DAY in, day out, we are warned of “more pain to come”, markets and economies in “free fall”, and “the deepest recession on the record.”
Swift on the heels of news that Covid-19 infections worldwide had hit over a million, came the latest data of 10 million US jobless claims in two weeks.
Never before has the burden of steering the rocking ship, that is the global economy, been so heavy on governments and central banks.
Can they succeed, or only mitigate the severe damage that this pandemic is causing?
According to Socio Economic Research Centre executive director Lee Heng Guie(pic below), despite the trillions of dollars pumped in, they can soften the blow of the economic damage and financial fallout, but they may not be able to avoid an outright recession.
Fiscal measures which are already pouring in, need to be huge enough to counter the severe impact, says Malaysian Rating Agency associate director, economic research division, Nor Zahidi Alias, noting that monetary policy has its limitations.
In the last financial crisis, a slow pick-up in lending growth in the United States was a key reason for the sluggish recovery, despite massive liquidity injections by the Federal Reserve.A “deep global recession” with world economic activity declining by 1.9% in 2020, is Fitch Ratings’ baseline forecast.
The United States, eurozone and Britain are expected to decline by 3.3%, 4.2% and 3.9% respectively while the recovery in China, which may register annual growth of below 2%, will likely be curtailed by the global recession.The United States, which will likely face the “deepest recession on record” at nearly five times more severe than the post-war average, could see as many as 20 million jobs lost, with the unemployment rate running up to 15.6% from the current 3.5%, according to the Bank of America.
Taking the example of China, the impact of the lockdown on real Gross Domestic Product (GDP) was significant, and this loss in output is likely to be repeated in other countries in lockdown, says RHB Research Institute chief Asean economist Peck Boon Soon.
Output in China fell by 13.3% year-on-year, while investment and retail sales plunged by 24% in January and February.
In the United States, there is a lot of uncertainty on how things will turn out, as the control measures involve social distancing and closure of shops only.
More drastic movement control measures may be required in the United States, and these will likely have a greater impact on the economy; the longer it drags on this decision, the worse it may be on them.
The task of saving jobs not just among big businesses, but also small ones that form a large part of the economy, is now gaining more traction among governments.
Governments should help as many small businesses as they can to retain their workforce, said Federal Reserve president Neel Kashkari, as keeping workers attached to their businesses will later help the economy to “turn back on” more quickly.
Citing the experience in 2008, when there were “millions and millions and millions of Americans losing their jobs, it took more than a decade to put the labour market back together, ’ said Kashkari, as reported by Reuters.Priority is placed on employee retention; if the current programme runs out of money, President Donald Trump said he would “immediately” seek further funding from Congress.
In Malaysia, ample liquidity released into the banking system can be used for lending especially to businesses faced with declining revenue against fixed costs.
This injection of fresh funds through business lending can help the economy recover, said Zahidi, noting that in 2009, loan approvals for businesses fell on an average of 28% between mid-2008 and mid-2009.
In the United States, banks are already flooded with calls from cash-strapped customers; they also face the risks of extending loans to small businesses even if these are guaranteed by the government.
The depth and duration of the recession will be key in gauging when the global economy will recover, and it may be an uneven recovery. While a V-shaped recovery is envisaged in China, the US economy may take longer to rebound, as the outbreak has spread and will probably run its course until the third quarter. The global economy may gradually recover in the fourth quarter of 2020, according to Lee.
A quarter of deep contraction is likely for countries including Malaysia, as the impact of the huge stimulus plans will only become more visible when the pandemic is under manageable control, probably in late 2020, according Peck.
As 35 organisations race to create a vaccine, Boston-based biotech company Moderna, will likely begin human trials soon.Columnist Yap Leng Kuen is monitoring developments in the race for a vaccine.
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