Since it was publicly revealed by China that a new virus, covid-19, was affecting its population (around 20 January this year), contamination has rapidly spread to Europe first and to many other countries worldwide afterwards. As a result, many countries have announced containment measures (lockdown, travel restrictions, border closures, curfews, etc.). These measures, while effective in combatting the covid-19 pandemic, dramatically undermine economic growth and business conditions. Given the impact of these containment measures, the world economy is experiencing a sudden stop that is without precedent in peacetime. The IMF forecasts that the world economy will contract by 3% this year. This is the worst global economic performance and the first time that both advanced economies and emerging market economies are in recession since the Great Depression of 1930.

Even if there are still a lot of uncertainties about the length and the propagation of the pandemic, it is already clear that the covid-19 virus and the sharp decline in commodity prices have led to an economic crisis that is likely to hit hard many – especially emerging – countries.  Given the large support measures already announced, the main scenario is that of a gradual recovery, which would take at least quarters given desynchronisation in virus spread, lockdown measures, possibility a second (and even a third) wave of infection and time for financial recovery for companies and households/consumers. Indeed, there is a direct link between the length of the lockdown, the amplitude of the downturn and recovery time.

The collapse in economic activity and trade, due to the covid-19 outbreak, has had a considerable impact on commodities demand and therefore on their prices. In the oil sector in particular, the loss of demand is currently estimated at almost 30%. The additional shock induced by the market share war between Saudi Arabia and Russia, dumping additional barrels on the market, has put extra strain on prices, which have halved since the beginning of the year. Even though a deal between global producers was reached on April 12 to remove 9.7 m barrels a day (equivalent to almost 10% of global production), the cut is unlikely to compensate for the drop in demand. Hence, prices won’t recover to the levels of end 2019 before several months, given the extent of the pandemic impact.

Countries not (yet) affected by the virus could suffer from spillover effects as their economy is likely to be hampered by one or more of the following transmission channels: drop in commodity prices, in tourism revenues, in remittances, in external demand, unprecedented capital outflows, sharp deterioration of global financial conditions, supply chain disruption and border closures. There are also large differences between countries in their ability to deal with the crisis. Some countries have room for fiscal and/or monetary stimuli while others have not. It is evident that for the latter group the impact on the economy will be larger. In this context, many emerging markets are likely to face a balance of payment crisis. An exceptionally large number of countries – almost 95 counties – are simultaneously requesting assistance from the IMF. Moreover, the IMF announced the establishment of a short-term liquidity line available for countries with very strong fundamentals in need of short-term liquidity. The Fund also approved the relief on debt service for 25 low-income countries while the G20 nations agreed to freeze bilateral government loan repayments for IDA countries until the end of the year in order to free financial reserves that can be used to combat the pandemic and its fallouts. Such initiatives are welcome as they create – at least temporally – fiscal spaces for the poorest countries.

The world was ill-prepared to face such a sudden and deep economic crisis. Macroeconomic fundamentals were weak: monetary policies in the USA, the EU and Japan were already very expansionist and fiscal space was limited in many countries. The year 2019 was marked by a broad-based slowdown in the manufacturing sector and experienced the lowest growth since the global financial crisis. Financial vulnerabilities were already high in a context of large public debt burdens (in the USA, some Euro Area members and some emerging markets), large corporate debt (in China and to a lesser extent in the USA and some emerging markets), large household debt (in some advanced and emerging market economies) and large external debt (in many emerging economies). These existing vulnerabilities are likely to exacerbate the downturn amid, among others, increases in bankruptcies, higher unemployment (and thus lower private consumption), and a deterioration of asset quality in the banking sector (cf. lower access to credit). Also trade and geopolitical tensions were already high as illustrated by the trade war between the USA and China. Unfortunately, these tensions have not retreated and could constrain global responses. 

Analyst: Pascaline della Faille - P.dellaFaille@credendo.com