Against the backdrop of the extraordinary measures being introduced by many governments to curb the spread of the coronavirus, and business activities coming to a halt across the world, financial institutions are busy revising their growth forecasts downwards.
In the United States, where California, New York and a few other major states have ordered non-essential workers to stay home, it is widely expected that the longest economic expansion in history is already over and a sharper slowdown will be registered in the coming months.
For instance, Goldman Sachs projects that the U.S. economy will contract by an annual rate of 24% in Q2 this year, after a 6% decline in Q1; while JPMorgan Chase says -14% in Q2 following -4% in Q1.
In other places, governments have shifted to wartime mode, which illustrates how devastating the situation is. Closing borders and stopping economic activity will no doubt have serious economic implications, especially for those economies that are struggling to deal with the virus.
Whether the future recovery will follow a V-shape, U-shape or L-shape path depends on the scale and effectiveness of the stimulus measures – some of them unprecedented – rolled out by governments, central banks and financial regulators; and more importantly, how long the coronavirus pandemic will last.
The Economist Intelligence Unit now expects global growth will be only 1% this year, compared to its prediction of 2.3% prior to the pandemic.
It may be too early to estimate the total costs to the global economy as the uncertainty surrounding the endgame remains extraordinarily high when no coronavirus vaccine is in sight. On 2 March 2020, the OECD announced that global economic growth would slow from 2.9% in 2019 to 1.5% in 2020 in its worst-case scenario. On 20 March, the Paris-based institution admitted that the situation had “moved well beyond” that.
Some economists are optimistic that the global economy could rebound quickly in the second half of the year. Others fear that the impact could be long-lasting due to a potential retreat from globalization, new austerity measures in the next few years to cope with the huge bailout costs, and a return of the virus or its mutants in the future.
For now, these downward revisions are mostly on GDP growth for this year, and not into 2021 and beyond. How the situation progresses and governments respond in the coming months will give us more clues on the longer term global impacts.
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