Photo: Pixabay
Photo: Pixabay

OPINION: There is light at the end of the economic tunnel

By Johann Els Time of article published May 25, 2020

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The unprecedented stoppage in global activity amid the lockdowns due to Covid-19 could lead to the weakest growth on record.

I expect global growth to be about -3.2% this year; a contraction greater than the -1.8% we saw in 2009, due to the recession induced by the global financial crisis (GFC).

Although there is enormous uncertainty ahead, the crisis is less akin to the GFC’s financial shock but more to a natural disaster - where recoveries tend to be rapid and include some overshoot, as lost production is recovered.

The crisis evolved into a financial crisis as well, but the policy response has been far more aggressive than in the aftermath of the GFC. Therefore, although there will be a very deep recession in the first half of this year, it will probably be shorter than the GFC recession and the recovery should be stronger.

This sharp V-shaped cycle is dependent on the assumption that strong physical distancing policies and effective countrywide lockdowns will mostly end by the middle of this month, and the virus infection rate will peak by end of the month. This should result in activity returning to closer to normal levels by late May into next month.

My latest growth forecasts for the main areas are:

* US growth is likely to be about -6.5% this year, from +2.3% in 2019 and -2.5% in 2009, and +4.8% and +2.6% in 2021 and 2022, respectively.

* In China, growth is likely to be +1.2% this year, from +6.1% in 2019 and +9.4% in 2009, and +9.5% and +6.0% in 2021 and 2022, respectively.

* In the euro area, growth is likely to be -3.5% this year, from +1.2% in 2019 and -4.5% in 2009, and +4.8% and +1.5% in 2021 and 2022, respectively.

These forecasts include shocking negative quarter-on-quarter annualised gross domestic product growth numbers in the first half of this year. But the end of lockdowns in most economies by end of this month, and some returning to normality during next month, should aid a strong recovery in the second half of the year.

The pace of recovery after the end of lockdown measures will depend on how quickly production and consumption recover. In China, production has recovered to about 80% of pre-lockdown levels in about seven weeks after the peak in new virus cases, while the demand side remains muted.

The policy response across developed and emerging economies has been quick in most economies - particularly in the US.

The Federal Reserve’s quick reaction has also created room for emerging market central banks to cut rates - in many cases, more than once - since February.

Quantitative easing (QE) has also been aggressive. Across the US, UK, euro area and Japan, an aggressive QE plan to the tune of $6.5trillion (R116.8 trillion) has been implemented. In the US alone, QE could be $4 trillion to $5 trillion, although it has been described as “unlimited” in size and duration.

Fiscal policy measures in the US have been more aggressive than during the GFC. The US fiscal expansion equals 10% of GDP, and more fiscal support packages are likely. Fiscal policy measures have been more limited in the euro area, while emerging markets don’t have enough room for huge fiscal support packages.

The dollar will probably remain strong during the crisis phase due to a flight to safe-haven assets, which also results in US Treasury yields dropping. Later, as infection rates start to roll over and the economy stabilises, expectations of a growth recovery should gain ground. But, similar to the GFC, policy will remain expansionary for a long time while the economy recovers, as policymakers will want to ensure the recovery remains on track.

Very low returns in the US, relative to those available in emerging markets, will probably lead to large capital outflows out of the US and towards emerging markets as investors look for better returns. This means that the dollar will probably weaken and emerging-market currencies strengthen.

The risks to this base case V-shaped cycle are the virus cycle timeline and the extent and duration of the containment measures. If the infection rate peaks later than expected - that is, not within the next two months or so - the cycle could take on an L or a U shape.


In line with the impact of Covid-19 on the global economy, the South African economy is also heading for a severe and sharply deeper recession. After five-consecutive years of less than 1% growth on average a year, this will put the economy in a deeper crisis. The biggest impact, apart from growth, will probably be on the fiscal deficit and therefore, the government’s ability to stabilise the debt-to-GDP ratio.

This year’s GDP growth will probably be about -5.7%, much worse than during the GFC in 2009, when GDP growth registered -1.5%. Quarterly annualised growth during the first two quarters of the year will probably be shockingly negative (the numbers could test -30% to -40%). But given the global V-shaped recovery and some policy measures, the South African economy should also recover sharply during the second half.

Johann Els is the chief economist at Old Mutual Investment Group.


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