As geopolitical tensions between the East and West rise, sanctions and souring relations could have lasting impacts on business globally.
While these forecasts can vary wildly, economists are unanimous in their warning that we are headed towards a deep global recession.
What is less clear is whether this will be a short, sharp shock to the global economy or a protracted recession.
In this article we explore the current state of the global economy and the hurdles that may shape the type of recovery we can expect to see.
The road to recessionSo far every major economy has suffered from a contraction of growth in the first quarter of 2020 as the lockdowns introduced in an attempt to halt the spread of the coronavirus greatly restricted economic activity.
Analysts are expecting a far more dramatic downturn in the second quarter given most lockdowns weren’t put in place until the last few weeks of March.
James Smith, an economist at Dutch Bank ING warns:
‘This is clearly just the start. Don’t forget these lockdowns were only brought in at the end of the first quarter, so the second-quarter numbers are going to be just as bad.’
The inevitability of a second quarter of contraction in most country means we have already entered a global recession.
Tough times ahead?While economists are confident the global economy will recover from the coronavirus crisis, they are split on how long this might actually take.
The most optimistic of economists predict a V-shaped recovery, with hopes that the lifting of lockdown measures will facilitate a sharp rebound in growth, potentially returning to its pre-pandemic baseline by the end of the year.
However, the general consensus is that we are facing a U-shaped recovery. This will see a longer lasting slowdown as a result of extended social distancing measures and a much more gradual return to pre-COVID-19 levels of growth.
Smith predicts it could be a couple of years until the economy is back on track.
‘Such is the scale of the crisis we are seeing at the moment, the recovery’s going to be very slow. At ING we don’t expect the likes of the Eurozone or the US or the UK economies to regain the size of where they were before the virus until say 2022 or later. It’s going to take a lot of time to pick up the pieces.’
Potential economic hurdlesWith most stores closed as part of lockdown, the high street has been brought to its knees in recent months. However, it’s the pandemic’s lasting impact on consumer spending that is proving particularly worrying for businesses.
Even with restrictions easing and shops reopening, most analysts are expecting only a trickle of consumers to return to the high street. Not only are people likely to remain wary of potential infection, but the online retail boom witnessed since the start of the crisis is likely to have converted many shoppers to ecommerce long term.
This is not to mention the lengths that businesses are going to have to go to maintain social distancing rules, which will greatly reduce footfall and could, in some instances, require a complete rethink of how the business operates.
Another issue is that many shoppers have less to spend as they find their budgets squeezed by layoffs and furloughing, not to mention the pandemic’s long-term implications for wage growth.
At the end of 2019, with the UK nearing full employment, wage growth had just started to return to levels seen before 2008’s financial crash. Now with massive layoffs and many companies struggling financially it’s likely we will see wages stall once more.
What’s being done to support the recoveryOf course governments haven’t been taking the coronavirus crisis lying down and many have implemented unprecedented spending in order to protect jobs and support the economy.
Since the start of the pandemic we have also seen major central banks move to slash interest rates to record lows and vastly increase their bond buying programmes in order to support massive government borrowing.
However, despite government measures to limit the impact of national lockdowns, it's inevitable that not all businesses will survive and those which do may be far leaner than before the crisis.
Now the focus will turn to what governments will be doing to support the economy now we are approaching the other side of the outbreak.
So far the EU appears to be ahead of the pack, with the reopening of much of Europe coinciding with the EU’s proposals for an ambitious €750bn coronavirus relief fund, which is designed to support a speedy recovery through grants and loans.
Expect more countries to follow suit in the weeks and months to come as they seek to prepare businesses for the ‘new normal’.
Ultimately however, this crisis is likely to have been the catalyst for a recession the likes of which the world has never seen before. The impact of the extraordinary lockdown measures could be felt for years to come, even once the global economy returns to its post-COVID trajectory.
Additionally, with concerns rising about a second wave of the coronavirus, it’s important for businesses that trade internationally to prepare for further volatility in the currency market.
Now is the time to:
- Look at your current strategy performance
- Reconfirm your risk view & exposure
- Adjust strategy / roll hedges, where necessary and possible
- Ensure your current hedging flexibility still works for you
- Free up any needed liquidity
- Contact a hedging expert to discuss what is available to you in more detail
Contact our team on [email protected] or call +44 (0) 20 7847 9400 to find out more.
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