises which mostly employ many vulnerable groups.

On the external side, global merchandise trade will be adversely impacted. According to the UNCTAD report, global merchandise trade was projected to fall in the second quarter by an unprecedented 19 percent year-on-year.

Oil prices had a nose dive, and international tourist arrivals also significantly declined by 65 percent in the second quarter of 2020, remittance flows also largely declined in the period throughout the first to third quarters of 2020. Taken together, these factors have grave implications for the income of global economies, especially LDCs as it translates to lower export levels, lower export prices and lower income receipts from tourism as well as remittance receipts.

Debt levels of across countries are also expected to increase significantly beyond high risk levels should the pandemic persist. Already, the first wave of the pandemic has plunged most developing countries into unsustainable debt burden levels. Therefore, making further borrowing for health-related, social and economic expenditure to mitigate the impact of a second wave of the pandemic remains an unviable option, UNCTAD warns

“With depressed economic activity through most of 2020 and a likely slow recovery in 2021, even servicing existing external debt obligations will represent a challenge for many developing economies.”- UNCTAD

The severity of debt levels is evidenced by the G20’s commitment to offer suspension of debt servicing to poorest countries extending to mid-2021, on debt service payments on official bilateral loans to 73 developing economies in receipt of International Development Association financing and/or classified by the United Nations as LDCs. However, without additional debt relief beyond the temporary suspension of debt service payments, the current debt distress situations among countries may worsened the more.

 There’s hope for a vaccine, but the likelihood of recovery remains uncertain

Health wise, global efforts to obtain a vaccine are yielding positive outcomes, as three vaccines by Pfizer-BioNtech, Moderna and Sputnik V pharmaceutical companies have shown to be about 95% effective in late-stage clinical trials. Other vaccine breakthroughs that are being made include AstraZeneca/ Oxford Covid vaccines which is currently 70% but hopeful to rise to 90% in the shortest possible time.

While this is very welcoming, there are uncertainties regarding whether vaccinations of populations all over the world in 2021 would abruptly end the economic fallout. The surging coronavirus cases in both advanced and emerging economies and developing economies are imposing fresh restrictions.

Economists are divided as to whether the economic fallout from the containment measures introduced would spark a slow recovery of economies or the recovery would be immediate. Economists at UNCTAD believe that, although there is confidence that an end to the health pandemic is in sight, the viability of a vaccine will not halt the spread of economic damages, which are likely to be felt long into the future. According to them, the inequalities and vulnerabilities across the globe risk worsening the distribution and access to the vaccine even after the vaccine becomes available.

THE GLOBAL ECONOMY IN Q4, 2019

THE GLOBAL ECONOMY IN Q4, 2019

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.

COVID-19 brings global economy on its knees

The COVID-19 pandemic has hit the global economy in ways that has never been seen before in a long time, with latest forecasts indicating that the global economy will contract by 4.9% at year end.

This is against a positive growth of 4.4% in 2019 where the Global GDP amounted to about US$142 trillion dollars, according to Statista. The top five countries in terms of nominal GDP; the U.S., China, Japan, Germany and India contributed an enormous 55 percent to the world’s GDP.

However, with all these countries hardly hit by the novel virus and economic activities brought to a standstill for a long period of time in these countries, the global economy is expected to record a negative growth this year.

The U.S. economy contracted by 5 percent in the first quarter of 2020, which according to analysts is an indication of the onset of a recession. The second quarter was worse, as the economy contracted 9.1 percent, according to scroll.in. The Congressional Budget Office predicts the third quarter will improve, but not enough to make up for earlier losses.

Effects will linger until the fourth quarter 2021, with slightly lower economic output and higher unemployment.

U.S. GDP growth will contract by 6.5 percent in 2020. It will rebound to a 5 percent growth rate in 2021 and 3.5 percent in 2022. This is according to the most recent forecast released at the Federal Open Market Committee meeting on June 10, 2020.

According to ‘the balance’, more than 20 million workers lost their jobs in response to the pandemic. The unemployment rate was also projected to average 9.3 percent in 2020. Inflation is expected to average 0.8 percent in 2020.

Due to the uncertainties brought by the outbreak of the coronavirus, the world’s second largest economy has decided not to set a growth target this year.

Data from the National Bureau of Statistics of China showed that China’s first quarter GDP contracted by 6.8 percent in 2020 from a year ago. This was the country’s first GDP decline since at least 1992, when official quarterly records started.

However, China’s economy has begun to pick up as shown by recent second quarter reports. China’s economy grew by 3.2 percent in the second quarter of this year, compared to a year ago.  Data released at the end of the first half of 2020 also showed weak consumption in China as retail sales were down 1.8 percent in June as compared to the corresponding period in 2019.

COVID-19 has also impacted significantly on the Japan, which is the third largest economy in the world. In May, manufactured goods exports fell 23.8% from a year earlier, while manufacturing production was also down by 25.9% over the same period. Japan’s economy contracts by 9.9 percent in the second quarter of 2020.

In the labor market, aggregate hours worked dropped 10.8% from a year earlier in May. The loss of hours worked have translated into a decline in average monthly wages. The major trading partners of Japan are China and the U.S.A, who have been hit heavily by the pandemic. This is likely to have a significant toll on the Japanese economy.

The output of the biggest economy in Europe, Germany is also expected to decline by 5.8 percent this year, plunging the nation into its worst recession since the end of World War II.

Unemployment is also projected to rise to an annual average of 2.72 million in 2020, up from 2.27 million last years. The experts also forecast a 4.4 percent expansion of the economy in 2021, according to DW.

In the second quarter, the economy contracted by a staggering 10 percent over the previous three months due to the devastating effect of a nationwide lockdown.

Data released by the Ministry of Statistics and Program Implementation showed that the GDP of world’s fifth largest economy, India had contracted by 23.9 percent in the second quarter of 2020. India recorded the biggest contraction in the second quarter of 2020 among the top five largest economies in the world.

Consumer spending which is the main driver of the economy dropped 31.2 percent year-on-year in the second quarter of 2020 as compared to a 2.6 percent fall in the previous quarter. Capital investments were also down by 47.9 percent compared to a 2.1 percent rise in the previous quarter.

Manufacturing has already entered recession as output fell 39.3 percent in April-June after falling 1.4 percent in the previous quarter, and construction and trade services plunged by around 50 percent.

With the world’s biggest economies all struggling due to the outbreak of the pandemic, it is therefore no wonder that the International Monetary Fund (IMF) in its April edition of the World Economic Outlook (WEO), projected that the global economy will contract sharply by 3 percent in 2020, much more than during the 2008–09 financial crisis. According to the IMF, the downwards projections were necessitated by the severe impact of the pandemic on economic activities.

However, in June this year, the IMF further downgraded its projections in the global economy. Global growth is now projected at –4.9 percent in 2020, 1.9 percentage points below the April 2020 WEO forecast. The COVID-19 pandemic, according to the IMF, has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecasted.

The recent forecast has downgraded some of the major components of aggregate demand; private consumption and firm investment.

The Fund states that Consumption growth, in particular, has been downgraded for most economies, reflecting the larger-than-anticipated disruption to domestic activity.

The IMF explained that the projections of weaker private consumption reflect a combination of a large adverse aggregate demand shock from social distancing and lockdowns, as well as a rise in precautionary savings. The Fund, however, indicated that Policy support will partially offset the deterioration in private domestic demand.

Investment on the other hand, the IMF said, is expected to be subdued as firms defer capital expenditures amid high uncertainty.

The projections have shown that in the baseline, global activity is expected to trough in the second quarter of 2020, recovering thereafter. Growth is expected to strengthened to 5.4 percent in 2021, with consumption and investment increasing gradually.

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“In 2021, growth is projected to strengthen to 5.4 percent, 0.4 percentage point lower than the April forecast. Consumption is projected to strengthen gradually next year, and investment is also expected to firm up, but to remain subdued. Global GDP for the year 2021 as a whole is forecast to just exceed its 2019 level,” -IMF.

 

 

World Bank’s projection

The World Bank on the other hand is projecting a global contraction of 5.2 per cent in 2020, much higher than IMF’s projections.

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The COVID-19 pandemic has, with alarming speed, delivered a global economic shock of enormous magnitude, leading to steep recessions in many countries. The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020—the deepest global recession in eight decades, despite unprecedented policy support. Per capita incomes in the vast majority of emerging market and developing economies (EMDEs) are expected to shrink this year, tipping many millions back into poverty,” -World Bank.

 

The World Bank pointed out that every region is subjected to substantial growth downgrades. The Bank indicated that East Asia and the Pacific will grow by a scant 0.5 percent. South Asia will contract by 2.7 percent, Sub-Saharan Africa by 2.8 percent, Middle East and North Africa by 4.2 percent, Europe and Central Asia by 4.7 percent, and Latin America by 7.2 percent.

 

Drop in trade volumes

A recent goods trade barometer report released by the World Trade Organisation (WTO) shows a 14% drop in global merchandise trade volume between the first and second quarters of this year.

The current barometer reading of 84.5 is 15.5 points below the baseline value of 100 for the index and 18.6 points down from the same period last year. This reading is the lowest on record in data going back to 2007, and on par with the nadir of the 2008-09 financial crisis.

This is however, broadly consistent with WTO statistics issued in June, which estimated an 18.5% decline in merchandise trade in the second quarter of 2020 as compared to the same period last year.

 The exact extent of the fall in trade will only be confirmed later this year when official trade volume data for the period from April to June becomes available.

“The WTO's June statistics implied a 14% drop in global merchandise trade volume between the first and second quarters of this year,” -WTO.

This estimate, together with the new Goods Trade Barometer reading, suggest that world trade in 2020 is evolving in line with the less pessimistic of the two scenarios outlined in the WTO's April forecast, which projected that the volume of merchandise trade this year would contract by 13% compared to 2019.

However, as WTO economists warned in June, the heavy economic toll of the COVID-19 pandemic suggests that the projections for a strong, V-shaped trade rebound in 2021 may prove overly optimistic.

As uncertainty remains elevated, in terms of economic and trade policy as well as how the medical crisis will evolve, an L-shaped recovery is a real prospect. This would leave global trade well below its pre-pandemic trajectory.

 

Increase in agricultural and Food Exports

It has, however, not been all gloom as a recent report published by the WTO Secretariat on the impact of the COVID-19 pandemic on world agricultural trade shows that agricultural and food exports increased by 2.5 per cent during the first quarter of 2020 compared to the same period in 2019.

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“While overall merchandise trade fell sharply in the first half of 2020, agricultural and food exports increased by 2.5 per cent during the first quarter of the year compared to the same period in 2019, with further increased in March and April. However, the crisis has exerted further downward pressure on food prices, and therefore on producer revenues,” -WTO

 According to the report, even though many of the initial measures were expected to impact negatively on the agricultural sector, the sector has shown resilience, with a trade performance that has fared better than other sectors.

The report however, warns that countries are still fighting the pandemic, and its repercussions for food supply chains are still unfolding.  While there is currently no reason why the ongoing health crisis should turn into a food crisis, disruptions to food supply chains constitute a risk, with governments’ trade policy choices likely to determine how the situation evolves.

Global growth remains precarious

Global growth remains precarious

Global growth is likely to dim this year, due largely to weaker momentum in developed economies and China.

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.

Global Economic Growth Becomes Fragile as Trade Tensions Persist

Global Economic Growth Becomes Fragile as Trade Tensions Persist

Global momentum has weakened markedly and growth is set to remain subpar as trade tensions persist.

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