There are signs of recovery in various parts of the global economy, starting in May, after the depressive dip imposed by Covid-19. Such signs emerged after the easing of restrictions on mobility established to flatten out the pandemic curves, and also reflected policies of flattening the recession curve (income transfers to part of the population, credit lines to vulnerable companies and others).
Three features of the post-pandemic global economy can already be anticipated: the worldwide rise in public and private debt levels, accelerated digitization, and a partial reversal of globalization. The first arises from the public sector's role as the ultimate insurer against catastrophes, government policies to smooth pandemic curves and the coronavirus recession. These will leave a legacy of massive public-sector debt worldwide (as discussed in a previous post. Lower tax revenues and higher social and health expenditures reflect the choice of trying to avoid widespread destruction of people's productive and livelihood capacity during the pandemic. On the private-sector side, indebtedness will be the way to survive the sudden stop, if the result is not to be bankruptcy or closure.
Data recently released on the first-quarter global domestic product (GDP) performance of major economies have showed how significant the impact of COVID-19 has been on economic activity and jobs, with large contractions across the board. The ongoing global recession is poised to be worse than the “great recession” after the 2008-09 global financial crisis, especially from the standpoint of emerging market and developing economies. The depth and speed of the GDP decline will rival that of the Great Depression of the 1930s.
In a previous article, we highlighted how developing economies have faced simultaneous shocks from their external environment, as pandemic and recession curves have unfolded abroad (Canuto, 2020a). In addition to financial shocks, there have been declines in remittances, tourism receipts, and commodity prices (Canuto, 2020b). The combination of these shocks with the hardships related to flattening domestic infection curves has configured what we have called a ‘perfect storm’ for developing countries, brought by COVID-19 (Canuto, 2020c).
The global reach of COVID-19 is now clear. In a short time, country after country has suffered outbreaks of the new coronavirus, with each facing a three-fold shock: epidemiologic, economic, and financial. In addition to dealing with their own local coronavirus outbreaks, emerging market and developing countries have faced additional shocks from abroad.
The outbreak in China has already affected economic sectors in Latin America. Is there more to come?
China’s economy has come to a sudden stop. Large parts of the country remain in shutdown mode after the end of the Lunar New Year holiday, with national passenger traffic declining by 85% on the Wednesday after the break compared to 2019.
The hike in tariffs imposed by the United States against its major trading partners since early 2018 has been unprecedented in recent history. President Trump alluded to, among others, the goal of revitalizing jobs in the country’s manufacturing industry by protecting it from unfair trade practices of other countries, particularly China. However, according to a study by two Federal Reserve Bank staff – Aaron Flaaen and Justin Pierce – released last December 23, the effect so far has been just the opposite, i.e. a reduction in U.S. manufacturing employment!
As world leaders gathered this month for high-level talks at the 74th United Nations General Assembly, pressing global issues were at the forefront of discussions, including progress toward the 2030 Agenda and the Sustainable Development Goals (SDGs). While taking stock of how far we have come in realizing commitments in key areas, including to end poverty and hunger, expand access to health, education, justice and jobs, promote inclusive and sustained economic growth, and protect our planet from environmental degradation, heads of state and government convened at the SDG Summit also faced heightened pressure to increase actions and implementation efforts to achieve the 2030 Agenda goals and concrete targets agreed upon in 2015.
Since the Fed’s July meeting, when the Fed Funds Rate had a 0.25% cut, fears about the impact of the US-China trade war on the global economy have escalated. The US yield curve inversion received much attention as a harbinger of a slowdown in the global and US economic outlooks. We approach here whether lights on next monetary policy events can be obtained from reading the minutes of the Fed’s meeting – and of the July meeting of the ECB governing council – released this week.
