Macro Moves

Global Recession: The World Economy Braces For A Recession

Created on 06 May 2020

Wraps up in 4 Min

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Updated on 31 Aug 2020

Global Recession: The World Economy Braces For A Recession
On 1st January 2020, the entire world rang in the New Year with hopes and dreams that they wished to fulfill. However, what struck the world was like a bolt from the blue. The Wuhan virus crisis gained momentum and soon the entire world was in the midst of a world war, fighting this pandemic within the frontiers of their homes. With lockdowns in place in every country, the Covid-19 has contributed to the collapse of the worldwide economy, leading it to what might be the worst global recession.

The pandemic is causing supply disruptions and the social distancing efforts necessary to contain the spread of the virus have imposed a large burden on workers and their families. Economists have predicted that global economic growth could turn out to be as low as 1%. One must note that this prediction came in at the start of the pandemic and much before the OPEC - Russia fall out which sent stock markets into a tizzy.

These predictions will fall in line once the world can arrest the spread of the virus. What business hates is uncertainty and uncertainty is the only thing that abounds when it comes to predictions about the vitality, endurance, and longevity of the new virus. The economic impact has been severe, but the faster the virus stops, the quicker and stronger the recovery will be.

One must also note that advanced economies would be in a better position to respond to the crisis, but many emerging markets and low-income countries face significant challenges. Since the virus began spreading beyond borders, developing countries have taken an enormous hit in terms of capital outflows, currency depreciation, growing bond spreads, and lost export earnings, including from falling commodity prices and declining tourist revenues.

In today’s scenario, no country and no industry survives in isolation. When China, with the disease’s epicenter in Wuhan, was brought to its knees, the Indian pharmaceutical, automobile, and mobile phone industries, for example, immediately wobbled. This is because India depends on China for supplies of components for products that these sectors make. Even the Indian pharma industry depends on China for 70% of the raw materials needed to manufacture drugs here. The restrictions in supplies have seen input costs go up by 50% in the first quarter of 2020. Pesticides, software services, gem, and jewelry industries were also facing the heat. With travel restrictions and closure of borders, the airline and hospitality faced the worst turbulence. Countries whose economies thrive on tourism, travel, hospitality, and entertainment are experiencing particularly large disruptions. Emerging markets and developing economies also face challenges with unprecedented reversals in capital flows as global risk appetite fades, currency pressures, and more limited fiscal space to provide support. Moreover, several economies were already experiencing sluggish growth and high debt levels before they were exposed to this crisis.

Technically, we are in an economic downturn right now, but that could change as it is a regular part of a healthy economy that ebbs and flows, with periods of growth followed by periods of contraction. What differentiates this downturn is that it's caused by the coronavirus, with the lockdown of nonessential businesses and high unemployment -- not through a natural economic shift or cycle. Until these lockdowns are gradually lifted when it's considered safe enough to open businesses and factories, the economic conditions are bound to worsen. 

Exceptional policy actions

As economies across the world are intertwined, it would only be feasible that policymakers take unprecedented steps. Just as during the Global depression of 2008, major central banks across the world cut interest rates simultaneously. And with the threat of another recession looming, it is imperative that the G20 nations became a powerful, action-oriented body, in coordinating a global response to the crisis. These actions were key to staving off the worst and repositioning the world economy toward growth. Major central banks are working on drastic fiscal fixtures to ease monetary policy. These bold efforts are not only in the interest of each country but of the global economy as a whole

Is there a silver lining at all?

With the assumption that the pandemic fades in the second half of 2020 and the policy actions have been taken by governments are effective in preventing widespread firm bankruptcies, bridging the unemployment gaps and system-wide financial strains, we can project a global growth in 2021 to rebound to 5.8 percent.

Countries would have to enhance their spending on their health systems, carry out widespread testing, and refrain from trade restrictions on medical supplies. Once therapies and vaccines are developed both rich and poor nations alike must have immediate access.

The timely, and targeted, fiscal, monetary, and financial policies that have already been taken by many governments will help in sustaining business and overcoming this crisis. Credit guarantees, enhanced liquidity facilities, loan forbearance, expanded unemployment insurance, tax relief announced by the Governments have been lifelines to households and businesses. 

Policymakers must also plan for the recovery. As lockdown measures come off, policies should shift swiftly to supporting demand, incentivizing firm hiring, and repairing balance sheets in the private and public sectors to aid the recovery. Moratorium on debt repayments and debt restructuring may need to be continued during the recovery phase.

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An MBA Finance graduate, having worked in the Telecom and Banking sector as a Risk and Compliance Manager. An avid blogger with a penchant for traveling

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