Company / Analytics

Analytics, 04 April 2020

Global Recession: What it means for investors?

The world hasn’t experienced a global economic halt as we are seeing with COVID-19 for a long time. The current recession is thus different than many we’ve had in history: it was triggered by a health pandemic at a time when the world economy was stable and functioning normally.

The risk of a wave of bankruptcies and layoffs, some already happening, could undermine recovery and make the recession as bad or worse than the 2009 downturn. On April 2, Fitch Ratings reduced its baseline forecast of its Global Economic Outlook (GEO) forecasts. The Rating agency expects global economic activity to decline by 1.9% in 2020 with the US, eurozone and UK GDP down by 3.3%, 4.2%, and 3.9%, respectively. On the other hand, China’s recovery from the disruption in quarter 1 of 2020 will be sharply curtailed by the global recession and its annual growth will be below 2%.

A fall in global GDP for the year as a whole is on a par with the global financial crisis but the immediate hit to activity and jobs in the first half of this year will be worse. Normal life could resume in the second half of the year, but massive job layoffs and economic crisis will result in low business activities either due to closed business or changing attitudes.

The current recession has been triggered by a public health emergency transmitted through human interaction. As long as human interactions remain dangerous business may not return to normal, and even what was normal before may not be anymore.

Even after the virus is contained, people may be less inclined to jam into restaurants, concert halls and even go on a vacation. Some may not even have the luxury and finance to attend events or travel anymore. And these will determine how quickly some businesses and industries recover.

Financial markets have reflected the economic alarm in different ways. The S&P 500, for example, fell 12.5% in March, its worst performance since October 2008. In the commodities market, oil has witnessed the biggest oil price crash since 1992, in part caused by a geopolitical conflict between major producers, but largely due to reduced demands as a result of coronavirus.

In the midst of all this, there is hope for investors. The recession will be painful in the short term but will give way to a robust recovery as the economy rebounds. Economic activity, and life in general, cannot remain frozen for long. Once the virus is contained, people will return to offices and shopping malls, life will go back to normal and consumption will resume. Planes will fill with families going for vacations while factories will resume production.

But even then, the life that emerges in the post-crisis environment will be challenging for many. Mass joblessness will exert pressure on society and widespread bankruptcies will leave the industry in a weakened state. In the United States, more than 6.65 million people have already filed for unemployment benefits.

Almost every nation or region in the world is feeling the impact of the abrupt halt of commercial activities. In addition to the global economy, the United States, the world’s largest economy, is almost certainly in a recession. So is Europe, and probably, significant economies like Canada, Japan, South Korea, Singapore, Brazil, Argentina, and Mexico. China, the world’s second-largest economy, is expected to grow by less than 2% this year.

Governments across the world are putting in place measures to cushion the economic impact of the coronavirus. The IMF is extending up to $1 trillion lending capacity to help countries around the world that are struggling with the humanitarian and economic impact of the novel coronavirus.

We are facing unprecedented health, economic, financial, social, and geopolitical crisis – all the same time. Until a vaccine is found or the virus is generally contained, we can’t estimate for sure how long the recession will last, or how long we’ll shelter in place.

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