The United States (US), Europe, and Japan are headed for recession - Photo: Special

JAKARTA (TheInsiderStories) – Disruptions to supply chains, demand, international trade flows, and travel, along with lockdowns and collapsing stock prices, resulting from the COVID-19 have dealt a heavy blow to the global economy. The United States (US), Europe, and Japan are headed for recession.

We forecast for world real GDP growth in 2020 has been revised down to 0.7 percent in response to the spread of the virus. Growth below 2.0% percent classified as a global recession.

The number of active world cases is assumed to top out by the third quarter. Nevertheless, the result will be a U-shaped rather than V-shaped cycle, as a sharp reduction in near-term growth is followed by a slow recovery.

Forecast risks are overwhelmingly on the downside and depend crucially on how governments respond. Central banks have already taken emergency actions, but the fiscal response is more uncertain.

The recent sharp drop in oil prices will help energy consumers and hurt energy producers. The net effect on global growth is likely to be negative, but small.

In United States, a recession will start in the second quarter. Incoming data point to solid growth at the start of 2020. Fear and financial stress stemming from the spread of the COVID-19 virus have swamped that good news. Volatility has surged, risks spreads have widened, and equity values have fallen more than 25 percent year to date, wiping out trillions in household net worth.

Real GDP growth will be hurt badly in the second quarter as consumers spend more cautiously and businesses put some investments on hold until the outlook clears up. Bans on travel and public gatherings will also hurt. Growth is not expected to return until the end of the year.

The US Federal Reserve’ emergency cuts of 150 basis points and liquidity measures will help. Nevertheless, fiscal relief will be needed. The net effect of the large oil price drop will be to cut growth a little, with consumers being helped, but oil producers and their suppliers being hurt. All told, US real GDP should fall 0.2 percent on a calendar year basis in 2020.

The Eurozone and British economies were already in a weak state before the impact of the virus that causes COVID-19. Eurozone real GDP increased just 0.1 percent quarter on quarter (QoQ) and 1.0 percent year on year (YoY) in the fourth quarter of 2019, the weakest performance in six years.

Germany’ output was flat, while Italy and France suffered in contractions compared to last month. The UK economy also stalled in the fourth quarter. We expects the spreading virus will do serious damage via trade, travel and tourism, financial markets, and sentiment. Italy is especially vulnerable, given its fragile economy, the high incidence of COVID-19, and resulting restrictions on activity.

Germany will be hit hard by a drop in exports to mainland China, especially the steep decline in light vehicle sales. We now expect a recession in the eurozone, with real GDP declining during much of the rest of 2020. For the full year, we expect eurozone real GDP to fall 1.5 percent and Britain real GDP to decrease 0.7 percent, before recovering weakly in 2021.

While, Japan already in recession. Japan’ real GDP fell 7.1 percent in the fourth quarter of 2019, led by sharp declines in household consumption and private fixed investment. Real GDP is expected to drop again in the first quarter because of the impacts of the COVID-19 virus.

Both, foreign and domestic tourism have declined, and several major events have been scaled down, postponed, or canceled. Nevertheless, our forecast assumes that the 2020 Tokyo Summer Olympics will go ahead. After a 0.7 percent expansion in 2019, Japan’s real GDP is projected to contract 0.8 percent in 2020 before recovering 0.6 percent in 2021 and 0.5 percent in 2022.

The Bank of Japan has repeated that it will not hesitate to introduce additional monetary easing if downside risks to the economy and inflation arise, but its actions so far have been limited.

In addition, the incidence of the COVID-19 virus in mainland China has been concentrated in Hubei province, the economic damage has been more widespread because of supply-chain disruptions. Moreover, labor shortages have hampered work resumption, as a good portion of the workforce traveled to their home regions during Lunar New Year and cannot return to work quickly owing to travel restrictions and local self-quarantine requirements.

The data for January and February show a precipitous drop in economic activity. The central government has announced a series of policies to limit the negative impacts of the outbreak on the economy. One key measure is to coordinate work resumption across regions.

The authorities have also indicated they will intensify monetary stimulus and speed up and expand investment spending. IHS Markit projects mainland China’ real GDP growth to slow from 6.1 percent in 2019 to 3.9 percent this year, with the economy contracting sharply in the first quarter. We predict growth to rebound in 2021.

The COVID-19 virus outbreak has created an even more challenging environment for emerging markets. Most do not have the financial or healthcare resources to deal with this pandemic. Fortunately, to date, only one country (Iran) in the emerging world has been hit hard. That could change very rapidly.

Meanwhile, much lower global growth and commodity prices will hurt prospects everywhere. Few, if any, countries will be immune to the economic damage.

The rapid spread of the COVID-19 virus beyond mainland China has set the global economy up for the worst growth downturn since the 2008–09 financial crisis.

by Nariman Behravesh and Sara Johnson from IHS Markit