Covid-19 and the Global Economy

2019 was a rough year for the humanity and the global economy. Trade wars and geopolitical tensions all over the globe melted down the risk appetite and that led to slowdown in an already slowed down global economy. The world has changed dramatically since January 2020.

Apart from geopolitical tensions, 2020 started relatively well. The trade war between the US and China stalled with the agreement of the phase one deal. It was enough to boost the risk appetite as global markets were waiting for the deal for too long. However, the world was caught unprepared against an outbreak (covid-19) that has killed hundreds of thousands of people by spreading rapidly across the globe.

There have been various conspiracy theories on covid-19 since it started its disruptive journey. Nevertheless, one thing is for sure that, it caused a crisis and this crisis is like no other. There is substantial uncertainty about its impact on people’s lives and there is no proper solution to get rid of it. International Monetary Fund’s (IMF) “world outlook report” claims that covid-19 caused the worst economic downturn since the Great Depression. The reason behind the claim is that the pandemic resulted in multiple crises such as; health crisis, financial crisis and a collapse in commodity prices.

Most of the countries have taken precautions (some of them were late) to stop the spread of the outbreak by imposing curfews. The lockdowns have been helpful in terms of slowing down the spread of the outbreak but it also shut off the engine of the global economy. Manufacturing and services PMIs, GDPs and many other statistics of countries have eroded, stock markets have jumped from the cliff and unemployment has risen as businesses have stopped or cut down their activities. The US initial jobless claims rate hit historical highs and the unemployment rate jumped to 4.4% in March 2020, the highest since August 2017, as the Covid-19 crisis threw millions out of work.

As a result of the pandemic, the global economy is projected to contract sharply by 3% in 2020 and it is projected to grow by 5.8% in 2021 as economic activity normalizes, with the help of policy support. The forecasts for the US economy are far worse when compared with the forecasts of the global economy. The US economy is forecasted to contract by 5.9% in 2020 and to grow by 4.7% in 2021. Partial lockdown in the US nearly stopped the industrial activity. DXY has gone up with an inversely proportional move since the global risk appetite has been disrupted and US dollar has lost its competitiveness in terms of international trade, which made it worse for them. As the currencies erode against the US dollar, emerging markets feel the pain too.

IMF’s projections show that China’s economy will keep on growing in 2020 by 1.2% and by 9.2% in 2021. They were the first country that applied a partial lockdown and they were the first country to lift the lockdown and return to normal life.

Central banks all over the world have been lowering the rates and supplying liquidity into the markets to be able to minimize the economic pain of the pandemic. Governments try their best too. Nevertheless, these kind of stimulus policies do not give immediate results as the uncertainty is all over the place.

It is for sure that the US and the eurozone have been getting through harder times than China. It is true that China has activated its industry when others cut down production and that is a clear advantage. Yet, China’s economy relies on export and they have to wait for its main exporters US and eurozone to get rid of the pandemics and return to normal life so that the uncertainty disappears and they are eligible to import again.

It was a great misfortune that oil price wars/shock coincided with the coronavirus period. It will delay the recovery of the global economy.

The lockdowns of the countries will be over in a month or two and the global economy will need time to show some signs of life. The risk appetite will show itself as the uncertainty leaves with the pandemic. Then we will be seeing the positive effects of the stimulus packages applied by the central banks, especially the FED.

Now, the main question is, what type of recovery to expect? U-shaped or V-shaped?

• I guess the shape will be just like “a check/tick mark”. We will find the bottom first and it will be a slow recovery that will last around a year.