Don’t count on a rapid rebound in the global economy


The world economy is experiencing an unprecedented sudden stop in peacetime. Investors have now accepted this as an unpleasant fact and have started to wonder how the next step – getting out of this sudden stop – would be. However, this depends entirely on the speed at which coronavirus locks can be reversed.

Major economies locked out at different times – first China, then Europe and finally the United States – but most forecasts suggest that the annualized rate of decline in global gross domestic product in the first quarter 2020 could approach less 20 percent, triple that recorded in the worst quarter of the Great Recession in 2009.

Federal Reserve officials have accepted that the US economy is likely already in recession, with new weekly estimates of New York Fed activity showing a drop in GDP as deep and much faster than in 2008/09.

The latest American forecasts from Goldman Sachs show that the depth of the recession was reached in the second quarter of 2020, with a GDP probably 11 to 12% lower than the value before the virus. This would imply a dramatic drop to an annualized rate of 34% during this quarter.

GDP should then increase very gradually, not reaching its pre-virus trajectory before the end of 2021. This trend, involving almost two “lost” years in the United States, has been common in recent economic forecasts. A similar picture is expected in the euro area, which is experiencing a more precipitous collapse in manufacturing production than during the euro crisis of 2012.

There is some reason to be optimistic about the partial recovery in China in March. The immediate forecast of the Chinese Fulcrum shows that the annualized growth rate over one month rebounded to 4.6% in March, against minus 2.0% in February.

But China’s export orders are weakening while foreign markets are falling sharply. The growth of industrial production is still clearly negative compared to the previous year, and the Council of State had to announce new measures to restore economic growth in the second quarter. Beijing also reintroduced partial closures in several major cities last week.

The central expectation of traditional economic forecasters is a strong global recovery in the third quarter (see charts below). This would follow the pattern in mainland China and Hong Kong after the Sars crisis in 2003.

Since then, economists have generally viewed epidemics as inherently temporary events that need not cause long-term structural damage to productive capacity, provided that general business failures and long-term unemployment are avoided duration. This is the basis of consensus forecasts for today’s recovery this year.

The coronavirus, however, clearly has far more widespread effects on global economic activity than other epidemics, such as Mers, Ebola or swine flu. If there is a protracted path to economic normalization, which lasts more than a few quarters, budgetary and monetary support for the activity of private enterprises could meet with political resistance. Deep-rooted recession forces could then set in. The general weakness of stocks last week suggested that the markets think these risks are increasing.

Is there an early exit route for the global economy?

A smart roadmap for reopening the economy, recently released by the American Enterprise Institute, suggests that there is indeed a way to avoid a very prolonged recession, based on virus and antibody tests with partial quarantine of affected citizens and localities. A localized, stop-start recovery is therefore the best thing we can expect. But the institute has not given a timetable for the stages of its plan, and it is hard to believe that it could be completed before the end of this year.

Successful management of the exit from the foreclosure will require skill and resolve in many areas of government policy. Unfortunately, the disorganized response to the virus so far in most major countries does not inspire much confidence in the likely speed of the global economic recovery.

A sudden stop but no depression?

A new activity tracker released by the New York Fed shows that US GDP growth fell to -4.5% year-on-year during the week of March 21.

The latest “representative” forecasts of the main market economists, collected by Fulcrum, show that the annualized quarterly growth rate of advanced economies reaches its lowest level in the second quarter of 2020, then rebounds strongly in the third quarter.


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