Coronavirus is rocking the world. Whatever we were focused on before, for the time being all has changed. Talk of trade policy, global slowdown and recession, labour shortages, the lack of saving, technological displacement, even climate change, among many other things—has taken a back seat to the novel coronavirus, or COVID-19. We’re all witness to the devastating consequences it’s having on human life. At the same time, people around the world are wondering what it’s doing to their livelihood. How is COVID-19 affecting the global economy, and what is the outlook for near-term growth?
Unlike many major economic events, no one saw this coming. Mid-December brought significant progress on the United States-China trade impasse, on Brexit and on the Canada-United States-Mexico Agreement. Moreover, key indicators were turning positive after a year of going the other way. We actually entered the new year with a whiff of optimism. But that all changed in mid-January when it became clear that there was a serious health issue unfolding in China.
The onset was so abrupt, there was no time to prepare. Simply put, containment measures are essential to stopping the virus, but they are simultaneously forcing the global economy into recession. The pattern started in China, and the second wave has now spread everywhere else. As we now watch economic activity melt, two questions are paramount: How deep will the drop in activity be; and second, how long will it last?
Many are asking if this is a repeat of 2008-2009. At times it may feel that way, but there are some critical differences. First, there is a lot more financial market regulation. Financial institutions have spent the last decade recapitalizing in order to avert 2009’s near-collapse. Second, demand is fundamentally stronger. If we had 2008-style consumer excesses, the virus would be a catalyst for recession. In direct contrast, today there’s clear evidence of pent-up demand and far more favourable personal finances. This will enable a third key difference: the uptake of aggressive monetary and fiscal stimulus. In 2009, aggressive policy measures were like trying to light a pile of rain-drenched wood. By comparison, this time the pile is tinder-dry.
History shows that in the face of a pandemic, the economic costs are significant, but are ultimately recovered in the ensuing sharp rebound. Why? Well, sudden, pervasive disruption causes a pile-up of demand that no other suppliers can meet; and when the pandemic stabilizes and diminishes, the demand is unleashed when production resumes.
EDC Economics’ Global Economic Outlook—Spring 2020 sees a short, sharp recession in the first half of this year that will have businesses the world over in need of large amounts of financial assistance. On the other side of this is a rush of aggressive catch-up growth. The global economy is forecasted to eke out 1.6% growth this year before rebounding with a robust 5.3% gain in 2021. Recession will hit the developed world, where output will rise just 0.2% in 2020, but giving way to impressive 3.7% growth next year. Likewise, emerging markets will see an exceptionally weak 1.6% this year before zooming back to 6.3% growth in 2021.
This forecast incorporates the March 8 oil price shock and the bulk of the interest rate adjustments made by the Federal Reserve Board and the Bank of Canada. We expect crude oil prices to average just under US$39 this year, and for other commodity prices to also have a rough year. Currently, we see the Canadian dollar averaging US$0.72 in 2020 before rising back to US$0.75 next year. (These numbers are based on conditions at the time the forecast was prepared.) Clearly, the forecast depends greatly on new developments on both the demand and supply fronts, and any counteractive fiscal and monetary policy measures announced in coming days and weeks.
While industries in every corner will be impacted by the effects of the coronavirus, some will be hit sooner than others. Anything connected to travel and tourism is facing instant duress, not the least of which are the airlines of the world. Cash concerns in all industries add risk to the financial sector. Essential services will be a government priority, so while impacted, things like food and health products and services will be a strategic priority.
The bottom line?
If forecasts are always a moving target, this one is zooming at warp speed. All prognosticators are likely to get the depth and duration of this debacle wrong. But if all players at the table are agreed on the dynamics of how events like this usually play out, then there’s hope that we can keep the more destructive “animal spirits” from exacerbating—or worse, prolonging—this episode.
This commentary is presented for informational purposes only. It’s not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.