Banks and global institutions have come out to warn that the recession that has gripped the world could be far worse than predictions made just weeks ago as the spread of the virus has been far worse than their expectations.
“We have revised down our global growth forecasts further to reflect likely longer imposition of ‘social distancing’ measures and slower recovery in economic activity thereafter than we had initially assumed. We also see greater chances of long-lasting effects as the economy’s supply capacity is permanently impaired,” BNP Paribas said in a note to its clients.
The French bank, which came out with its ‘Markets 360, Strategy & Economics’ said that the global economy is expected to contract by 2.5% this year against the previous projection made just 3-weeks ago of a 0.5% growth.
Luigi Speranza, chief global economist and Marcelo Carvalho, head of global emerging market research said that the impact of the coronavirus was far worse than the bank had earlier predicted in a note on March 19.
Globally, the number of infections has reached 2 million with more than 125,000 dead as of Wednesday April 15. There is not yet a cure or vaccine.
“We now expect global GDP to contract by 2.5% this year before rebounding in 2021, with a sharp contraction in activities across the board in both developed and emerging markets,” the report said.
BNP was not the only bank to come out with a report, Goldman Sachs, another global bank, came out to say that advanced economies are likely to shrink by as much as 35% during this quarter (Q2) from the previous quarter. The global banking giant said that the 35% decline this quarter is 4 times the previous record set during the Global Financial Crisis (GFC) in 2008/2009.
Jan Hatzius, the economist for Goldman Sachs said in a note to clients that although the coronavirus cases were peaking, the improvements have only been due to the ‘direct consequences of social distancing’ which means that economic activities have plunged and numbers could reverse quickly if people went back to their pre-outbreak routines.
BNP’s economist added to it too was worried that the relaxation of the measures would be a temporary respite and that adjustments will have to be made to its global outlook predictions.
Swiss banking giant, UBS AG, also predicted that the global economy during the 2nd quarter of this year could shrink by as much as 19% and Q1 2020 would shrink by as much as 11%. The bank predicted a -1.5% contraction in the global economy for 2020.
The Swiss bank said it was a sharp contrast to the events in 2009 when the global economy contracted by as much as 6.3% in the Q2 of that year, while for the entire 2009 the global economy saw a 0.07% growth.
Steepest Recession says IMF
Multilateral organizations such as the International Monetary Fund (IMF) came out to say that the it was expecting the global economy to shrink by as much 3% this year.
In a report titled ‘Great Lockdown’ IMF’s chief economist Gita Gopinath, came out to say that this recession would be the steepest in almost a century and that the contraction and the recovery would be worse than anticipated if the virus situation is prolonged or countries see 2nd waves.
The IMF which had in January predicted that the global economy would expand by as much as 3.3% came out to reverse its decision and said that this would be the steepest decline since the ‘Great Depression’.
Although IMF came out to say that it was anticipating a 5.8% growth next year, which could be the strongest growth since 1980, it cautioned that the risk of possible downside is greater.
Ms. Gopinath was not alone in predicting that the risks for growth in 2021 is tilted towards the downside, UBS & BNP both had similar predictions.
The cumulative loss in the global GDP this year could be close to $9 trillion which is bigger than the combined economies of Japan and Germany, Ms. Gopinath said.
“This is a crisis like no other, which means that there is a substantial uncertainty on the impact it will have on people’s lives and livelihoods,” she said during an online briefing to media outlets.
Unemployment on the Rise
UBS said in its report that the historical relationship between output loss and job losses are that for every 1% of GDP loss employment declines by 0.56%.
“The worst peak to trough decline in GDP we currently have in our forecast is around -10% (for Thailand and Singapore),” it said in its report. Adding that there have been worse cases than this with Estonia, Turkey and Ireland in the past but global average is 5.7%.
“This would imply a 320 basis points increase in global unemployment (from about 5% to 8.2%),” the report said.
This does not come as surprise as Thailand has already come out to warn that as many as 10 million people could fall into unemployment. A report in Bloomberg on Tuesday stated that Asean’s largest economy – Indonesia, has seen 4 million people filing for jobless allowances under a national program within 3-days of its launch after companies impacted by the coronavirus fired scores of workers.
Indonesia, which is the base for one of the world’s largest workforce – 127 million, out of which 70 million (56%) are in informal employment. This leaves many people with no safety net and exposed to the economic crisis.
The virus that has left companies idle has the potential to create unprecedented employment outcomes as was evident from the surging claims of unemployment in the United States and Canada over the past few weeks.
“Despite the launch of short-term work schemes and job retention initiatives, such as those in Germany and UK, the number of unemployed still appears to be rapidly on the rise….some of these jobs will probably be permanently lost in the medium term, especially in the sectors such as leisure and hospitality, where loss of business this year is unlikely to be made up later and changing household habits might affect demand for a prolonged period,” BNP said in its note.
The hospitality sector was something that UBS said it was worried about, as it will be the sector that would be impacted the most.
BNP said that in the US alone it was expecting things to get worse.
“The March decline in the US payrolls is only the start of a trend, in our view, as we now expect the unemployment rate to approach 20% by the end of Q2.”
JP Morgan said that US GDP could fall 40 per cent in the second quarter from the previous year with unemployment spiking to 20 per cent.
China Gone Missing
The world has seen money being pumped into the system like never before with UBS revealing that stimulus packages have reached 2.9% of the global GDP against the 1.66% of the global GDP that was put in place during the financial crisis in 2008/2009.
But it said that the fact that the interest rates around the world are near 0% has put constraints on the measures that are being put in place.
One missing piece of puzzle that economists around the world are questioning is the moves by the People’s Bank of China, the Chinese central bank that had been instrumental in helping out during the 2008/2009 financial crisis.
During the GFC in 2008/2009, the PBOC had pumped in close to $600 billion to prop the Chinese economy which helped fuel a 20% increase in RMB loans thus prompting China to register growth of double digits in 2009 and 2010.
This time around though the PBOC has not stepped in and questions are being raised on what was behind this move.
The global slowdown is likely to keep the markets subdued and economist from all across the banking sector feel that earnings for companies are going to take a major hit.
UBS says that earnings per share of companies are likely to take 35-40% hit in 2020 if the lockdown is until April but if the lockdown is extended to June this year then the earnings per share of companies are likely to decline by as much as 45-50%.
Another Swiss banking group – Credit Suisse, said that it was expecting the dividends to be cut by as much as 50% against the 40% cut that was registered by companies across the globe in 2008/2009.
Emerging Markets Need More Help
Godman’s Hatzius said that the although the response of the European countries needed to be scaled up via greater fiscal easing and ‘whatever it takes’ commitment, the Emerging Markets are the ones that may need more help from the developed world to get through the current crisis.
Ms. Gopinath of IMF had similar views when she went on Bloomberg to say that the risk to the global growth could have a worse than expected impact in emerging markets putting further downside risk to the baseline scenario that the IMF has come out with for a 3% decline in the global GDP this year.
IMF said that the US’ economy is expected to shrink by 5.9% against a projection of a 2% expansion projected in January by the institution. It may grow by 4.7% next year. While the Eurozone is expected to see the economy shrink by 7.5% in 2020 but expand by 4.7% in 2021.
In the emerging markets, the fund sees that contraction would be around 1% barring any major impact, with both China and India decelerating.