Economic growth is one of the most unpredictable statistics in the world, especially in the current scenario. With the Coronavirus pandemic having no cure for the foreseeable future, the Global Economic Growth rate is as dismal as it can get and none of the figures can be trusted as certain. On Tuesday, the International Monetary Fund (IMF) predicted the global economy to shrink by 3% in 2020 and said that it could be even higher as the world tackles the deadly, Coronavirus. Let’s look at how the so-called “Economic Giants” are hit by the pandemic and what lies ahead for the Global Economy.
Let me hit you with a few statements and figures so that you can understand why the title is what it is.
- The IMF’s prediction of a 3% global shrink in the economy is the steepest downturn since the Great Depression of the 1930s
- Forecasted Global GDP growth due to COVID-19 in FY20 is 2.4%
- The world is likely to lose USD 9 Trillion in output which is greater than the combined output of Germany and Japan added
- A longer pandemic that stretches to the third quarter of 2020 may cause a further drop of 3% in output
- Around 170 countries have now confirmed COVID-19 cases and outbreaks are severe in both developed as well as underdeveloped nations
- The United States, Italy, Spain, Germany, France, India, Iran and Australia are among the ones severely hit and facing serious lockdown measures
- Global growth is already slow and financial markets across the world have very low-interest rates which makes it even more difficult for Central Banks in any country to mitigate a potential Economic fallout
- The impact on demand has created large cash flow gaps for corporates and tough financial conditions will make it difficult for them to finance it through market borrowings
- Global Indices such as Dow Jones, FTSE, Nikkei, NASDAQ, CAC 40, SENSEX, NIFTY, etc. have been on a constant downturn and stock markets over the world have entered the bear phase
- A Global Lockdown as it may be called means that production is at its worst with major producing giants, China and USA on the steep end of the Corona curve
- Asia’s fastest-growing economy, India has seen growth figures being cut from almost 7% in FY19 (prediction) to 1.9% in FY20
- Crude Oil prices have rallied to record lows amidst the row between OPEC complimented by the pandemic
To put these facts into perspective, let’s see what has happened in a few top performing economies of late.
United States of America:
On March 16, 2020 the Dow Jones index fell almost 3000 points marking the largest ever single day fall of the index and a worry for all investors and economists. The trade-war between China and US had already had a stirring impact on the economies of both these countries. With signs of the trade war coming to an end, the COVID-19 pandemic made matters worse especially in the States. The US economy has fallen by almost 2.4 % after it was hit by the Coronavirus crisis. The employment and production figures are more worrying than ever. According to the US Bureau of Labor Statistics, the number of people filing for unemployment hit a record high close to 7 million people. Travel is the worst hit industry with worldwide travel restrictions causing havoc among hotels and flight operators. The number of daily flights has dropped significantly since the outbreak of the pandemic. With the number of people being affected increasing day by day, the average output may decline to significantly low levels. The Institute of Supply Management said its index of national factory activity may fall to low levels having previously dipped from 50.9 to 50.5 in February. Exports contribute about 12.2% of the GDP and these disruptions make it tougher for US companies to export their goods and services amongst restrictions worldwide. The Manufacturing sector contributes close to 11% of the US GDP and a fall in this sector is expected to have adverse effects on the GDP of the World’s largest economy which previously stood at $20.5 Trillion in FY19.
India, the world’s fifth largest economy is one the most recent countries to see an upsurge in Coronavirus cases. With the nation-wide lockdown extended to 40 days in total and fears of extension still on the horizon, the manufacturing and service sector has taken a toll. Manufacturing is at a bare minimum with only essential supplies contributing to production. Producers also fear that once the lockdown is over it may not be possible to kickback production due to problems relating to workers. The Indian Automobile industry had seen a drop of almost 19% last year and with signs of recovery in Q4 of 2019, Q1 of 2020 has not been kind. One of the most potent industry in India is on the decline once again and along with low production between March-April, the fear of low demand may once again lead to a bad year in the automobile sector. The Stock market is volatile in India and investors are having a run for their money. Agriculture which contributes a majority to the GDP of India is also on the slower side of growth. Unemployment figures are not yet worse but with daily-wage workers out of work, the poverty condition is on the verge of going from bad to worse in India. Times are set to get tougher in India and a low demand may lead the government wanting to increase spending and provide incentives to the people.
The largest exporter of goods in the world and the center of discussion when it comes to the COVID-19 crisis is also one of the worst hit economies in the world. Chinese Industrial production fell sharply by 13.5% in the first two months of 2020. Restrictions have affected supply of industrial equipment manufacturer JCB and carmaker Nissan along with many other big companies. Services sector saw a fall of around 13% while the retail sector plunged to -20.5%. Unemployment was also at a record high with unemployment rate at 6.2% in Jan’20. With strict actions taken by the government to curb the outbreak, production is expected to kickback by the end of April in parts of China and the crisis may well be averted by the end of 2020 in terms of economic impact. China contributes about 16-17% of the World Economy and if the impact on its domestic economy is negative by the end of FY20, it will have a grave impact on the World Economy as well.
Buckle up for a Period of Recession
Global Economic growth has been slow for a while now and a worldwide recession is on the horizon. Economists predict that this recession may be more demand driven and could be tackled by an increase in government spending. Although things may not seem as easy as said because of low levels of output in major countries. The employment and output figures for major economies as stated above are worrying. A contraction in demand is set to worsen employment figures as companies may resort to a cut in workforce contributing to greater unemployment levels globally. This also means fewer job opportunities for the foreseeable future for the youth and contribute to greater cyclical unemployment rate. This problem is only enhanced by a decline in production and exports worldwide along with disrupted supply chains in major economies. Exports contribute about 30% of the World GDP and this percentage is expected to reduce significantly in the coming year. The IMF predicted a partial economic rebound of 5.8% growth rate globally but also mentioned that this forecast was marked by “extreme uncertainty”. Considering the current situation, this figure looks highly optimistic and a period of recession is the harsh reality that we all must be prepared for.
With China on the wrong end of the Coronavirus crisis, it gives the opportunity to other countries especially to India to be the hub for production and emerge as the new Global Production Giant. It is a time to harness opportunities in the future for various companies and technology-driven production will be key to reducing the harm caused by this crisis. Continuous improvements in production and marketing strategies will be key in raising demand for goods and services. Calculated risks may reap huge benefits in the future and lead to a period of boom soon.
- KPMG Case Study on “Potential Impact of COVID-19 on Indian Economy”
- GDP-> Gross Domestic Product: It is the Gross value of the total goods and services produced in a country within its domestic territory.
- Institute of Supply Management national factory activity: A value above 50 shows expansion in the Manufacturing Sector of US.
- Cyclical Unemployment: It is the type of unemployment which occurs because of an economic collapse or a downturn in economic activity when companies feel the need to reduce production due to lack of demand.
- IMF-> International Monetary Fund