IMF View of the World … Does Not Make for Easy Reading
COVID-19 continues to wreak havoc on the health of the global population and the health of the global economy. In its January global economic outlook, the International Monetary Fund (IMF) was reasonably upbeat about prospects for the global economy in 2020. In just a matter of weeks, this relatively benign view has changed dramatically and the IMF is now fearing the worst economic downturn since the great depression. Global growth is forecast to contract by 3 per cent this year, with the Euro Zone projected to collapse by 7.5 per cent. In total, it is estimating that over the next two years the world economy could forego $9 trillion in lost economic activity, which is equivalent to the German and Japanese economies combined. This is truly dramatic stuff.
However, on a somewhat brighter note – everything is relative – the IMF is expecting recovery in 2021, but to get there, it will be paramount to prioritise containment and strengthen health systems everywhere. What differentiates this recession from previous ones is that the way out will be determined by health/medicinal developments than by normal economic forces.
Thankfully, the IMF is totally supportive of the monetary and fiscal measures that have been taken to date, but believes much more will be needed on the fiscal front. This is so, because there is basically not much more that can be done on the monetary policy front. The IMF appears to have learned its lessons from 2007/08 and is intent on doing what it needs to do. For example, it stands ready to deploy all of its $1 trillion lending facility, and much more besides. Much more will be needed.
One of the real fears I have had over the past couple of weeks is that COVID-19 could wreak absolute economic and human havoc in less developed countries. The IMF is now alluding to and very cognisant of this potential story, because many of these countries simply do not have the resources or the capability of dealing with a pandemic of this type.
Global Economic Data Painting a Grim Picture...No Surprise There
In terms of economic data releases, the calamitous impact of COVID-19 is becoming more obvious on a daily basis.
- In March, the composite Purchasing Managers Index (PMI) in the US fell from 49.6 to 40.5; the UK index fell from 53 to 37.1; and the Euro Zone index fell from 51.6 to 31.4. These declines are without precedent and are truly dramatic. Within the composite indices, services are taking the biggest hit as many service activities are being shut down. The April indices will be available over the coming days and are likely to paint a similarly grim picture.
- US retail sales fell by 8.7 per cent in March alone.
- Initial jobless claims in the US increased by 22 million in the four-week period to 10th April. These are the largest weekly increases ever recorded.
- US employment declined by 701,000 in March, which brought an end to 113 consecutive months of employment increases.
- Chinese GDP plunged by 6.8 per cent in the first quarter. The Chinese only began recording quarterly economic growth in 1992, but the last time it officially acknowledged a year-on-year decline in economic output was in 1976.
I could go on, but it is clear that the global economy is in the middle of one hell of a dramatic collapse.
Irish Economic Data Also Painting A Grim Picture...No Surprise There Either
There is a limited amount of economic data available that relates to the period since the stringent COVID-19 measures were taken. However, that which is available, highlights clearly the dramatic economic impact.
- The Live Register increased by 24,000 in March to reach 207,200. However, a further 283,037 people received the Pandemic Unemployment Payment, and 25,104 received the payment under the Wage Subsidy Scheme. This means that at the end of March, 513,500 were in receipt of Live Register and COVID-19 related payments. By the middle of April, it is estimated that 533,000 people were in receipt of COVID-19 unemployment benefits; 42,000 employers had registered for the temporary COVID-19 wage subsidy; and 27,300 have applied for the COVID-19 enhanced illness benefit. These figures do not include the 200,000 plus people on the Live Register in the normal course of events. The impact on the labour market is absolutely dramatic.
- The Exchequer returns for the first quarter of the year were only affected towards the end of the quarter. Overall tax revenues were 1.1 per cent higher than the same period last year, but were 5.7 per cent or €788 million lower than expected. VAT receipts were most adversely affected, and were €986 million lower than expected and 17 per cent lower than a year ago. This is due to COVID-19 related forbearance by the Revenue Commissioners. Current government expenditure was €1 billion higher than profile, with COVID-19 related spending pressures evident in Social Protection and Health. There is much more of this to come.
- The Purchasing Managers Index (PMI) for manufacturing declined from 51.2 to 45.1 in March.
- The PMI for services declined from a two-year high of 59.9 in February to 32.5 in March.
- The PMI for construction fell from 50.6 in February to 28.9 in March, which is the lowest level in 11 years. (For PMIs, a reading below 50 signifies a contraction in activity.)
- New car sales in the year to April 16th were 25.6 per cent down on the same period in 2019.
- The consumer confidence index in April declined from 77.3 in March to 42.6. This is the largest monthly drop in consumer confidence in the survey’s 24-year history.
- Merchandise exports in the first 2 months of the year increased by 1.7 per cent. However, February exports were 6.5 per cent lower than a year earlier. This decline occurred when China was really the only country affected by COVID-19, so the situation looks set to become considerably more difficult over the coming months as the global economy slows.
Severe Impact on Irish Economy…Some Sectors More Than Others
The impact on the Irish economy is clearly severe. The real pain is being felt by the service sector, with tourism-related businesses and those depending on discretionary consumer spending particularly badly hit; as are non-grocery retailers, including new car sales. While the immediate hit for construction activity is very severe, building will re-commence immediately once the restrictions are eased. For many service-sector businesses, it will take considerably longer for activity to recover. For example, 2020 will now be a complete write-off for international tourism. Furthermore, ‘social distancing’ will remain a feature of life for the next year at least and that will impose extra costs on many businesses and act as an impediment to activity.
Re-opening Economies…It Will Not Be Easy
As the full and devastating consequences for the global economy become more obvious on a daily basis, attention is increasingly focusing in every country on when and how the restrictions on social and business life can be eased initially, and then eventually removed altogether.
China is opening up quite aggressively, while countries such as Denmark, Austria, France and Italy are doing so on a more gradual basis. The UK has extended its lockdown for a further three weeks to close to the middle of May, and longer if death rates do not start to decline.
In the US, President Trump has backed away from his blustering threat/promise to re-open the US economy quickly, which would have been a dangerous and highly risky course of action in terms of his political career. Governors will be allowed to take a phased and deliberate approach to re-opening their states. There will have to be a downward trajectory in confirmed coronavirus cases over a 14-day period or a downward trajectory in positive tests as a percentage of total tests over the same period. Restrictions on entry into the US will be preserved for the moment.
The challenge for every country is to weigh the risks to society and economy against the risks of the virus taking hold again and breaking an established downward trend. It is not an easy call and inevitably, there will be false starts and a very stop-go return to some semblance of normality. It will take the creation and delivery of an effective vaccine to change the narrative and that still seems to be some distance away.
A NIKE ‘Swirl’ Recovery….
The futility of economic and business forecasting and planning has been highlighted once again by COVID-19. There is always something out there waiting to blow the best laid plans off course. This particular shock is much more difficult to assess and understand, as it is a human health issue rather than an economic issue.
The hope is that over the next 6 months we will pass the point of maximum weakness. However, prospects for a ‘V-shaped’ recovery look more forlorn, and a ‘NIKE Swirl’ recovery looks more likely.
Austerity Is Not An Option…
Over the next couple of years, Ireland will inevitably run significantly higher deficits and grow its outstanding debt. It is essential for the economic and financial health of the overall economy, that this crisis is not followed by a period of fiscal austerity. That would risk turning a recession into a depression. Economic growth and recovery must be fully supported and a higher level of Government debt must be accepted as a fact of life in the near-term. The promotion of stronger economic growth is ultimately the best way to reduce the burden of debt. Lessons from 2007/08 must be learned here and elsewhere. A final thought – aren’t we lucky that we did not pursue the populist debt default option that was being pushed in some quarters a decade ago, or give two fingers to the IMF in 2011.