How COVID-19 Pandemic Caused A Global Recession

What Is A Recession?

When a country's economy grows, its citizens benefit as the value of services and goods increases—namely the gross domestic product (GDP). By contrast, when a country faces a period of economic decline there is a marked reduction of trade and industrial production. When this happens across two quarters, the overall GDP declines, and the economy is said to be in a recession.[1]

History Of Global Recessions

Across history, the world has encountered various economic crises that have had devastating consequences. From the Credit Crisis of 1772 to the Great Depression of 1929, the OPEC Oil crash of 1973, and the Financial Crisis of 2008, severe financial downturns have reaped economic devastation with lengthy recovery times.[2]

Affecting all major entities across the world, the ramifications of the COVID-19 pandemic have been far greater than initially estimated and much wider-reaching than any previous recession. As the outbreak has spread, the process to curb the infection rate globally—namely worldwide quarantine attempts—has essentially ground multiple economies to a halt. The closure of businesses is predicted to drive a rise in inflation, and millions of people have already lost their jobs.[3] According to Johns Hopkins University (as of 20th June 2020) there were a reported 8,665,920 cases of COVID-19 infections globally, with 460,043 deaths.[4]

However, the prime difference between the COVID-19 pandemic and recessions of the past is that the coronavirus was not caused by debt and overspending, a housing bubble, or economic overextension but instead has been deemed an act of God. The recovery, in theory, was originally predicted as easier than that of the Great Recession but assumed to be slower depending on the time frame and intensity of the virus globally.[5] Not a single credible source will make that claim now.

Are We In A Recession?

The COVID-19 outbreak was declared a public health emergency on the 30th of January 2020. Initially detected in Wuhan, China it was first reported to the World Health Organisation on the 31st of December 2019 and officially titled COVID-19 on the 11th of February 2020.[6]

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The 2020 financial year was already off to an uncertain start on the back of slow global growth of 2.9% in 2019. Adding to the uncertainty was the early threat of the pandemic crushing economically vulnerable economies.[7] Early in the first quarter, the 2020 outlook still held hope for economic growth, but by April the International Monetary Fund stated that expected contraction of the global economy would settle in at 3%. There was global negative growth for the first quarter, with bigger declines expected for April to June. The economy contracted by 2% in the first quarter in the U.K. and by a further 20.4% in April.[8]

The World Bank has flagged the current situation as a deeply concerning recession with a slow and challenging recovery ahead. The first possible recession to be caused by a pandemic, the enormous effect of COVID-19 on the global economy is set to be the worst since 1870.[9] Reports from OECD reflect uncertainty surrounding the effects of the pandemic, gauging that the overall global economy could contract by as much as 7.6%.[10]

The predictions for economic contraction in 2020 are grim, and fear of a resurgence of the virus makes the future even more uncertain. The U.S. economy is predicted to contract by 6.1%, Europe by 9.1% and Japan by 6.1% The ripple effects of the pandemic will be felt on a global scale, but most severely in countries with a heavy reliance on international trade, commodity exports, tourism and external loans.[11]

The World Bank has forecast the shrinkage of emerging markets and developing economies by 2.5%.[9] That forecast may seem better than overall global predictions, but with poverty affecting 60 million people, even the slightest fluctuation in an already struggling economy can have dire consequences. Due to income loss and business closure, people are forced to seek help, but with the economically damaging effects of COVID-19, there are also fewer resources and reserves available as safety nets for small businesses. The major concerns for emerging economies are that the global changes will be heavily unfavourable to them.[9]

Expectations Of 2020 Recession

Across the world, experts have gathered to debate the plausibility of a recession, many predicting a sharp downturn and agreeing on the level of uncertainty.[12] In June 2020, The National Bureau of Economic Research determined that as of February 2020, the U.S. expansion from 2009 had ended and we are amidst a global recession. The 2008 depression lasted 18 months, from 2007 to 2009, and expansion lasted for a total of 128 months.[13] Determining the length and expectations for this COVID-19 depression can only be considered quarter by quarter.[14]

There are no countries or regions that have come out unscathed by the global impact of COVID-19. Major GDP forecast adjustments have been seen in Brazil, South Africa, Turkey, Mexico and Russia due to the falling prices of commodities, capital outflow and limited flexibility in policies. A sub-1% growth is expected in India and China, with a severe contraction in the GDP of emerging markets.[15]

The attempt at recovery can only begin once economies are able to resume trading, which is challenging between different levels of lockdown across the world. Some countries are opting for extended lockdown periods, further reducing the flow of income. The prospective daily loss of activity for the first quarter of 2020 and under lockdown is close to 25%, with China reporting a first-quarter decline of 10% through their five-week lockdown period.[15]

Many governments have opted to offer zero interest rates, borrowing money from abroad to support their economies and going as far as supplementing the income of their citizens. However, the ramifications of acquiring this debt to curb the lack of public spending and taxes will have dire consequences in years to come.[16]

How Long Will The Recession Last?

Although difficult to determine, the International Monetary Fund predicts that by 2021 the recession will be over and recovery can begin.[16]

There is continued concern around the recurrence of the virus and whether it will again damage domestic economies that have started to recover. As businesses try to stay afloat, the question remains how many of them will still be viable once the virus has subsided. As lockdown protocol eases at different rates in different countries, air travel and traveling will return, increasing the opportunity for the virus to resurface. Until a more reliable method of dealing with COVID-19 is discovered, namely a vaccine, the potential threat may be around for years to come.[16]

Financial uncertainty will remain for prolonged periods as lockdowns end and risks are assessed. The longer the lockdown period, the more damaging the effect and the decline in the global GDP. The assumption thus far is that once the health crisis recedes, there should be significant growth and increase in activity. As demonstrated by China, the restructuring of expenditures from the first half of the year and a macro policy stimulus could potentially increase the chances of growth and recovery. Major fiscal stimulus packages have been identified in many countries, from 10% GDP in the U.S. to 5% in the U.K. and Germany.[15] The Federal Reserve predicted that the U.S. GDP will contract by 45.5% for April to June, with an unemployment rate of 13.3% for May.[17]

In recessions of the past, when the manufacturing sector has struggled, the services sector has been able to create a buffer.[19] However, the global COVID-29 pandemic has affected all industries and the U.S. lost more than 36 million jobs by April 2020.[18] Businesses will take on debt to pull through their own expenses and lack of revenue, rendering them unable to make major investments. For most consumers, the market crash compounded their financial problems as debt increased and asset values decreased. With the current level of economic uncertainty, consumers will be cautious in their spending and financial decision-making.

How Soon Will The World Recover?

A question that plagues the minds of economists is what type of world will emerge post COVID-19. No one has the answers and the statistics change daily. What is certain is that the face of globalisation has changed as supply chains deconstruct and the flow of goods across borders is drastically reduced. COVID-19 has altered the cogs that kept the world turning, creating a fundamental shift in economic interaction and transactions. As world leaders are forced to create new ways to adapt, a series of discoveries have been made. For many businesses, one of those is to allow employees to work from home.

Once the COVID-19 pandemic subsides, a large number of white collar employees are predicted to remain working from home. A rise in online shopping and education has decreased the dependence on brick-and-mortar retailers, the restaurant industry, and universities as consumers try to balance income and expenditures.[19]

Post pandemic, physical businesses will face the challenge of remaining competitive versus online entities that have lesser overheads.[20] Economists agree that whatever the consequence, the pre-COVID-19 GDP and the rate of unemployment will take years to recover.[21] For months to come, we can expect to keep hearing the question "How soon will we recover?"[22]

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.



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