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How long will the recession last for?
Alinea outline views on the global recession, and the projected economic recovery anticipated by the International Monetary Fund.
On a global basis, 2 billion people are experiencing lockdown and social distancing measures. In certain countries, 30% of the economy is closed down. The World Health Organisation has declared the outbreak a pandemic, and it has spread to 190 countries worldwide. In a statement released on 14th April 2020,
Gita Gopinath, Chief Economist of the International Monetary Fund outlined that the IMF predict the economy to contract by 3% in 2020, with an accumulated loss of $9 trillion dollars, the worst recession since the Great Depression, and the most serious pandemic since the 1918-20 influenza outbreak according to the World Economic Forum.
In a baseline scenario in 2021, presuming that the pandemic fades in the second half of 2020 and containment efforts and policy actions taken around the world are effective, global growth is anticipated to rebound to 5.8%.
The significant recession is anticipated to be alleviated subject to the duration and intensity of the health crisis, and policy actions taken to prevent widespread bankruptcies, extended job losses and system wide financial strains.
The global pandemic affects the economy in 4 capacities. This includes:
- Supply chain disruption. Companies all over the world, irrespective of size have experienced contractions in production, from countries including but not limited China as transportation and public sector imposed quarantine measures limit access to production.
- Direct loss of working staff due social distancing measures. Within the UK, employers have been requested to furlough staff if they are unable to continue with usual working activities due to economic conditions, or adherence to public policy measures.
- Indirect means such as the effect of quarantine measures, travel restrictions, and store closure, distorting the market from usual trading activities.
- Demand shocks, and people’s incomes are limited by unemployment lowered earnings and profit loss, with decreased spending effecting consumption behaviours and leading to a slowdown in economic activity.
Consumption activities are restrained, and worsening financing conditions for the public sector can be a threat to the price stability.
The Great Depression started due to the Wall Street Crash, in October 1929, and lasted for 10 years until 1939. It featured a GDP decline of 10% and an unemployment rate which almost reached 25%. Starting in the United States, it impacted global GDP, which experienced a contraction of 15% between 1929 and 1932. Comparatively global GDP fell by 1% between the 2008 – 2009 recession. The near consensus amongst economists is that an economic depression is a sustained, long term down turn in the economy, characterised by unemployment, lack of the availability of credit, bankruptcies, a reduction in international trade and volatile currency fluctuations.
The International Monetary Fund was established in the wake of the Great Depression to counteract any significant global market swings. Headquartered in Washington DC, the IMF is an international organisation which plays a central role in managing financial crisis. The IMF’s Managing Director Kristalina Georgieva has predicted a “deep recession, slow recovery model” scenario, according to the duration and intensity of the health crisis, anticipating 6 months to gain control over the pandemic, however due to the extreme uncertainty surrounding Covid-19 if the duration and intensity of the health crises continues, the global GDP would be anticipated to fall by 8% in 2021 if a longer containment period is required. Jan Hatzius, Chief economist of Goldman Sachs anticipates advanced economies to contract by 35% in the second quarter of 2020, equating to 4 times as much as in the 2008 financial crisis. Currently, a significant recession is anticipated to be alleviated by 2021, and policy actions taken to in preventing widespread bankruptcies, extended job losses and system wide financial strains.
The Coronavirus crisis differs significantly to the Great Depression, in that the crisis has been caused by environmental rather than financial conditions leading to a change in economic circumstances. In addition to this, legislation and financial policy, and institutions such as The International Monetary Fund are firmly established with the purpose of acting as a safety net, providing a committed infrastructure to mitigate domestic and global risk in times of crisis. Fiscal policy has adapted with agility to accommodate the market conditions – in the United States, the Federal government has increased public spending, with President Donald Trump releasing a phase one $8.3billion fiscal bill on 6th March 2020, a Phase Two stimulus bill on 13th March, which is awaiting vote by the Republican senate, and suggested a Phase Three $1trillion interventionist package with Treasury Secretary Mnuchin on 17th March, which awaits to be passed by congress, with stimulus including $1,500 per individual with a tax identification number, $600 per week for any workers made unemployed, $150billion for hospitals, $500billion in aid to small businesses and $200billion to stabilise state governments, included within a multitudes of other measures. This differs significantly from the Republican government’s non-interventionist response during the Great Depression.
Investment yields are very low in the US and Japan, where investors have flown to safer assets and long term bonds such as the 10 year US treasury. The Corporate Credit Facility (probability of inflation below 1% in the US has risen, most surveys of inflation expectation show fairly subdued inflationary measures, and are anticipated to remain low for an extended period.
In the United States, The Federal Reserve has embarked on large asset purchases, easing financial conditions in the US and around the world, serving as a funding backstop for corporate debt issued by eligible issuers. The Federal Reserve put into place the establishment of a Primary Market Corporate Credit Facility (PMCCF), for new bond and loan issuances, the Term Sheet Corporate Credit Facility to keep the credit market functioning and mitigate the fall out from COVID-19, established the Secondary Market Corporate Credit Facility (SMCCF), a special purpose vehicle, to purchase US investment grade corporate bonds and ETFs in the second market. The PMCCF and the SMCCF have expanded their scope and may now purchase $750 billion in bonds, increased from $200billion, and has reestablished the Term Asset-Backed Securities Loan Facility (TALF) to boost consumer spending established to provide $100 billion in asset backed securites and small business loans.
Central banks including The U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and many emerging markets have introduced quantitative easing measures and introduced new facilities and funds to support issuance and liquidity in corporate debt, and purchase Commercial Paper. China was the first country to experience Covid-19, and reacted early by putting aggressive control measures into place, leading to a containment and shock to the Chinese economy. In China, financial conditions were associated with an inflow of capital into asset classes, leading to cumulative negative portfolio flows. The crisis requires a multipronged approach in health care policies, targeted fiscal policies, containment measures which shut down production, a expansionary monetary policy, and loan restructuring to assist economic recovery in a crisis, which is only anticipated to last another few months.
Within the UK, Rishi Sunak, the chancellor of the ex-chequer has introduced around £390 billion of stimuli. The Coronavirus Job Retention Scheme is estimate to cost £30 - 40 billion, state backed loans to businesses and commercial paper work £330 billion, business rates relief and grants £20 billion, and the new Futures Fund, to support innovation, research and development and the UK’s start ups is worth £1.25 billion.
The G7 has issued a statement indicating that it is working to alleviate debt for the poorest countries. Emerging markets and developing economies have been particularly affected by loss of capital flows, affecting currency pressures, and have weaker health systems and less fiscal space to support their economies. Central banks are crucial in providing a line of liquidity to revitalise economies. To cushion shock, and secure steady, sustainable recovery close international collaboration is required, to help protect the world’s most vulnerable economies, and strengthen activity.
The global banking system currently has more capital and liquidity than in the global financial crisis of 2008. Banks are resilient to adverse economic scenarios under the wheel baseline the IMF’s anticipates most banks to be stable. In certain countries, banks may be struck particularly hard by the crises.
On 9th April 2020, in a “Spring Meetings: Curtain Raiser” speech by Kristilina Georgieva, the Managing Director of the International Monetary Fund, announced:
“Global growth will turn sharply negative in 2020. We anticipate the worst economic fall out since the Great Depression” . The IMF now project that over 170 countries will experience negative per income growth this year – particularly hitting vulnerable countries in Africa, Latin America and much of Asia are at high risk, with weaker health systems, and with fewer resources to begin some may face an unsustainable debt burden. In the last 2 months, portfolio outflows were more than $100billion, more than three times larger the the global financial crisis, effecting exports, and remittances are anticipated to dwindle. IMF will announced all governments have sprung into to coordinate action, with governments collectively contributed $8trillion in fiscal measures to counteract the crisis, including G20 nations. If a gradual lifting of measures is enable, a partial recovery can be anticipated in 2021, according to the duration of the pandemic, and much is dependent on policy actions.
Four priorities in a bridge to action a global recovery include:
- Prioritise health spending – build the medical infrastructure and funding for medical equipment, doctors and nurses, cleaning and medical supply chain investment.
- Shield people and firms with large timely targeted fiscal and financial measures. Lifelines for households and businesses are a must to avoid scarring of the economy. Prevent liquidity measures from turning into insolvency measures.
- Reduce financial stress to financial system and avoid contagion – assessment of vulnerabilities in the financial sector. Monetary stimulus and liquidity for emerging economies will provide relief and lift confidence.
- Plan for recovery. Minimise potential scarring through policy action taken now, based upon clear evidence. Move swiftly to boost the market with coordinated fiscal stimulus. Those will greater resources and policy space will need to do more, others will need more support. Deputy Chief Medical Officer Jenny Harries announced on Sunday 29tth March from Downing Street that social quarantine measures may be in place for up to 6 months. The World Health Organisation is particularly concerned about the impact on the poorest countries.
A short term liquidity lending line, and use of Special Drawing Rights could create critical financing solutions that will alleviate immediate debt relief, creating space for urgent spending on heath care, rather than current debt servicing. The SDR is an international reserve asset created by the IMF in 1969 to supplement its members official reserves. The value of the SDR is based upon the value of 5 currencies, the US dollar, the euro, the Chinese remnibi, the Japanese yen, and the British pound sterling. The SDR provides the measure for calculating the interest rates on members borrowing from the IMF.
Financial regulators have freed around $500billion of capital, from Washington to Hong Kong, for lenders on a global basis, with the intention of keeping credit flowing to businesses and households. Policy makers have outlined that banks have restructured to become the instruments of state relief and lending, drawing from lessons learned by the 2008 crisis to provide liquidity to mitigate economic scarring. “In a way the banking sector has suddenly been transformed from a nominally capitalist enterprise into effectively a state entity. It’s temporary, but significant, ” outlined Nicholas Véron, senior fellow at the Bruegel think-tank and the Peterson Institute for International Economics. Bank capital is made of shareholder’s equity and retained earnings, and used to measure a bank’s strength. By enabling banks to operate with lower levels of capital reserves, the higher demand for loans, rising customer defaults and deterioration in credit quality can be serviced with the short term without having to raise capital.
On a global basis, there will be not just a demand shock, but a supply shock experienced if 20 -30 % of the global economy experiences lockdown for the next 2 years. If extensive testing measures are implemented, then healthy people will be allowed to return to work. In current circumstances businesses are reluctant to invest and to hire, due to facing impeded market conditions, and potentially further accumulation of accrued debt. The vulnerable emerging markets and developing economies face an increasing burden on their health resources, and loss of development capital, the World Bank Organisation has announced $1.9billion to assist 25 countries, and is prepared to release $160billion over the next 15 months to mitigate the health consequences of the pandemic, and bolster economic recovery.
The Coronavirus pandemic differs to the 2008 financial crisis, where an $8 trillion housing market imploded in the United States in 2007. Bankers had approved mortgages which weren’t qualified, the banks packaged the mortgages as securities and sold them to other financial institutions. When home prices fell, many homeowners stopped making mortgage payments, within a subprime mortgage crisis between 2007- 2008. Banks were left unable to lend to business, and homeowners were paying off debt, rather than borrowing or spending, leading for the value of mortgage backed securities to decline, with repercussions experienced on a global basis, until June 2009. People became less wealthy overnight than they thought they had been, as investments suddenly lost value. The Coronavirus pandemic has placed significant limitations in scope, but spending power hasn’t been diminished in the same way, however as prolonged unemployment increases simultaneously with the chances of a long rebound. In addition to this, it may take time to re-establish businesses and the supply chain, reboot websites and phone call centres, and establish manufacturing, and logistics within routes to warehouse and distributors may take months to revitalise.
Providing that the pandemic is contained, and the duration of the pandemic is closed by the end of 2020, the global economic is anticipated to rebound in 2021.
“Great perils have this beauty that they bring to life the fraternity of strangers” – Kristilina Georgieva closed the Confronting the Crisis, Priorities for the Global Economy broadcast, prior to the 14th April report with a quotation from Victor Hugo, outlining the imperatives of solidarity, courage, creativity and compassion to emerge from the crisis more resilient.