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Coronavirus causing worst contraction since great depression

Economic data is showing one of the sharpest declines in economic activity since WWII but economists are reasonably optimistic of a quick recovery

The global economy is estimated to contract 4.4 percent this year, the worst contraction since the great depression according to analysts.

The US economy is currently expected to contract by 6.2 percent while the UK economy will shrink by 7.4 percent. Even the Chinese economy is expected to contract by 2.2 percent, the first contraction since economic reforms were initiated in 1978.

Speaking on a webcast about the economic assessment of coronavirus, Sohaib Shahid, International Senior Economist at TD Bank Group, said: “Our view has been downgraded over time, reflecting the emergence of a second pandemic wave in certain Asian economies, poor high frequency indicators from across the world and unrelenting risks within emerging markets.”

Advanced economies will see a larger output drop this year, with advanced economies currently predicted to contract 6.5 percent, developing economies are predicted to contract by 2.9 percent. On the assumption economic activity begins to resume in the second half, TD expects the global economy to grow 6.8 percent in 2021.

“The service sector was single handily supporting the global economy, while the manufacturing sector was showing recessionary symptoms. Unlike the last cycle, the service sector has been the biggest victim of this pandemic”, Shahid said.

“Manufacturing is interesting because its resilience and potential retooling for the pandemic suggest it may hold onto its resilience more that services. We will likely see a break from history where instead of manufacturing acting as the leading indicator of recovery it would in fact be the service sector.”

Governments across the globe have undertaken one of the most extensive fiscal packages in order to counter the economic fallout of coronavirus. In the US and Canada, coronavirus fiscal spending amounts to 10.3 percent and 12 percent of GDP respectively. In Europe that amount is even higher. The UK’s fiscal package is worth 17 percent of its GDP while Germany’s response spending is valued at 36 percent of GDP.

Shahid said that a lot of focus will be on Europe to see how European government finance these support programs.

“Once this crisis is over and the dusts settles, depending on the [European] country we’re looking at, some of these countries may go through some debt sustainability issues.

“I personally believe [they’ll be an increase in taxes] this is because they are spending a lot today and they need to make up for the lost revenue. Once this crisis is over, we can expect an increase in taxes at least in Europe”.

The world’s largest economy

In the US, forecasts based on the assumption that lockdowns will last until May see a rebound in both economic and job growth in June. However, GDP is not expected to reach Q4 2019 levels until the end of 2021 or the first quarter of 2022. In addition, 10-year yields on US bonds are expected to remain below one percent until 2021.

“With much of the shock concentrated in services sector, some [economic] activity just won’t be recouped”, said Leslie Preston, US senior economist at TD.

“For example, demand at hair salons will likely be off the charts after weeks of physical distancing but people will not be getting more haircuts, some activity will just be lost.”

Current estimates put a peak unemployment rate of nearly 19 percent in April with current forecasts predicting the Q2 US unemployment rate to be 16.5 percent.

Preston cautioned that these number have a degree of uncertainty because many businesses have decided to mothball and few of the newly unemployed will be looking for work, which may classify them as ‘out of the labour force’. She said the sliver of goods news coming from unemployment data was that most job losses seemed to be temporary.

“The vast majority of increase in unemployment was in temporary layoffs and furloughs. Comments in the latest beige book, have businesses hoping to reverse layoffs once activity returns to normal.”

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