In a matter of mere weeks, the novel coronavirus moved from an impending threat to a confronting reality, and has had an unprecedented impact on both public health and the economy.
Projected Global growth forecast 2020
Global inflation rate
In our early March Knowledge Centre update, we referred to COVID-19 as a new threat to the global economy, following eighteen months of uncertainty arising from the US-China trade war, which appeared to be coming to an end with the signing of the Phase 1 deal in early 2020. In a matter of mere weeks, the novel coronavirus moved from an impending threat to a confronting reality, and has had an unprecedented impact on both public health and the economy.
As the region in which the COVID-19 outbreak originated, many parts of Asia are a number of weeks ahead of the rest of the world in terms of recovery. Indeed, as other parts of the world seek to curb the spread of the novel virus, they can look to countries such as China, to review the efficacy of various policy responses in efforts to soften the economic shock.
The pandemic initially caused shutdowns in Asia earlier than elsewhere in the world, with industry grinding to a halt in February and having a significant impact on global supply chains. COVID-19 then brought much of the world’s economic activity to an abrupt standstill, serving a secondary blow to the export-reliant Asian economy.
Asia’s purchasing managers’ indices (PMI) in August show up some mixed results – with Indonesia and Taiwan above the 50 mark, and the latter recording its highest figure in two years at 52.2, and Japan, South Korea, Malaysia, the Philippines and Vietnam all sub-50, indicating contraction. However, some of these sub-50 figures are still indicating gradual improvement and recovery, particularly in the big manufacturing nations. Bloomberg Economics also reported that a private gauge of China’s factory activity grew at the fastest pace in August since January 2011, helped by improving exports and continued domestic recovery.
Having seen economic growth of 6.1% in 2019, despite the trade war, the Chinese economy was heavily impacted in Q1 with a 6.8% decline before a return to positive growth of 3.2% in Q2. Although the Phase 1 agreement seemed hopeful with regards to the US-China trade war, tensions have once again intensified, which is having an impact on the Chinese economy and remains a risk factor.
In India, pre-COVID, some important reforms, while expected to benefit the economy in the longer term, such as a unified tax system and demonetisation, have been disruptive in the short term, and India has since been faced with considerable economic challenges due to the pandemic. Q2 was India’s worst quarter ever recorded, with a 23.9% contraction and the IMF is projecting a ‘historic low’ for 2020, with a 4.5% contraction, before a return to growth is expected in 2021.
Although Australia appeared to have a good handle on containing the virus by June, and was beginning to focus on awakening its economy, there has been a recent resurgence in the virus and a recession has hit the nation for the first time in 28years. A contraction of 6% is expected for 2020 before a prolonged recovery period kicks in over the coming couple of years. The Government introduced a considerable stimulus package, including the AU$130 billion JobKeeper payment, which aimed to keep Australians in work and support businesses that had been significantly affected by the economic impact of the virus.
Singapore had an austere reaction to the pandemic, implementing an eight-week circuit breaker to suppress the virus. It entered a recession in Q2 with a 41.2% contraction quarter-on-quarter. To date, the government has announced four support packages worth close to S$100 billion (nearly 20% of GDP), and has not ruled out announcing another package.
The eurozone recorded an economic contraction of 11.9% in Q2.
Europe has been particularly hard-hit by the pandemic, between the public health impacts and the strict lockdowns seeing economic activity plummet, and the eurozone recorded an economic contraction of 11.9% in Q2.
Although the European Central Bank acted quickly upon the onset of the virus, with significant stimuli put in place to prop up the regional economy, it now appears that even more stimuli will be required from the ECB to tackle the disinflationary impact. Inflation in the eurozone was negative in August for the first time in over four years, with a figure of -0.2% recorded across the 19 countries, well below the ECB’s target of 2%. While it is hoped that this is relatively temporary and that a rebound is in the near future, Brexit remains a significant risk, in addition to the pandemic.
Although many European countries looked to be making a recovery in July, as lockdown and restrictions were lifted, a marked slowdown was seen in August as COVID cases rose again in some countries, with the eurozone PMI dropping from 54.9 to 51.6. Unemployment hit 7.9% in July, up from 7.7% in June, although a Reuters survey of economists had projected a slightly higher figure of 8%.
As Europe’s largest economy, Germany, which was already enduring a period of political instability and ongoing economic uncertainty, has reported Q2 as its worst quarterly performance on record, with total output falling by 10.1%. Despite Germany not being as reliant on tourism as other European countries and the public health effects not being as stark, consumer spending has nosedived, and this has been coupled with the steep decline of exports and global trade, which are significant contributors to its economy. While its economy is doing better than initially expected, the aforementioned sluggish demand may prolong the recovery period. Germany’s political landscape is in a state of flux, as far-right and the green parties gain popularity, and the once-powerful democratic left has become alienated from the industrial, working-class base.
Meanwhile the French economy, Europe’s second largest, saw GDP decline by 13.8% in Q2, although there was moderate improvement in May and June as lockdown measures eased. It was reported that economic activity was down 7% year-on-year in July, albeit an improvement on previous months, as construction activity ramped back up. Spain, however, has recorded its worst recession of modern times, with the economic shock leading to declines of 5.2% in Q1 worsening to 18.5% in Q2, coming out as the eurozone’s worst performer.
The Irish economy is expected to shrink by 8.5% this year, and Government’s budget deficit increased to €9.5 billion in August, as VAT receipts reduced and spending on the likes of income supports related to the pandemic soared, compared to a deficit of €625 million this time last year, marking a year-on-year deterioration of €8.8 billion. In addition to contending with COVID-19, Ireland stands to be one of the most impacted countries in the eurozone at the hands of Brexit, with the lack of direction adding to the uncertainty. Furthermore, as a country that is heavily reliant on FDI, the performance of the US economy is particularly impactful.
The UK has entered a recession for the first time since 2009, with a decline of 2.2% in Q1 followed by 20.4% in Q2 – the steepest decline on record
As the end of the Brexit transition period fast approaches, and the economic shock of COVID continues to be felt, the UK has entered a recession for the first time since 2009, with a decline of 2.2% in Q1 followed by a negative figure of 20.4% in Q2 – the steepest decline on record. The Government has put in place various packages and supports to mitigate the negative impacts and start on the road to recovery, but it is fair to say that economic recovery will be heavily dependent on any recurrence of the virus and whether post-Brexit trade deals are secured.
Israel has posted its worst performance in more than 40 years in Q2, coupled with the CBS (Central Bureau of Statistics) reporting a 28.7% decline. This follows a 10.1% contraction in Q1, after 3.4% growth in the second half of 2019. The country’s high-tech landscape has been largely unscathed in comparison to other sectors of the economy. The ripple effect from the pandemic has not been felt so far in the sector, but a slowdown is expected as the pandemic continues.
The US started the year with strong optimism, but reported its sharpest contraction on record (since 1947) in Q2, at a rate of 32.9%. While it was hoped that recovery would ensue quickly, the second wave of the virus in some locations and resulting measures to suppress it infer that it may take longer than initially anticipated.
As the main driver of the US economy, consumer spending is a particularly important indicator, and declined by 10.7% year-on-year in Q2. Unemployment stood at 10.2% in July, down from 11.1% in June. In addition to the pandemic, rising tensions again between the US and China also pose a significant risk to its recovery.
Looking forward, unsurprisingly, projections for 2020 have been curtailed significantly, with GDP now expected to contract by 6.5%. Key commodities and materials have already seen a drop in prices, with oil and steel products bearing the brunt of this decline. Production facilities are slowing down, and in some cases, closing completely, which raises concerns over the ability to increase supply once demand returns.
In addition to COVID, oil prices, geopolitical tensions, global trade wars and macroeconomic performance continue to have a significant impact on growth and make the GCC less predictable than most major global markets. A contraction of 7.3% is expected in the Middle East oil-exporting countries as of July 2020. In addition to the effects of COVID, the GCC remains highly dependent on the oil economy, and the market volatility will undoubtedly have a role to play in terms of the pace of recovery post-pandemic.
The UAE Central Bank has forecast economic contraction of 3.6% for 2020, having put together a comprehensive stimulus package to support the economy, with increased loan-to-value ratios for first-time home buyers, as well as the range of regulatory changes announced in 2019.
The pandemic is dealing a double blow to Saudi Arabia, with a high volume of COVID cases, as well as energy market turmoil, including cuts in production and an oil price decline to below US$20 per barrel, saddling the Government with a budget deficit that could rise to around 15% of GDP this year. Officials have been reported to have doubled their borrowing plans and implemented a series of austerity measures, including raising the VAT rate from 5% to 15%.
Contributors: Kim Hegarty
Below, the * symbol denotes graphs/data last updated in March, and so the impact of COVID-19 is not accounted for in the marked items.