The COVID-19 has pushed the whole World almost certainly in an impending and devastating Global Recession.
As per International Monetary Fund(IMF), Global Recession is “a decline in annual per‑capita real World GDP (Purchasing Power Parity weighted), backed up by a decline or worsening for one or more of the seven other global macroeconomic indicators: Industrial production, trade, capital flows, oil consumption, unemployment rate, per‑capita investment, and per‑capita consumption”.
The economic impact is already visible in the countries most affected by the pandemic. It is just a matter of time when the Recession’s impacts would be felt by all.
So, in this blog post, I want to share my thoughts on the impacts, possible solutions touted and expected duration of the arriving Recession, to make the readers aware of the severity of the situation at hand.
In a bid to prevent the spread of the Pandemic, Governments across the globe enforced lockdown which has led to businesses being temporarily shut down. Another major psychological and health barrier is that the Coronavirus spreads among people through respiratory droplets and contact routes, which has diminished the concept of public space and hindered consumer-led economic growth.
It is impossible for businesses to return to normal as long as Human interactions are dangerous. As things stand, till a vaccine arrives, prospects look bleak for businesses and economies to be back in full force. If the current situation continues for long, it would lead to a “mother of all financial crisis”.
This abrupt Stopping of all Economic activities in the last few months could possibly have huge damaging impacts on economies and people across the world. This all would mean that the recovery may take even a few years, which is a big reason to worry.
To make things simpler and easier for readers, let us take a look at various aspects of the Global Recession one by one.
Impacts of Global Recession
This Pandemic is unique in the sense that there is substantial uncertainty about its impact on people’s lives and livelihoods. The final Impact would depend on
- Epidemiology of the virus
- Effectiveness of the containment measures
- Development of therapeutics and vaccines
All these are at the present moment, difficult to predict.
Almost All Nations currently face multiple crises in the form of a health crisis, financial crisis and a collapse in commodity prices etc.
- Mass joblessness
There are many instances in the public domain in the last months where companies small or large have chosen to lay off their employees.
While the companies are doing this to prevent bankruptcy and ensuring stability, it has led to a huge humanitarian crisis for the employees who are facing difficulties in ensuring the survival of themselves and their companies.
India has seen the plight of migrant workers due to this Pandemic. They are hugely affected by the COVID-19, as many of them were stuck in the lockdown and facing huge difficulties in food and survival.
Various measures have been taken by the Governments at the Union and State Level as well as by the NGOs, Celebrities like Sonu Sood etc but still, All Migrant Labours can’t be reached and as a result, many of them have suffered even leading to loss of lives.
The Coronavirus Pandemic has led to the demise of many companies who were already in trouble around the globe.
In the USA, Oil and gas driller companies like Whiting Petroleum and Diamond Offshore, Retailer company J.Crew are the major ones to have filed for bankruptcy.
In Japan, Around 150 companies have been pushed to bankruptcy since February. Most Affected companies were in Tourism and restaurant industries, but the damage is spreading to other sectors with construction firms also been under the radar.
Widespread bankruptcy could leave Global Economy in a weakened state, depleted of investment and innovation.
India will suspend bankruptcy proceedings for one year so that companies are not dragged into tribunals at a time they are trying to get back on their feet, Union government has announced.
The government will also make provisions in the law to exclude all debt associated with the coronavirus pandemic from defaults covered under the Insolvency and Bankruptcy Code (IBC).
The measures will be brought to effect by way of an Ordinance issued by the President of India.
- Supply and demand shocks
On the supply side, there is a direct reduction in the supply of labour from unwell workers. There is also a huge drop in capacity utilisation, because of the lockdown and social distancing measures.
In addition, firms that rely on supply chains may be unable to get the parts they need, either domestically or internationally. For example, India is an important supplier of intermediate goods to the rest of the world, particularly in automobiles, engineering goods, chemicals and gems. These disruptions are already having knock-on effects on the related firms. Together, these disruptions contribute to a rise in business costs and constitute a negative productivity shock, reducing economic activity.
On the demand side, the loss of income, fear of infection, and heightened uncertainty will make people spend less. Workers are being laid off already, as firms are unable to pay their salaries. These effects can be particularly severe in some sectors such as tourism and hospitality—as seen for example in Italy. In addition to these sectoral effects, worsening consumer and business sentiment can lead firms to expect lower demand and reduce their spending and investment. In turn, this would amplify business closures and job losses.
- Falling Stock Markets
The stock market has responded to the COVID-19 pandemic with worrying volatility, as traders have panic-sold out of fear.
12th March 2020 is infamously known as “Black Thursday”.On that day, All major Global Stock Markets suffered the largest single-day decline in their history. This happened a day after the World Health Organisation (WHO) officially declared the COVID-19 outbreak a “Pandemic”.
In India, The Sensex closed the day down by a whopping 2,919.26 points (-8.18%) to end at 32,778.14 points and the Nifty slumped 8.3 per cent to close at 9,590.15 points.
In the United States, lower circuit breakers were triggered, halting trade on both Wednesday and early Thursday as premier indices like the Dow Jones tanked. Eastern and European stock indices also saw a bloodbath, with London’s FTSE diving more than 9 per cent.
Since the crash, global stock markets made unprecedented and volatile swings, mainly due to extreme uncertainty in the markets.
- World Economic Outlook Projections
IMF in its World Economic Outlook Report, April 2020 has projected Global Growth in 2020 to fall to -3 per cent ( Negative growth Rate). This is also on the assumption that the pandemic and containment peaks in the second quarter of the year and then recede for the latter half of 2020.
This is a downgrade of 6.3 percentage points from January 2020, a major revision over a very short period. This makes the Great Lockdown the worst Global recession since the Great Depression, and far worse than the Global Financial Crisis.
IMF has projected the global growth in 2021 to rebound to 5.8 %, assuming the pandemic fades in the second half of 2020 and that policy actions are taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains.
IMF has also warned about much worse growth outcomes, which are very likely in the current scenario. All the World economic Outlook reports are available at https://www.imf.org/en/Publications/WEO.
- Financial effects and spillovers
Borrowing power of the consumer can drop and financial conditions tighten (strict mortgage rules), as banks suspect consumers and firms may be unable to repay their loans on a timely basis. Higher borrowing costs will expose financial vulnerabilities that have accumulated during years of low-interest rates, leading to a heightened risk that debt cannot be rolled over. A reduction of credit could amplify the downturn arising from the supply and demand shocks.
And when these shocks of the Global Recession are added up across many countries, the effects can be further amplified through international trade and financial linkages, dampening global activity and pushing commodity prices down. Oil prices have fallen dramatically in recent weeks and are about 30 per cent below their levels at the start of the year. Countries reliant on external financing could find themselves at risk of sudden stops and disorderly market conditions.
Since this global Recession would have terrible impacts in specific sectors, the policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to help affected households and businesses.
Households and businesses hit by supply disruptions and a drop in demand could be targeted to receive cash transfers, wage subsidies, and tax relief, helping people to meet their needs and businesses to stay afloat.
Central banks will need to provide ample liquidity to banks and nonbank finance companies, particularly to those lending to small- and medium-sized enterprises, which may be less prepared to withstand a sharp disruption. This suggestion is highly necessary to be implemented in India as the MSME sector in India is highly unorganised and severely affected by the Pandemic.
Governments could offer temporary and targeted credit guarantees for the near-term liquidity needs of these firms and to make sure that they bounce back, once the lockdown is uplifted.
Policy rate cuts or asset purchases can lift confidence and support financial markets. Broad-based fiscal stimulus consistent with available fiscal space can help lift aggregate demand but would most likely be more effective when business operations begin to normalize.
Considering the epidemic’s broad reach across many countries, the extensive cross-border economic linkages, as well as the large confidence effects impacting economic activity and financial and commodity markets, the argument for a coordinated, international response is clear.
The international community must help countries with limited health capacity to avert a humanitarian disaster.
” वसुधैव कुटुम्बकम् “
In my opinion, the whole world should adopt the Indian Motto of “Vasudhaiva Kutumbakam” ( The world is one family), so that all of humanity can recover from this setback of Global Recession and flourish together to achieve new heights.