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World economy faces $5trn hit, that’s like losing Japan

Although the downturn is predicted to be short-lived, it’ll take time for economies to make up the lost ground.
Image: Bloomberg

The coronavirus pandemic is set to rob the global economy of more than $5 trillion of growth over the next two years, greater than the annual output of Japan.

That’s the warning from Wall Street banks as the world plunges into its deepest peacetime recession since the 1930s, after the virus forced governments to demand that businesses close and people stay home.

Although the downturn is predicted to be short-lived, it’ll take time for economies to make up the lost ground. Even with unprecedented levels of monetary and fiscal stimulus, gross domestic product is unlikely to return to its pre-crisis trend until at least 2022.

That’s a similar timescale to the aftermath of the global financial crisis just over a decade ago, though the recovery could yet prove even more sluggish than economists are predicting.

It underscores the massive task for policy makers, who must deliver enough stimulus to drive the rebound but avoid reopening their economies too soon and allowing the virus to return.

“Trajectory matters a whole lot,” said Catherine Mann, chief economist of Citigroup, which expects a global hit of around $5 trillion. “If your trajectory is positive, that is supportive of business confidence and supportive of individuals feeling they can go get a job. That’s a critical ingredient going into the second half of the year and 2021.”

JPMorgan Chase & Co. economists put the lost output at $5.5 trillion or almost 8% of GDP through the end of next year. The cost to developed economies alone will be similar to those witnessed in the recessions of 2008-2009 and 1974-1975.

Morgan Stanley says that despite an aggressive policy response, it’ll be the third quarter of 2021 before GDP in developed markets returns to pre-virus levels. Deutsche Bank AG says the “lingering cost and scarring effect” will leave the US and European Union economies alone $1 trillion below pre-virus expectations by the end of 2021.

The World Trade Organisation said Wednesday that the pandemic could cause a deeper collapse of international trade flows than at any point in the postwar era. The International Monetary Fund is due to announce its latest forecasts as part of its spring meeting — to be held virtually — next week.

European Central Bank President Christine Lagarde said on Thursday that each month of lockdown is costing the euro-area economy 2% to 3% of economic output.

What our economists say

“The global economy is already contracting, and is losing steam faster than in the early days of the financial crisis.” – Dan Hanson

The numbers risk masking the human toll of the crisis. As well as the mounting death count, businesses will lose income and many will be forced to close. Millions of employees will be cast out of work.

The International Labour Organisation said this week that more than 1 billion workers are at high risk of a pay cut or losing their job.

“It’s going to be temporary, but it’s putting stress on everything,” Steve Schwarzman, chief executive officer of Blackstone Group, told Bloomberg Television this week.

Governments will need to coordinate. The Bank for International Settlements has warned that disjointed national efforts could lead to a second wave of cases, a worst-case scenario that would leave US GDP close to 12% below its pre-virus level by the end of 2020.

Without a concerted global effort, emerging markets face an especially long road to recovery, according to Amlan Roy, head of global macro policy research at State Street Global Advisors.

“The recession we are likely to see, if emerging markets don’t come out of it by June, is something that could last many years, just like the Asian and Latin American crises,” he said. “It’s likely to be a five or 10-year effect if the world doesn’t get together.”

The ramifications of the pandemic are in any case likely to be felt for a very long time if history is a guide. Research from the University of California, Davis, shows that previous outbreaks tend to curb wages and weigh on investment for decades.

The current scenarios also assume that that policy makers get their response largely right. That’s not guaranteed — as the failure of EU finance ministers on Tuesday to agree a joint strategy showed.

Holger Schmieding, chief economist at Berenberg, notes that governments might need to keep heavy restrictions on travel in late 2020 or 2021 to prevent the pandemic from recurring. At the same time, they must keep spending well beyond their initial measures to support the upturn, or risk another dip in a so-called W-shaped recovery.

“A major policy error could do serious damage,” he said. “It would be easier to come up with darker forecasts. You just have to assume that the policy response won’t be quite adequate.”

© 2020 Bloomberg

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Test people that are still working at a communal workplace. Isolate the ones that test positive. Then start opening up other sectors after testing employees. Otherwise we face wide scale bankruptcies.

Yep, that coupled with antibody testing. If you have the antibody (ie had the virus and have recovered) you can safely work and travel anywhere. Plus, some interesting research into the benefits of donating antibodies for treatment.

There are no Antibodies yet !

Trying to retire,I think we are probably already there in terms of Bankruptcies and job losses but the longer it takes us to get there the worse the fall-out will be. The worst part though about the job losses is the time it will take to replace these jobs. Every job loss translates to lost income spent in the economy which feeds to economic vacuum. On a positive note is that there will be a forced changed in mindset that people will begin to side hustle economy more serious and in turn some people will be able to slowly start generated additional and even maybe replacement incomes. The strategy though for people doing this is to find multiple income stream and not one singular income stream.

edalsg

No – every recovered patient has antibodies and is immune. You are maybe thinking of vaccine?

There once was a vaccine, named after Maxine,

Her body had a virus much like her sister Cyrus,

Her mother named it Corona after her Aunt Serona

Their bodies were infected and thanks to Maxines vaccine was rejected

Don’t be facetious. The economy is being murdered, people are going hungry and everybody is desperate by now.

And i’m sure no one is bombarded with a plethora of humor via social media concerning the virus on a daily basis, you included?

Oo Griet, jy klink soos ‘n kriek..Get a life!

You will remember this inappropriate comment when we are in the depths of a depression, due to the reckless economic decisions made by the government at the moment. With a husband in the medical field at the forefront of the illness and children seeing their businesses sink before their eyes, I find nothing humerous anywhere. I see an economic disaster we will not recover from in our lifetime.

Griet, I’m old enough to know what you are referring to having been through 28% interest rates, an economic downturn and much more

My wife and friends in the medical field are also at the forefront of this epidemic so I’m quite enlightened

Some of us deal with crisis different than others, we’re not all the same. You can only read many news sites to see how people deal with this, many suggest humorous tales

So, Griet, lets not get into an argument.. I agree with you and i apologize if my post has offended you and anyone else

Lets hope and pray we get through this crisis sooner than later

Once again, please accept my apology and God bless!

Thanks Seve, I appreciate the remarks. I know humour is a way of dealing with hardship, but as a student of history I am doubly concerned with the speed and randomness we have also been deprived of hard-won civil liberties. We are in deep trouble.

End of comments.

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