Coronavirus Pandemic: Latest Update (April 14, 2020)

As the total number of Covid-19 soared past the grim milestone of two-million this week, new economic developments gave us a clearer picture on how the future will look like.

The news is not good, at least if one prefers the guidance of multilateral institutions over the performance of the markets.

On Tuesday, the International Monetary Fund announced that the world faces the worst recession since the Great Depression - with the global economy contracting 3 percent this year as countries shrink at the fastest pace in decades. The crisis could erase $9-trillion off global GDP over the next two years.

”It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago,” said the IMF’s Gita Gopinath.

For example, while the UK economy pre-virus was expected to record 1.4 percent GDP growth in 2020, it will now shrink by 6.5 percent. The US economy is expected to contract by 5.9 percent and unemployment will jump by more than 10 percent.

While the IMF said a rebound of 5.8 percent growth is expected in 2021, it “assumes the pandemic fades in the second half of 2020 and that policy actions taken by countries are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains.”

I applaud efforts by countries such as the US and Canada to fund emergency health needs, support economic activity and to provide ordinary people with a stronger social safety net. However, if the pandemic continues to keep large sectors of the economy closed, one wonders how long elected leaders can continue to spend without printing more money.

Meanwhile, in China - where the virus originated and where the key epicentre is beginning to roar back to life - the economy will expand by just 1.2 percent this year. The slowed growth could be a liability for the ruling Communist Party: economic contagion from Covid-19 could trigger unrest in various parts of the country.

Italy Caves In

Last week, the European Union’s Europgroup announced a comprehensive economic policy in response to the Covid-19 epidemic - calling it “an unprecedented challenge with very severe socio-economic consequences.” The package contains loans and lending support amounting to 1 percent of GDP, or 120-billion euros for 2020. Limits on EU member state’s government spending and borrowing have been suspended for now.

As one of my Wall Street friends wrote to me: “The EU has put together a deal to save Italy in order to save the EU and Italy normally would balk at the terms. But Italy is in a state of shock because of COVID-19, so it folded.” He added that the bottom line is that Italy has always been the weakest, most dysfunctional economy  in the EU (next to Greece). The difference is that, unlike Greece, Italy is so large that it can bring down the whole EU if it fails. Germany, has always been the economic savior of the EU, but Merkel is on her way out. 

So far, Italy, one of the worst hit countries globally from Covid-19, has pledged 25 billion euros to Italian firms and families.