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Global Economy is on the Brink of Collapse

Sajida Razzaq

OUTLINE

1) Introduction

“Today we are confronted with a crisis like no other, we anticipate the worst economic fallout since the Great Depression.

Kristalina Georgieva, the head of the International Monetary Fund April 2020.

2) Oxfam Report

2.1) Poverty forecasting

3) Comparison of current economic crisis with historical economic crisis

3.1) Great Depression 1930 and Current CONVID -19

3.2) Financial Crisis 2008 and Comparison with CONVID-19

4) Unpredictable nature of world economy

4.1) World Trade Organization (WTO)

4.2) International Monetary Fund (IMF)

4.3) Organization for Economic Cooperation and Development (OECD)

4.4) Current negative situation of global economy

5) Covid-19

5.1) Challenge for policy makers of the world

5.2) Long term virus effect

6) Global economies

6.1) Trade depending countries

6.2) Past High economic predictions are getting down

6.3) Value of dollar

6.4) Oil prices

7) Social implications

7.1) Public is self quarantined

7.2) Drop in business

7.3) Decline of tourism

8) Decline in international Trade

9) Implications for Pakistan

10) Recommendations

11) Conclusion

 

“Today we are confronted with a crisis like no other, we anticipate the worst economic fallout since the Great Depression.” — Kristalina Georgieva The head of the International Monetary Fund April 2020

The world economy is facing its most severe challenge of the postwar period. Economic activity, financial markets, and private sector confidence are all collapsing. This time, no economy is immune, eliminating the option of an export-driven recovery for any country. The economic collapse has increased deflationary and financial risks in the advanced economies. Other emerging market economies are heading for a traumatic period. Many have decrepit health care systems, congested urban population centers, and high levels of poverty, leaving little room for maneuver between controlling the pandemic and sliding into economic disaster. Making matters worse, some of these economies are also having to cope with sudden stops of capital inflows, depreciating currencies, and a lack of external demand for their exports. Others face formidable debt loads that are only growing harder to finance. The collapse has been instantaneous, swifter than during the Great Depression. The shock to the global economy from Covid-19 has been faster and more severe than the 2008 global financial crisis and even the Great Depression 1930.

 

Coronavirus could push half a billion people into poverty, Oxfam warns. An Oxfam report published before virtual meetings of finance ministers of the G20 group of leading developed and developing nations, the International Monetary Fund and the World Bank, said by the time the pandemic was over half of the world’s population of 7.8 billion people could be living in poverty.

The research  conducted by King’s College London and the Australian National University said that a 20% drop in income as a result of a recession caused by Covid-19 would push an additional 548 million people below $5.50 a day one of the World Bank’s definitions of poverty.

Furthermore José María Vera, Oxfam’s international interim executive director stated: “For poor people in poor countries who are already struggling to survive, there are almost no safety nets.”

 

As for as global economy is concerned, Brookings financial times tracking index reported that the global economy was facing the worst collapse since the Second World War as coronavirus began to strike in March, well before the height of the crisis.

 

For instance, the worldwide economic downturn that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world. Although the Depression originated in the United States, it resulted in drastic declines in output, severe unemployment, and acute deflation in almost every country of the globe. Likewise, the fundamental cause of the Great Depression in the United States was a decline in spending (sometimes referred to as aggregate demand), and the coronavirus pandemic (Covid 9 ) is also resulting in deflation as people are quarantined and markets are closed like never before. Thus, this global pandemic may cause a collapse of the global economy worse than any other past crisis.

Like it has been said Covid-19 spares neither Leave nor Remain, neither Imam nor Chinese doctor, and respects no national border.

Furthermore, sharp declines in the stock market and broader financial sector turbulence; interest rate cuts and large-scale Federal Reserve intervention; and discussions of massive government stimulus packages have led some observers to compare the current market reaction to that experienced a little over a decade ago. There are similarities and important differences between the current economic crisis and the global financial crisis of 2008/2009. Foremost, the earlier crisis was rooted in structural weakness in the U.S. financial sector. Following the collapse of the U.S. housing bubble, it became impossible for firms to identify demand and hold inventories across many sectors (construction, retail, etc.). This led to massive oversupply and sharp retail losses which extended to other sectors of the U.S. economy and eventually the global economy.

As Jason Furman, who served as deputy director of the National Economic Council during the financial crisis, stated: “This isn’t a financial crisis where, if you can stop the panic, you can unfreeze the economy.

“Here, there’s a deadly germ out there and you don’t want to go near it for your sake and your community’s sake. There’s only one equilibrium: It’s economic inactivity until the danger passes.”

Unlike the 2008 crisis, the current crisis began as a supply shock. As the global economy has become more interdependent in recent decades, most products are produced as part of a global value chain (GVC), where an item such as a car or mobile device consists of parts manufactured all over the world, and involving multiple border crossings before final assembly. The earliest implications of the current crisis came in January 2020 as plant closures in China and other parts of Asia led to interruptions in the supply chain and concerns about dwindling inventories.

Furthermore, Brooking institution stated:

“Unlike the 2008-09 crisis that was triggered by liquidity shortages in financial markets, the crisis now unfolding involves more fundamental solvency issues for many firms and industries beyond finance.”

Thus, contrary to the 2008 crisis response, which involved liquidity and solvency-related policy measures to get people spending again, the current crisis did not start as a financial crisis, but could evolve into one if a recovery in economic activity is delayed.

According to an April 8, 2020, forecast by the World Trade Organization, global trade volumes are projected to decline between 13% and 32% in 2020 as a result of the economic impact of Covid-19.The WTO argues that the wide range in the forecast represents the high degree of uncertainty concerning the length and economic impact of the pandemic and that the actual economic outcome could be outside this range both higher and lower.

Kristalina Georgieva, the head of the IMF stated:

“Emerging markets and low-income nations across Africa, Latin America, and much of Asia are at high risk. With weaker health systems to begin with, many face the dreadful challenge of fighting the virus in densely populated cities and poverty-stricken slums where social distancing is hardly an option.”

Just three months ago, the IMF was predicting that the global economy would grow by 3.3% this year, but Georgieva said:

“Covid-19 has disrupted our social and economic order at lightning speed and on a scale that we have not seen in living memory. The virus is causing tragic loss of life, and the lockdown needed to fight it has affected billions of people.”

Since the Covid-19 outbreak was first diagnosed, it has spread to over 190 countries. The pandemic is having a noticeable impact on global economic growth. Estimates so far indicate the virus could trim global economic growth by at least 0.5% to 1.5%, but could rise to 2.0% per month if current conditions persist. Global trade could fall by 13% to 32%, depending on the depth and extent of the global economic downturn. The full impact will not be known until the effects of the pandemic peak.

On March 23, 2020, OECD Secretary General Angel Gurria stated:

“The sheer magnitude of the current shock introduces an unprecedented complexity to economic forecasting. The OECD Interim Economic Outlook, released on March 2, 2020, made a first attempt to take stock of the likely impact of Covid-19 on global growth, but it now looks like we have already moved well beyond even the more severe scenario envisaged the pandemic has also set in motion a major economic crisis that will burden our societies for years to come.”

Moreover, Before the Covid-19 outbreak, the global economy was struggling to regain a broad-based recovery as a result of the lingering impact of growing trade protectionism, trade disputes among major trading partners, falling commodity and energy prices, and economic uncertainties in Europe over the impact of the UK withdrawal from the European Union. In this environment, Covid-19 could have an outsized impact. While the level of economic effects will eventually become clearer, the response to the pandemic could have a significant and enduring impact on the way businesses organize their work forces, global supply chains, and how governments respond to a global health crisis.

Besides, the challenge for policymakers has been one of implementing targeted policies that address this crisis. If the economic effects of the pandemic continue to grow, policymakers are likely to give more weight to policies that address the immediate economic effects at the expense of longer-term considerations. Initially, many policymakers had felt constrained in their ability to respond to the crisis as a result of limited flexibility for monetary and fiscal support within conventional standards, given the broad-based synchronized slowdown in global economic growth, especially in manufacturing and trade that had developed prior to the viral outbreak.

Initially, the economic effects of the virus were expected to be short-term supply issues as factory output fell because workers were quarantined to reduce the spread of the virus through social interaction. The drop in economic activity, initially in China, has had international repercussions as firms experienced delays in supplies of intermediate and finished goods through supply chains. Concerns have grown, however, that the virus-related supply shock is creating more prolonged and wide-ranging demand shocks as reduced activity by consumers and businesses lead to a lower rate of economic growth.

Additionally, Countries highly dependent on trade—Canada, Germany, Italy, Japan, Mexico, and South Korea—and commodity exporters are now projected to be the most negatively affected by the slowdown in economic activity associated with the virus. In addition, travel bans and quarantines are taking a heavy economic toll on a broad range of countries.

The OECD notes that production declines in China have spillover effects around the world given China’s role in producing computers, electronics, pharmaceuticals and transport equipment, and as a primary source of demand for many commodities.

Across Asia, some forecasters argue that recent data indicate that Japan, South Korea, Thailand, the Philippines, Indonesia, Malaysia, and Vietnam could experience an economic recession in 2020.In early January 2020, before the Covid-19 outbreak, economic growth in developing economies as a whole was projected by the International Monetary Fund (IMF) to be slightly more positive than in 2019. This outlook was based on progress being made in U.S China trade talks that were expected to roll back some tariffs and an increase in India’s rate of growth. Growth rates in Latin America and the Middle East were also projected to be positive in 2020.These projections likely will be revised downward due to the slowdown in global trade associated with Covid-19, lower energy and commodity prices, an increase in the foreign exchange value of the dollar, and other secondary effects that could curtail growth. Commodity exporting countries, in particular, likely will experience a greater slowdown in growth than forecasted in earlier projections as a result of a slowdown on trade with China and lower commodity prices.

In a broader perspective, the combined impact of Covid-19, an increase in the value of the dollar, and an oil price war between Saudi Arabia and Russia are hitting developing and emerging economies hard. Not all of these countries have the resources or policy flexibility to respond effectively. According to figures compiled by the Institute for International Finance (IIF), cumulative capital outflows from developing countries since January 2020 are double the level experienced during the 2008/2009 crisis and substantially higher than recent market events.

Generally speaking, public concerns over the spread of the virus have led to self-quarantines, reductions in airline and cruise liner travel. School closures are affecting 1.5 billion children worldwide, challenging parental leave policies.Other countries are limiting the size of public gatherings.Some businesses are considering new approaches to managing their workforces and work methods. These techniques build on, or in some places replace, such standard techniques as self-quarantines and travel bans. Microsoft and Amazon have instructed all of their Seattle-based employees to work from home until the end of March 2020.

Charles Dumas, chief economist at TS Lombard, an investment research firm in London, said: “The psychology won’t just bounce back. People have had a real shock. The recovery will be slow, and certain behavior patterns are going to change, if not forever at least for a long while.”

For example, the drop in business and tourist travel is causing a sharp drop in scheduled airline flights .Industry experts estimate that many airlines will be in bankruptcy by May 2020 under current conditions as a result of travel restrictions imposed by a growing number of countries.

In the same way, the loss of Chinese tourists is another economic blow to countries in Asia and elsewhere that have benefitted from the growing market for Chinese tourists and the stimulus such tourism has provided. The decline in industrial activity has reduced demand for energy products such as crude oil, causing prices to drop sharply, which negatively affects energy producers, renewable energy producers, and electric vehicle manufacturers, but generally is positive for consumers and businesses.

Moreover, Saudi Arabia is pushing other OPEC (Organization of the Petroleum Exporting Countries) members collectively to reduce output by 1.5 million barrels a day to raise market prices. U.S. shale oil producers, who are not represented by OPEC, support the move to raise prices. Russia’s unwillingness to agree to output reductions added to other downward pressures on oil prices and caused Saudi Arabia to engage in a price war with Russia that has driven oil prices below $25 per barrel at times, half the estimated $50 per barrel break-even point for most oil producing countries. Rising oil supplies and falling demand are combining to create an estimated surplus of 25 million barrels a day and could soon overwhelm storage capacity and challenge the viability of U.S. shale oil production.

As the developed nations of the world are facing the full brunt of the disease, developing countries are yet to arrive at the point where they are overwhelmed. Pakistan is on the brink and there is a tight rope in front of a weak economy. The year ahead is perhaps the most formidable challenge the country has faced, and one that will require resilience, competence and discipline, the other side of the equation, if we fail, is worse than our darkest nightmares.

According to PIDE (Pakistan Institute of Development Economics), there will be losses of jobs in the millions, particularly for semi-skilled and daily wage earners. Around 2.4% of the Annual GDP will be lost due to Covid-19, which is enough to send the country into a spiralling recession.

While people all over the world remain quarantined, the number of those infected still continues to aggressively increase. The effect of Covid-19 remains uncertain. In a case such as this, when continued volatility can be expected, it is wise to employ strategies that enhance returns, whether the market shifts violently up or down. To overcome this challenge, multilateral institutions need to come forward and fight this pandemic through a collective and collaborative response.

As the coronavirus crisis has unfolded, there has thus far been a lamentable absence of global leadership. History will judge the more prosperous nations harshly if they fail to act decisively to help the world’s poor in this hour of need.

To sum up, it may be said that the global economy is on the verge of collapse. Besides, in the near-term, the impact of the coronavirus seems long-lasting and more intensive than assumed in the projections. In the event if virus outbreaks spread more widely in the Asia-Pacific region or the major advanced economies in the northern hemisphere, the adverse effects on global growth and trade will be much worse and more widespread.

As Kenneth S. Rogoff, a Harvard economist and co-author of a history of financial crises, “This Time Is Different: Eight Centuries of Financial Folly” said: “I feel like the 2008 financial crisis was just a dry run for this. This is already shaping up as the deepest dive on record for the global economy for over 100 years. Everything depends on how long it lasts, but if this goes on for a long time, it’s certainly going to be the mother of all financial crises.”