Why Global Recession Can Last Longer

The world is almost certainly enslaved in the devastating recession delivered by the coronovirus epidemic.

Now, there are growing fears that the recession may be far more punitive and longer-lasting than anticipated – possibly in the next year, and even further – governments intensifying trade restrictions to prevent the spread of the epidemic And fear of viruses. Reconstructs the very concept of public space, thereby disrupting consumer-led economic growth.

The epidemic is above all public health emergencies. Business cannot normalize responsibly as long as human interaction remains dangerous. And what was previously normal may no longer be. Even after having the virus, people may have less desire to jam in crowded restaurants and concert halls.

The sudden stoppage of commercial activity threatens to make the economic pain so deep and enduring in every region of the world that recovery can take years. Losses to companies, many already saturated with debt, trigger a financial crisis of risk cataclysmic proportions.

Stock markets have shown economic danger. The S&P 500 in the United States fell more than 4% on Wednesday as investors hung on for worse conditions ahead. This was followed by a brutal march in the worst month since March 2008, during which the S&P 500 fell 12.5%.

“I think the 2008 financial crisis was just a drought for it,” said Kenneth S. Rosoff, a Harvard economist and co-author of the history of financial crises.

“It is already taking shape as the deepest dive on record for the global economy for over 100 years,” he said. “Everything depends on how long it lasts, but if it lasts long, it is certainly the mother of all financial crises.”

This situation is uniquely rare in developing countries, which have seen a rush of investment for this year, laundering currencies, forcing people to pay more for imported food and fuel, and governments with insolvency. Threatened – all this while the epidemic itself is threatened. Massive insufficient medical system.

Among investors, a hopeful scenario holds the currency: the recession will be painful but short-lived, giving way to a strong recovery this year. The global economy is in a temporary deep cold, the argument goes. Once the virus is contained, enabling people to return to offices and shopping malls, life will return to normal. The Jets will only be filled with families going on postponed holidays. Factories will restart, completing saved orders.

But even after the virus is detected – and no one really knows when it will occur – the emerging world is likely to be in trouble with challenging recovery. Unemployment Accurate Social Costs at Large. Comprehensive bankruptcy may leave the industry in a weak position, lacking investment and innovation.

Families may become agitated and face risks they may be thrilled with. Some social removal measures may remain indefinitely. The consumer spends about two-thirds of the amount of economic activity worldwide. If anxiety ceases and people are reluctant to spend, then expansion will be limited – especially as continued vigilance against coronovirus may be necessary for years.

“Psychology has not returned yet,” said Charles Dumas, chief economist at TS Lombard, an investment research firm in London. “People have got a real shock. Recovery will be slow, and some behavior patterns are going to change, if not forever, at least not for long. “

Rising stock prices in the United States have been expended in recent years. Millions of people are now filing claims for unemployment benefits, while wealthy households are absorbing the reality of retirement savings to a large extent.

Americans significantly increased their rates of savings in the years following the Great Depression. Fear of borrowing and limited dependence on tarnished debt. This can happen again.

“The loss of income on the labor front is tremendous,” Dumas said. “Loss of value in money effect is also very strong.”

The sense of alarm is heightened by the fact that every inhabited part of the world is now in trouble.

The United States, the world’s largest economy, is almost certainly in a recession. So is Europe. So perhaps there are important economies like Canada, Japan, South Korea, Singapore, Brazil, Argentina and Mexico. According to research firm TS Lombard, China, the world’s second-largest economy, is expected to grow only 2% this year.

Over the years, the economic conservative class carried forward the notion that globalization had come with an implicit insurance policy against mass disaster. By the time some part of the world economy was growing, the impact of the recession in any country should have been reduced.

That thesis was redeemed by the global recession following the 2008 financial crisis. The current recession presents an even more extreme event – a worldwide emergency that has left no safe haven.

When the epidemic erupted, initially in central China, it was seen as a major threat to that economy. Even China shut itself down, with conventional wisdom stating that at the very least, large international companies such as Apple and General Motors would suffer sales losses to Chinese consumers, while manufacturers would sell parts made in Chinese factories elsewhere Will struggle to secure.

But then the epidemic spread to Italy and eventually threatened factories across Europe, all over Europe. Government policies then were ones that essentially shut down modern life, business was involved, while the virus spread to the United States.

“Now, anywhere you look at the global economy, we are impacting domestic demand on top of those supply chain effects,” said Ince McPhee, managing director of macro and investor services at Oxford Economics in London. “This is incredibly worrying.”

Oxford Economics estimates that the global economy will contract marginally before the reform from June this year. But McPhee said that the scene was likely to be revised rapidly.

Billions of dollars of loans and loan guarantees left by central banks and governments in the United States and Europe have probably dwarfed most developed economies. Economists say that a large number of businesses can be prevented from failing, while ensuring that workers who lose jobs will be able to keep up on their bills.

“I am attached to the notion that this is a temporary crisis,” said Mary Owens Thomson, global chief economist at Indosuse Wealth Management in Geneva. “You hit the pause button, and then you hit the start button, and the machine starts running again.”

But it depends on the rescue package that proves to be effective – not a sure thing. In typical economic shock, the government spends money to encourage people to go out and spend money. In this crisis, officials are demanding that people stay inside to limit the virus.

Owens Thomson said, “The longer it lasts, the more likely there will be destruction of productive capacity.” “Again, the nature of the crisis is something more permanent than temporary.”

According to the United Nations Conference on Trade and Development, worldwide, foreign direct investment is on the decline of up to 40% this year. It threatens “permanent damage to global production networks and supply chains”, the body’s director of investment and enterprise James Zan said.

“Most economies will take two to three years to return to their pre-epidemic levels,” IHS Markit said in a recent research note.

In developing countries, the consequences are already severe. Not only is there a capital exodus, but a drop in commodity prices – especially oil – is gathering many countries, among them Mexico, Chile and Nigeria. China’s recessionary wave to countries supplying Chinese factories with components from Indonesia, South Korea.

According to a report released on Monday by the United Nations Board of Trade, between the end of next year and the end of next year, developing countries are set to repay a debt of $ 2.7 trillion. In normal times, they could take most of that debt into new debt. But the sudden exodus of money prompted investors to charge higher interest rates for new loans.

The United Nations body called for a $ 2.5 trillion rescue for developing countries – $ 1 trillion in debt from the International Monetary Fund, $ 1 trillion in debt forgiveness from a wider range of creditors, and $ 500 billion for health recovery.

“There is a huge fear for developing countries that there are economic shocks before they actually take place,” said Richard Kojul-Wright, director of the United Nations division on globalization and development strategies in trade. Body in Geneva.

In the most optimistic view, the fix is ​​already underway. China has effectively incorporated the virus and is beginning to operate, albeit slowly. If sugar factories spring for life, which will spark worldwide demand, creating demand for computer chips in Taiwan, copper mining in Zambia and soybeans grown in Argentina.

But China’s industry is not far from the global reality. Chinese consumers are an increasingly powerful force, yet cannot make full recovery. If Americans are still reeling from the epidemic, if South Africa cannot borrow on world markets and if Europe is in recession, it will limit the hunger for Chinese goods.

“If Chinese manufacturing comes back, who are they really selling?” Asked Rogoff, the economist. “How can global growth not take a long-term hit?”

Peter S. Goodman c.2020 The New York Times Company

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