World economys prospects look bleak owing to Covid-19 outbreak and Donald Trumps trade policy
At the start of this year, things seemed to be looking up for the global economy. True, growth had slowed a bit in 2019: from 2.9% to 2.3% in the US and from 3.6% to 2.9% globally. Still, there had been no recession and as recently as January, the International Monetary Fund projected a global growth rebound in 2020. The new coronavirus, Covid-19, has changed all of that.
Early predictions about Covid-19s economic impact were reassuring. Similar epidemics such as the 2003 outbreak of severe acute respiratory syndrome (Sars), another China-born coronavirus did little damage globally. At the country level, GDP growth took a hit but quickly bounced back, as consumers released pent-up demand and firms rushed to fill back orders and restock inventories.
It is becoming increasingly clear, however, that this new coronavirus is likely to do much more damage than Sars. Not only has Covid-19 already caused more deaths than its predecessor; its economic consequences are likely to be compounded by unfavourable conditions beginning with Chinas increased economic vulnerability.
Chinas economy has grown significantly more slowly in the last decade than it did previously. Of course, after decades of double-digit growth, that was to be expected and China has managed to avoid a hard landing. But Chinese banks hold large amounts of non-performing loans a source of major risks.
As the Covid-19 outbreak disrupts economic activity owing partly to the unprecedented quarantining of huge subsets of the population there is reason to expect a sharp slowdown this year, with growth falling significantly below last years official rate of 6.1%. During the recent meeting of G20 finance ministers, the IMF downgraded its growth forecast for China to 5.6% for 2020 its lowest level since 1990.
This could hinder global growth considerably because the world economy is more dependent on China than ever. In 2003, China constituted only 4% of global GDP; today, that figure stands at 17% (at current exchange rates).
Moreover, because China is a global supply-chain hub, disruptions there undermine output elsewhere. Commodity exporters including Australia, and most of Africa, Latin Americaand the Middle East are likely to be affected the most, as China tends to be their largest customer. But all of Chinas major trading partners are vulnerable.
For example, Japans economy already contracted at an annualised rate of 6.3% in the fourth quarter of 2019, owing to last Octobers consumption-tax increase. Add to that the loss of trade with China, and a recession defined as two consecutive quarters of shrinking GDP now seems likely.
European manufacturing could also suffer considerably. Europe is more dependent on trade than, say, the US and is linked even more extensively to China through a web of supply chains. While Germany narrowly escaped recession last year, it may not be so lucky this year, especially if it fails to undertake some fiscal expansion. As for the UK, Brexit may finally have the long-feared economic consequences.