The coronavirus problem has revealed the imbalances in the global economy. If it hadn’t been for the coronavirus something still would have to have been done to deal with the risk of recession. But now the majority of world powers have an excuse to do it in a coordinated and synchronized manner. Alexander Losev, general director of the Sputnik Capital Management Asset Management Comp., explains how they will do it in this analytical article.
Entering Global Recession
The global economy approached 2020 in less than ideal shape: a slowing of economic growth rates, a decline in investment activity and the growth in global debt that has already reached an astronomical $20 trillion.
In the fall of 2018 the Group of Thirty wrote in its report
“Managing the Next Financial Crisis: An Assessment of Emergency Arrangements in the Major Economies” that a new global crisis was inevitable and the next crisis “may emerge in unexpected ways from unexpected sources of systemic risk.”
The provision of monetary incentives to central banks, and low interest rates, which lasted for over a decade has weakened the immunity of the financial system and has led to stock market and derivatives bubbles.
The risk of global economic recession (decline in production and zero GDP growth) was obviously increasing already in January 2020. This was borne out by the debt problems of the Chinese economy, the reduction of industrial production in Germany, Japan and South Korea in the fourth quarter of 2019, and a drop of the Baltic Dry Index from September that reflects the cost of dry cargo shipments by sea on 20 main trade routes.
The spread of the coronavirus that has led to tough quarantine measures in the majority of countries and the shutdown of entire industries and services has accelerated and aggravated all of these negative processes. The global economy is now experiencing a dual supply and demand shock. The global financial crisis has become a reality in 2020: company assets, as well as individual savings and sovereign funds are burning on stock exchange markets. The global stock market lost $30 trillion in capitalization by middle March.
Regrettably, the reduced revaluation of all global assets has further aggravated the imbalances and problems of a global economy that is barely coping with the test for its endurance by the global spread of the COVID-2019 coronavirus. Without resolute and coordinated actions by the governments and central banks of major countries, the restoration of markets will be short-lived and a new wave of panic and sales will not be long in coming.
Since China is already restoring its companies’ operations after the quarantine, the answer to the question of how long it will take the global economy to overcome the recession depends on the actions of the advanced countries that are linked with China through commodity, production and financial chains. The coronavirus problem has revealed the main imbalances in the global economy. If it hadn’t been for the coronavirus something still would have to have been done to deal with the risk of recession. But now the majority of world powers have an excuse to do this in a coordinated and synchronized manner.