Recession Imminent as Global Economy Comes to a Screeching Halt

Fayaz Mahessar

Never in peacetime has the global economy experienced what it is going through at the moment. Almost 3 billion people are currently under a lockdown as factories are forced to halt production, travel banned, services discontinued and international trade facing a standstill for an indefinite period.

Coronavirus Continues to Spread

With over 1.3 million confirmed cases and 70,600 deaths worldwide, governments and policy makers across the world are running out of options on how to control the pandemic and insulate against the economic meltdown that is likely to follow in the coming quarters.

As cases rise and death counts mount, more and more countries are undergoing a lockdown which is likely to exacerbate the situation from bad to worse. Keeping in view the impact of partial lockdown during March, the economic outlook for April and May is looking bleak.

Recession Highly Likely

The Bloomberg Global GDP trigger showed the global economy contracted on an annualized rate of 0.5 percent in March, 2020. These figures, however, may just be the beginning with worst yet to follow in the next two quarters.

The International Monetary Fund (IMF) is already predicting a recession — which some economists point out may have already begun in March. “The outlook for global growth for 2020 it is negative — a recession at least as bad as during the global financial crisis or worse,” IMF’s Kristalina Georgieva said last week after announcing that nearly 80 countries have sought help to contain the economic impact from the coronavirus.

The Institute of International Finance (IIF) reiterated that view: “We see global activity falling more than 1pc this year, with major developed markets in ‘recession’. Emerging markets, which were already struggling to grow, will suffer heavily. Uncertainty around growth forecasts is high but the scale of capital outflows since late January makes deep recessions in EM hard to avoid.”

Emerging Markets are Most at Risk

At least $80 billion in funds has been pulled out of emerging market bonds and stocks in March alone, especially from the riskier and more vulnerable Asian economies as investors gauge the impact of the demand slump and economic meltdown.

But things are likely to get worse before taking a turn for the better. “Markets have so far been preoccupied with the economic fall-out from COVID-19 on advanced economies. This focus may now be shifting to EM, which could set in motion a second wave of capital outflows, even after the unprecedented pace of outflows [$80bn] in Q1,” said the IIF.

“This record-breaking outflow episode is significantly larger than the one seen during the global financial crisis and dwarfs stress events such as the China devaluation scare of 2015 and the taper tantrum in 2014,” said the IIF.

Global Equities Down 20%

Estimates suggest the pandemic may have wiped out more than $18 trillion from the value of global equities year to date, bringing the world’s stock market capitalization down 20 percent to under $70 trillion.

The sharp selloff in US equities has brought CAPE (cyclically adjusted price-to-earnings ratio) below their 2005-2019 average pushing valuations to multi-year lows. Meanwhile, European markets with CAPE valuations for Germany and France currently at their lowest level. The European equities are now trading at a 40 percent discount to their peers, elaborated the IIF in a note last week.

But it’s the emerging markets that have seen the worst outflows. Given the sharp portfolio exodus, the emerging market stocks are trading far below their historical averages, some even selling at the biggest ever discount of 65 percent compared to the US stocks.

Oil Crash

But in this screeching halt to global demand, the worst casualty has been the oil markets. The West Texas Intermediate or WTI and Brent have seen record falls. WTI and Brent respectively fell from $61.15 and $65.56 per barrel in January 1 to $27.2 and $33.53 respectively.

The situation is further aggravated by the ongoing feud between Russia and Saudi Arabia who have traded diplomatic barbs against each other in the last few weeks. Prices hit new lows on Monday after OPEC and other oil producers delayed the much-anticipated meeting to Thursday to decide on production cuts after Riyadh and Moscow blamed each other for talks failure last month.

Fitch Ratings, in a report, warned the prices could fall to as low as single digit if producers fail to reach a deal on the output cuts to solve the massive global supply glut in the wake of sudden drop in demand.

Silver Lining

Apart from the prediction of recession being imminent, analysts also agree that the recovery — once the pandemic is contained — is likely to be swift and quick. The recession is likely to be V shaped rather than U shaped like it was during the crisis of 2008. This means the recovery will be sharper as coronavirus is hopefully contained in the next few months.

“We expect recovery in 2021. To get there, it is paramount to prioritize containment and strengthen health systems— everywhere. The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be,” said the IMF.