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Economies face extreme headwinds

Global economies were already not at their healthiest when Covid-19 arrived to shut down cities, curb trade and restrict travel. Now, economic warnings from around the world are being issued making the 2020 outlook rather bleak. Consequently, those reliant on healthy economies to drive world trade now need to batten down the hatches.

Singapore announced a raft of support packages in its budget this week to shore up its economy against the impact of the Covid-19 outbreak. A total of S$800 million has been allocated to fighting the spread of the virus and two economic support packages totalling S$5.6 billion will support businesses and consumers. Singapore has reported one of the highest numbers of Covid-19 infections outside China, with 75 confirmed cases as of Sunday noon, according to its Ministry of Health.

But while the packages were welcomed, they were not good enough to mask a downgrade in the country’s annual GDP: Singapore’s Ministry of Trade and Industry pulled its growth forecast range down to between -0.5% and 1.5%. Previously the forecast for growth was between 0.5% and 2.5%.

The Singapore economy grew by 1% in the fourth quarter of last year and 0.7% for the whole of 2019, the ministry said.

“In China, GDP growth in 2020 is expected to come in lower than earlier projected due to lower household consumption as a result of the lockdowns and travel restrictions implemented in several major Chinese cities to contain the spread of the virus,” said the ministry.

“These developments in China will, in turn, have a knock-on impact on regional economies, including the ASEAN economies, through lower outbound tourism and other import demand from China, as well as disruptions to supply chains.”

Japan, meanwhile, is said to be heading for a recession this year after reporting a drop in output at the end of 2019, which is expected to pull down growth in the current quarter and into the next. Its economy declined by an annual rate of 6.3% during the last quarter of 2019. A technical recession is defined as two consecutive quarters of falling output.

Financial reactions

China, the epicentre of the Covid-19 crisis, is also reacting to temper a hit on its economy. The Chinese Central Bank has cut interest rates on its medium-term loans to national banks. It has also moved to inject liquidity into the financial system, buying securities on the financial market worth 100 billion yuan. However, Moody’s Investors Service has still lowered its growth forecast for China from 5.8% to 5.2% for 2020, reflecting “a severe but short-lived economic impact, with knock-on effects for economies across the region”.

Outside of Asia, international trading partners are preparing for the worst. Germany faces the triumvirate of falling Chinese trade, Covid-19 impacts and weakened consumer demand.

Germany’s central bank, the Bundesbank, has issued a warning around a continued fall in orders across the country’s major industrial sectors.

Analysts from Moody’s have forecast that Germany might only hold its 1% growth rate this year.

In South Africa, forecasts for economic growth have been lowered, largely due to domestic challenges rather than external factors such as Covid-19.

Weak industrial activity in in the country is being dragged down by low business and consumer confidence. Recurring power outages have also hit manufacturing and mining output. Moody’s predicts that GDP growth will be just 0.7% in 2020, down from 1%, followed by growth of 0.9% in 2021.

Weather worries

While those forecasts give a hint of immediate international trade prospects, there are long term threats on the horizon that also hang heavy over global economies.

A recent World Wildlife Fund study of 140 countries, Global Futures, has calculated the economic cost of nature’s decline. It found that if the world carries on with “business as usual,” the US would see the largest losses of annual GDP in absolute terms, with $83 billion wiped off its economy each year by 2050 – an amount equivalent to the entire annual GDP of Guatemala. Japan and the UK also stand to lose $80 billion and $21 billion every year respectively.

The projected economic losses in the US, Japan and UK are due largely to expected damage to coastal infrastructure and agricultural land through increased flooding and erosion as a result of losses of natural coastal defences such as coral reefs and mangroves.

Another piece of research, this time from Nature Energy, warns of the detrimental effects of extreme weather on global economies, and goes so far as to warn of a massive economic recession.

The Nature Energy paper found that financial markets that countries are not taking seriously enough the risks that extreme weather events pose to the economy.

“If the market doesn’t do a better job of accounting for climate, we could have a recession — the likes of which we’ve never seen before,” the study’s author, University of California, Davis accounting professor Paul Griffin, said in a statement.

So while economists attempt to make sense of the mire that countries around the world currently find themselves in, there is a need to cast nets further to really appreciate the ominous predicament that the global economy is facing.
Source: Baltic Exchange

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