By: Toh Han Shih
With a global recession all but certain, the Covid-19 pandemic is expected to jack up world unemployment to its highest level in recorded history and batter global consumption, according to a wide and almost-unanimous range of analysts, with Moody’s Investor Service, for instance, warning on March 25 that the virus “will cause an unprecedented shock to the global economy.”
That warning is echoing across the financial services industry, with Richard Li Xiang, head of the research department at the Ping An Macroeconomic Research Institute, saying in an interview that “We are worried about the global economy.” By the end of this year, the global unemployment rate will spike to 15 percent from 5.4 percent in 2019 and 5.5 percent in 2018, according to Ping An’s model.
Since global unemployment data became available in the 1980s, the highest global unemployment rate so far was 7.1 percent in 2009 during the global financial crisis.
“Now this figure will double. The global financial crisis mainly affected big financial unemployed. This is much more than a financial problem; it is a social problem,” Li said.
If there is to be any recovery, it likely will have to start with China, now the world’s second-largest economy, which led the world into the crisis. First-quarter growth declined by 10 percent year-on-year according to official figures, with industrial production contracting by 12 percent, fixed asset investment falling by 20 percent, retail sales by 18 percent and exports contracting by 12 percent.
China’s Producer Price Index fell 0.4 percent year-on-year in February, swinging back into deflationary territory, according to official Chinese data. Coal consumption, an indicator of industrial activity, is about 80 to 90 percent of normal, but given the fact that the rest of the world is tipping into deep recession, exports, which comprise roughly 20 percent of GDP, are unlikely to recover anytime soon.
“In China, the latest official data for February was even worse than our already dire expectations, prompting us to cut our first quarter growth forecast from 2.3% to -5%, on an annual basis,” said a March 20 report by Oxford Economics, an economic forecasting firm headquartered in Oxford, UK.
In addition, some governments may push to have manufacturing return to their home countries, because manufacturing can absorb many jobs, Li predicted. It is already happening in the US, where US President Donald Trump has been calling for the reversal of US outsourcing to Asia, especially China., so far without notable success. According to the US Commerce Department, manufacturing constituted 11 percent of GDP on the second quarter of 2019, the smallest share since 1947.
The pandemic, which has been raging since the beginning of this year, could be expected to accelerate the decoupling of the US and Chinese economies, which Trump and anti-China hawks in the US establishment are hoping for. There are signs that China itself is moving toward decoupling, with a “whole-of-government: push to retain a larger share of domestic value-added through a transition to high-quality growth of industrialization.
As factories leave China for US and Europe, that will definitely affect China, Li acknowledged. However, Ping An’s surveys of multinationals operating in China indicate most US companies will take at least three years to shift their manufacturing from China to other countries, so China still has some time to adjust to this transition, Li said. A change in politics in the US could lessen the pressure for decoupling if the virulently nationalist Trump administration were to be defeated at the polls this November.
“We think now the major problem is consumption. (The pandemic) will be devastating for consumption,” said Li, with consumer spending expected to fall by 7 percent worldwide by the end of this year, in contrast to 5.3 percent growth last year, according to Ping An’s model.
For example, in Hong Kong, famed for its shopping, consumer spending plunged 52.8 percent to HK$22.7 billion (US$2.9 billion) in February as Chinese tourists abandoned the territory because of the Coronavirus, from HK$48.1 billion in January last year, according to official Hong Kong data.
Deeply falling consumption could be devastating for countries like Italy and Spain, Li warned. Tourism contributes more than half of Italy’s GDP growth and accounts for 25 percent of Spain’s GDP growth, while consumption accounts for 59.4 percent of US GDP. In Asia, tourism accounts for 18 percent of Thai GDP. It is the third largest contributor to Malaysian GDP after manufacturing and commodities. In Indonesia, tourism contributes 6 percent of GDP and is responsible for 5.4 million jobs.
Related to falling consumption, world trade for this year is expected to contract for only the second time since the mid-1980s, according to the Oxford Economics report.
Various countries including the US and China have sought to stimulate their economies in an attempt to inoculate their economies against the virus.
Trump signed the largest stimulus package in US history on March 27, a US$2 trillion bill intended to rescue the world’s largest economy. On March 31, he called for another US$2 trillion to be spent on infrastructure like roads and bridges.
The Chinese government has also stepped up financing of infrastructure projects, albeit less aggressively than Trump. In China, most of the government’s stimulus money goes to infrastructure and financial institutions.
The huge stimulus packages of countries like the US and China will not fully mitigate the consumption drop, because investments in infrastructure and financial institutions will not directly help consumption, said Li.
Slow improvement in consumer demand will temper the pace of China's recovery, said Moody’s report. Moody’s forecast China’s real GDP growth to be 3.3 percent this year, followed by 6.0 percent growth in 2021, slower than China’s official 6.1 percent GDP growth in 2019.
The international rating agency expects the real GDP of G20 nations, including China and the US, to contract by 0.5 percent in 2020, followed by a pickup to 3.2 percent growth in 2021. In November last year, before the emergence of the COVID-19 pandemic, Moody’s expected G20 economies to grow 2.6 percent in 2020.
“Our latest forecasts now show the global economy and many major economies entering a deep recession in the first half of 2020,” said the Oxford Economics report.
“We now see global growth contracting in Q1 at a faster pace than during the global financial crisis (of 2008). Global growth is likely to average just zero percent in 2020, down from 2.5 percent in January, making this our largest two-month forecast revision ever, including the global financial crisis,” Oxford Economics forecast.
The global GDP growth of zero projected for the whole of this year will be the second weakest rate in almost 50 years, Oxford Economics noted. Oxford Economics does not rule out a worse scenario, where the global economy suffers a contraction of 1.3 percent in 2020 with severe recessions in all major economies.
A global recession is certain, including in China, said a report on March 20 by Enodo Economics, an economic think tank headquartered in London. “But the Communist Party is set on a mission to get China back to normal, snatching victory from the jaws of defeat.”
China’s mountain of bad debt makes the Chinese Communist Party’s job way harder than it was after the global financial crisis, said Enodo. But looking out on a 12- to 18-month horizon, it is not an impossible task, Enodo added.
Toh Han Shih is a Singaporean writer in Hong Kong.