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.
“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.
“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.
“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.