A major role in this was played not only by coronavirus, but also by problems in the capital market.
A global recession has begun because of declining business activity, 31 out of 41 economists surveyed by Reuters said. Their forecasts of GDP dynamics vary from -2 to +2.7% in 2020, the median is +1.6%. The IMF considers the global recession an increase of less than 2.5%.
Over the past month, analysts have repeatedly worsened forecasts. Now the basic scenarios are considered, which were considered as the most pessimistic, Reuters writes. According to Eaton Harris of Bank of America, there will be a decline in the US and the eurozone this year, while China’s GDP will grow by only 1.5%, this year’s crisis will be comparable to the recessions of 1982 and 2009.
Q2 will be truly terrible, analysts agree. “Apparently, US GDP will decline by 10%, but even this is an optimistic forecast”, writes James Knightley, chief economist at ING. And Goldman Sachs expects the collapse of GDP in April-June by 24% in annual terms; this is not comparable even with the record I quarter of 1958, when it was minus 10%.
Since April, when a significant part of transport will not work in the main economies of the world, the agreement of the OPEC and non-OPEC countries on limiting oil production ceases to apply; Saudi Arabia and Russia have promised to increase the supply.
There is no recession without rising unemployment, said Jon Trisi, publisher of the Fuller Treacy Money Investment Newsletter. On Thursday, the US Department of Labor announced a weekly increase in the number of unemployment claims by 281,000 (a week earlier – 70,000), this is the fourth largest value since 1967. The data reflect the situation two weeks ago, recalls Tricey, then the companies just started to cut staff, still there was no quarantine in the states of New York and California. So, says Trisi, the only factor holding back the jump in unemployment data will be the inability of accounting systems to handle applications.
On March 26, may appear data on 2 million applications, expect Goldman Sachs and ING. The record was 695,000 applications – in October 1982, Knightley recalls, in the next couple of weeks it will be in the region of 1 million.
JPMorgan Chase expects a loss of 7-8 million jobs, and then some people will return to work if the economy begins to recover.
Of those who do not lose their jobs, many will lose their earnings. Since April, Marriott International, for example, will send thousands of employees around the world on forced leave for 60-90 days, although in the USA they will receive 20% of their salary.
“The financial damage [from the coronavirus] is greater than after the terrorist attacks of September 11, 2001 and during the 2008-2009 crisis combined”.
And neither growth nor decline
The Institute of International Finance (IIF) lowered its forecast for world GDP growth from 2.6% to 1.6% two weeks ago, but the picture has changed radically since then, his report said. The OPEC and non-OPEC price war destabilized an already fragile situation, and a sharp drop in oil prices and the uncertainty due to coronavirus led to a sharp stop in capital markets, IIF writes: a new forecast for world GDP growth in 2020 is 0.4%.
In the USA, IIF expects a decline in Q1 and Q2 of 0.8 and 8.9%, respectively, for the year – by 0.4%. Eurozone GDP will decline by 2.8% over the year, Japan – by 1.5%, and China will grow by only 3.5%.
The main argument in favor of recovery in the second half of the year – the pandemic will subside, the fear factor that holds back global demand will fade. But due to a sharp stop, recovery will be slower. Therefore, the risks of decline and uncertainty in the forecast remain, writes IIF.
Over the past two weeks, IIF has recorded an unprecedented outflow from emerging markets (mostly not from China), stress in the US credit market and a lack of dollars in regions of the world.
Viral shock in China in the first quarter turned into a shock for the rest of the world, which will fully manifest itself in the second quarter, expects IIF.
Investors sell everything to get money. Even safe assets no longer haven during a market crash.
Even safe bonds, such as long-term bonds of the USA and Germany, fell along with stocks. Bond funds recorded record outflows. Companies and investors around the world bought up dollars, which led to a strong drop in the exchange rates of both developing and developed countries. Gold has fallen in price. Nobody wants to own anything but money, it causes new sales of assets, says Liz Young, director of market strategy at BNY Mellon Investment Management.
The inflow of funds to the funds of the US money market (an analogue of investments in cash dollars) amounted to $95 billion for the week to March 18, and a week earlier – a record $136 billion, according to EPFR Global. Assets in them reached $3.8 trillion, slightly less than the maximum of $3.9 trillion at the beginning of 2009, IIF writes: running out of money reduced liquidity in market segments with riskier assets and made the process of determining fair prices even more difficult.
Some dealers stopped issuing emerging market bond quotes, according to The Wall Street Journal (WSJ). The outflow from the funds of these instruments for the week of March 18 amounted to a record $18 billion, and the previous week’s record of $7 billion was broken.
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Growth in bond yields of developing countries and devaluation will greatly complicate the refinancing of dollar debts, which in developing countries are at a record $5.8 trillion.
The low cost of loans has led to their unprecedented growth since the 2008 crisis worldwide. “I was always worried that having corporations with too much debt would aggravate the economic downturn, no matter what it caused,” warned former Fed Chairman Janet Yellen in an interview with WSJ.
The outflow from mutual and exchange-traded bond funds in the world over the past week amounted to a record $109 billion, according to EPFR. Of particular concern to analysts are the situation in the bond sector with a speculative rating and the expected sharp increase in the number of “fallen angels” - companies that have lost investment grade rating. Since the end of February, the yield on speculative-rated bonds in the United States jumped by an average of 4.2 percentage points (pp), with investment - by 1.3 pp. The worst situation is for small business borrowers, IIF notes, spreads their bonds soared to 12 pp, followed by energy (at 10 pp) and airlines (about 8 pp).
The average yield on corporate bonds with the highest speculative rating (BB) rose to 7.75% from 3.63% in January. But almost 10% ($320 billion) of bonds with the lowest investment rating (BBB) have even higher returns. “We see sales in anticipation of the problem of the “fallen angels”, says Trisi.
All this will complicate raising new funds or refinancing debts by companies, local authorities and other borrowers, who are already in a difficult situation due to the shock in the economy provoked by coronavirus, a collapse in the stock and oil markets, warns Mohamed El-Erian, senior adviser on economics Allianz.