Covid-19, deeper pain awaits us

Due to the spread of coronavirus and the global lockdown, global organisations and agencies have been predicting the worst economic downturn since Great Depression (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). I believe everyone is aligned on this view for two main reasons. First, the virus has affected both the developed and developing economies simultaneously. Its geographical coverage is now expanding. It is not just China, Europe and the United States; it is now spreading fast into Russia, Turkey, South Asia, West Asia and Latin America, perhaps in the last leg will cover Africa. Second, it has drastically reduced consumption leading to reduced demand and supply. When the governments themselves have directed industry and services to shut operations, traditional stimulus packages have little meaning.

 Now it is not just forecasts, actual GDP numbers for Q1 2020 for some major economies are out. The extent of their decline has surpassed some earlier predictions. The European Union’s (EU)’s statistical agency, Eurostat, has reported that for the 2020 first quarter, the GDP in 19 Eurozone economies has shrunk by 3.8 percent. The same figure for 27 EU economies is minus 3.5 percent.

Nothing was surprising when the world economy data for Q1 was released by some countries like France, the second-largest economy in the EU, has announced that its GDP has dropped by minus 5.6 percent, its biggest drop since 1949. This drop is much bigger than recorded during the financial crisis in Q1 2009 (–1.6 percent). Except food, all sectors have seen contraction. Similarly, Italian GDP dropped by 4.7 percent, Spanish economy dropped by 5.2 percent and the Austrian economy by 2.5 percent. My expectation is when released other economies in Europe will have no different trends. The impact of this on currency in 2020 is expected to be between 5 to 12 percent.

The situation is no different for the world’s two largest economies, USA and China. The United States has reported minus 4.8 percent GDP in Q1 whereas China declared a 6.8 percent decline in Q1 of 2020 as compared to previous year. This is the first quarter in last 28 years that China has seen this kind of decline.

India’s growth story cannot be any different with close to six weeks of completed national lockdown with extension of another 2 weeks. With more than 40,000 infections and curve continuing to grow, the possibility of India getting free from complete lockdown is aspirational. IMF has predicted 2 percent GDP growth where as some economist are predicting 0.2 percent GDP growth for India in FY21. With what is happening around the globe, India will be very fortunate if it is able to achieve this. The economy was already weak when the lockdown started which was further compounded by lockdown. Since India is a largely self-producing and consuming nation with little dependence on global value chains and high dependence on agriculture, this will support India’s economic growth.

IMF Chief Gita Gopinath predicts that the cumulative loss from the pandemic to global GDP in 2020 and 2021 “could be around $ 9 trillion, greater than the economies of Japan and Germany, combined”. This relates well with our assessment of bigger downturn in second quarter of 2020.

My sense is that the relief packages announced by various countries will only be helpful if world can find affordable health solutions soon. It is best to take all care to stay safe and support the community and learn to adapt new normal in life.

Rajeev Sharma

Country Managing Director at G4S India

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