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Global Recession Deja Vu?

  • Writer: Tejas Rokhade
    Tejas Rokhade
  • Mar 19, 2020
  • 6 min read
recession

Goldman Sachs and Morgan Stanley economists in Wall Street are predicting a second global recession in 2020 after its 2008 edition fall in economic growth. With the coronavirus pandemic shaking the stock market, bankers, companies and individual investors have started jumping in. There has been a surge in cash stock up amongst other assets like bonds and loans, to fight back against the S&P 500 plunge of nearly 12%, that is the worst one-day decline since 1987.


Crux of the Matter


Recent Stock Market Crash Says It Out Loud Morgan Stanley’s team, led by Chetan Ahya, has predicted a worldwide recession is at its base form and its growth is expected to fall to 0.9% this year. Goldman Sachs, meanwhile has seen a slump of 1.25%. Diane Swonk, chief economist of Grant Thornton, says that “Losses are likely to equate in the thousands, with travel and tourism and manufacturing being affected, with the labor force sick or quarantined. The 3.5% unemployment rate, a 50-year low, could rise to 3.8% to 4.1%.”


Elizabeth Warren: We need a grassroots stimulus package .@ewarren: "Based on the latest projections of the likely economic harm of coronavirus, I have called for an immediate $750 billion stimulus — roughly 3.5% of GDP."#StockMarketCrash #COVID2019 https://t.co/Ou5nSbW5kn — Warren Democrats 🗽 (@WarrenDemocrat) March 16, 2020

COVID-19 The Main Culprit?

Over the last century, recessions have almost always been started by a sustained period of higher interest rates. Never a virus. New York Times

Data from numerous sources show the COVID-19 pandemic’s effects: Investor confidence in the German economy has plummeted to levels last seen during the European debt crisis while U.S. retail sales fell the most in a year in February even before coronavirus containment measures began rippling through the economy. In case of a longer lasting and more intensive coronavirus outbreak, the global economic growth could slump to 1.5%.

Who Stands To Lose In The Numbers Game? China’s Purchasing Managers Indices (PMI) have collapsed for February – the manufacturing PMI fell to 35.7 and non-manufacturing PMI to 29.6, both well below market expectations. Suggesting a sharp fall in the first quarter growth of the country having a 17 % share of the global economy, the Organisation for Economic Co-operation and Development (OECD) has cut its 2020 forecast of global economic growth from 2.9% to 2.4% – a figure that borders on a recession. However the dragon land has managed to stealthily accumulate U.S. Treasury securities over the last few decades. As of May 2019, the Asian nation owns $1.11 trillion, or about 5%, of the $22 trillion U.S. national debt, which is more than any other foreign country. In the other part of the world, France’s finance minister, Bruno Le Maire announced a 45 billion Euro aid package to help businesses and employees cope with the escalating health crisis. Meanwhile Russia and Saudi Arabia, two of the world’s biggest oil producers, are entangled in a who-rings-the-bell-first race to grab market share. The former has launced an oil war against the latter by announcing that it will hike oil production 12.3 million barrels per day (mb/d) from April, and has also offered deep discounts to its buyers, potentially swamping an already oversupplied oil market.


$20 oil in 2020 is coming. Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc – may prove existential 1-2 punch when paired with COVID19. https://t.co/cw5uzDz8Yx — Ali Khedery (@alikhedery) March 7, 2020

Could India come out as a winner ? The impact of the virus has been less in India so far compared to other geographies. As per TV Narendran, CEO and Managing Director, Tata Steel, the de-risking of supply chains originating from China, is likely to be heightened in this outbreak. The centre has identified 21 agricultural products, in which Indian exports could benefit from trade restrictions against Chinese goods which amounted to $5488.6 million in 2018. India exported $4,445.9 million worth of these commodities in the same period. With the age old trade issues between US and China and now COVID-19, India can understand how over-dependency on any one country can be a reckless decision in the wrong run. The only primary problem that India might face is that it does not have a work-from-home economy and a large number of people depend on manual labour till date.

Then and Now: 2008-09 vs 2020 Recession Since central bankers have the memories of last decade’s crash, banks are in better shape today. According to Rodgin Cohen, senior chairman of Sullivan & Cromwell LLP and a top advisor to major U.S. financial firms. In 2008, banks had far less capital and liquidity than they have now.

The risk this time arises from the pandemic’s impact on the real economy and corporate growth: Drop in car, house sales and business capital spending. He adds that the liabilities are however similar since if you own a restaurant and you borrow money for the rent, you’ve still got to make the monthly payment.

NBER Says There’s Still Hope The NBER or National Bureau of Economic Research is a widely-recognized arbiter of recession beginnings and endings. As per their observations till date, during a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. The opposite happens in cases of expansion. However within an expansion, a brief period of decline can occur, and during a recession a brief rebound might happen. Such a non-recession was the oil industry collapse in 1986. Oilmen felt a severe decline, and Texans thought they were in a recession, but other industries and other parts of the country were expanding quite nicely.

G-20 Summit To The Rescue ! The Group of Twenty (G20) leaders should rise together, like they did at the Pittsburgh G20 Summit in 2009, and form a joint plan of action to address the upcoming crisis. This should contain measures to intensify scientific cooperation to develop a vaccine and coordinated economic steps to stabilize the global economy. Fiscal stimulation can be the main tool to revive economic growth.


Curiopedia


Recession in economics is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. In the United States, it is defined as “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”. In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters. More Info

The Great Depression was the worst economic downturn in the history of the industrialized world, lasting from 1929 to 1939. It began after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and employment as failing companies laid off workers. By 1933, when the Great Depression reached its lowest point, some 15 million Americans were unemployed and nearly half the country’s banks had failed. More Info


Inverted yield curve is when the yields on bonds with a shorter duration are higher than the yields on bonds that have a longer duration. It’s an abnormal situation that often signals an impending recession. In a normal yield curve, the short-term bills yield less than the long-term bonds. Investors expect a lower return when their money is tied up for a shorter period. They require a higher yield to give them more return on a long-term investment. A steeply inverted yield curve that goes on long enough is like having 108° fever. Both banks and shadow lenders go upside down on their “book” and stop making loans. That can freeze the economy and make a garden-variety recession even worse.More Info


Morgan Stanley calls it, nearly a year after the "inversion" "The yield curve has once again proven its efficacy for calling the end of the cycle." #recession #COVIDー19 pic.twitter.com/g7N6GppCIs — David Scutt (@Scutty) March 17, 2020

Inverted Yield Curve

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