How to perceive global economy in middle of pandemic, recession

CAIRO – 2 October 2020: In June, the World Bank estimated that the global GDP would shrink by 5.2 percent in 2020. An official report speculated that advanced economies would shrink by 7 percent, which would have repercussions on emerging and developing economies estimated to contract by 2.5 percent. In light of these predictions, we analyze economic projections, especially in emerging countries such as Egypt.

What to Expect?

Global growth projections set by the World Bank are as follows: East Asia and the Pacific (+0.5 percent); South Asia (-2.7 percent); SubSaharan Africa (-2.8 percent); Middle East and North Africa (-4.2 percent); Europe and Central Asia (-4.7 percent); and Latin America (-7.2 percent). “These downturns are expected to reverse years of progress toward development goals and tip tens of millions of people back into extreme poverty,” the World Bank’s report indicates.

The reasons showcased as driving downturn in emerging and developing countries are the “pressure on weak health care systems, loss of trade and tourism, dwindling remittances, subdued capital flows, and tight financial conditions amid mounting debt.”

The report estimates that lifting restrictions by mid-year may heighten global growth to 4.2 percent in 2021. Yet, if restrictions prolonge, the recession will be deeper.

“Businesses might find it hard to service debt, heightened risk aversion could lead to climbing borrowing costs, and bankruptcies and defaults could result in financial crises in many countries. Under this downside scenario, global growth could shrink by almost 8 percent in 2020,” the report warns.

The most vulnerable countries are believed to be those with massive informal sectors that constitute one-third of the GDP, and around 70 percent of total employment. The report recommends that such states should come up with innovative measures that would “deliver income support to these workers and credit support to these businesses.”

Repercussions of the recession are reported to be “setbacks to potential output —the level of output an economy can achieve at full capacity and full employment —and labor productivity.” Furthermore, protective measures in developing and emerging economies are likely to experience deeper and longer recessions crippling their already slow growth.

Delving Deep

Professor of Economics at Ain Shams University Yomn al-Hamaky tells Business Today Egypt that developed and developing countries cannot be compared, given the former’s already slow growth rates. While developed countries possess a great production base and are highly efficient, developing countries are mostly inefficient, have not exploited their capacities – including human ones - to the fullest, and can be defective in management.

On another note, Professor of Economics at Cairo University’s Faculty of Economics and Political Science Ahmed Ghoneim tells Business Today Egypt that developed countries have high standards. Hence, they identify more COVID-19 infections; and subsequently, they take more measures, which in turn yield higher costs. Moreover, when a country is more effi - cient, it is likely to sustain a heavier impact, he notes, adding that developing countries already squander resources and have high unemployment rates, unlike developed countries where unemployment rises significantly when a crisis occurs.

Ghoneim further explains that the crisis in developed economies is neither financial nor driven by corruption. “It is pure supply and demand,” the professor stresses.

As for developing countries whose growth rates are not turning into negative like Egypt, East Asia and the Pacific, Ghoneim highlights the necessity of contemplating the factors driving growth. For instance, Egypt has a large domestic market while countries in East Asia and the Pacific export intermediate products that compose a crucial portion of the supply chain worldwide.

Egypt’s economy was previously expected to grow by 5.9 percent in 2020, but now the rate is estimated to be in the range of 2 to 3 percent, Hamaky highlights, saying that if the country’s non-used resources and human ca - pacity are well managed to maximum potential, the growth rate can hit 10 percent. “To achieve that, we need technology transfer, training of human resources, and efficiency of the public enterprise sector as well as the private sector. That is in addition to developing new areas away from the Nile Valley and Delta,” the economics professor asserts.

Hamaky further clarifies that an Asian economic weight on a global scale is very normal given the size of economies like China and India, and the high potential of other countries in the continent such as Indonesia, Vietnam, and South Korea.

Additionally, Ghoneim predicts globally thriving industries under the current circum - stances to be telecommunication, media, food, and pharmaceuticals as they were not originally hit. “If tourism recovers, its growth will surpass the growth of other sectors,” he argues.

As for the industries that will experience slow recovery, Hamaky perceives that aviation will take the longest time to recover since business trips will decline after the current surge in online meetings.

Recession projections

The recession has already begun, and not just because of the outbreak of COVID-19 but because of the trade war between the United States and China, and the dispute over oil prices between Russia and Saudi Arabia, Ghoneim underlines. “COVID-19 has just exacerbated the crisis,” he adds.

Similarly, Hamaky affirms that the recession already exists and that it is hard to tell when it will come to an end. “There is a status of high uncertainty, which COVID-19 highly contributed [to],” he underlines.

Speaking of Egypt, Ghoneim estimates that the most populous Arab country will experience the worst recession in its history, and that the world will be subject to a crisis that is worse than the 1930 Great Depression. He speculates that many countries will focus on self-sufficiency due to the rise of populism and the right wing.

Hamaky estimates that the focus on self-sufficiency will be concentrated in the food sector, as it is a matter of national security. The economics professor argues that countries will neither give up the concept of comparative advantage nor seize being export-oriented.

As for how long such global recession may persist, Ghoneim agrees that it is unpredictable as its aspects are not very clear. “No one can see the light at the end of the tunnel now,” he says. He also clarifies that the amount of resources on which each country depends through the crisis determines the duration for which they will hold out; moreover, developed and oil-rich countries may resist collapsing for longer. “You can consider it from a micro-economic perception. If your income decreases, you will survive on your savings until they’re over,” Ghoneim highlights.

Concerning Egypt, the economy professor underlines that the government was generous at the beginning of the pandemic when it comes to levying the economic impact. Now, higher fees are being imposed on certain public services. That is because the debt-to-GDP ratio is quite high. According to Trading Economics, the ratio in Egypt is 90 percent. According to Investopedia, when the rate exceeds 77 percent and 64 percent in developed and developing countries, respectively, for a prolonged period, growth is crippled by 1.7 percent in the former and 2 percent in the latter for every percentage point of debt above those levels.

Vulnerable Sectors

The World Bank report underlines that ex - porters of energy and industrial commodities will experience a decline. The pandemic sent demand on oil to dive incurring a crash in oil prices. Also, demand for metals and transport-related commodities such as rubber and platinum used for vehicle parts has plummeted.

Yet, agriculture markets do not suffer from any shortages on a global scale, although trade restrictions and supply chain disruptions may compose a threat to food security in some countries.

CNN cited Statista projections on the impact of the decline in tourism on GDP. The top three countries to experience decline are Mexico, Spain, and Italy given the industry’s large share in GDP, standing at 15.5 percent, 14.3 percent, and 13 percent for each respectively, according to the World Travel & Tourism Council (WTTC) figures in 2019.

Brookings further estimates that the most vulnerable sectors in the United States are mining/oil and gas, transportation, employment services, travel arrangements, and leisure and hospitality. The pandemic also took its toll on the retail industry specifically, which has al - ready been struggling due to competition with online shopping. The crisis also included the culinary industry, in addition to entertainment venues like cinemas and gyms.

After the expiry of a federal emergency policy offering U.S. citizens $600 per week, former U.S. Labor Secretary Robert Reich told The Financial Times in August that it “will push tens of millions of Americans into, or uncomfortably close to, poverty. They won’t have the money to buy billions of dollars worth of goods and services. As a result, the entire economy will suffer. Small businesses will continue to suffer the most because they’re already pre - carious.”

According to a preliminary estimate from the Bureau of Economic Analysis by measuring the size of bankruptcies, the U.S. economy shrank at an annualised rate of 32.9 percent in the second quarter of 2020, the highest in postwar history, as reported by the Financial Times.

Additionally, the United Kingdom was the most influenced among the OECD countries between April and June as it suffered a contraction of 20.4 percent compared to a 9.8 percent contraction sustained by all 37 OECD members together, according to the BBC. Spain came second in the list of 18.5 percent decline. It is noted that their maximum drop occurred in 2009, with 2.3 percent.

The G7 and the eurozone experienced contractions of 10.9 percent and 12.1 percent. France, Italy, Canada, and Ger - many witnessed falls at 13.8 percent, 12.4 percent, 12 percent and 9.7 percent, respectively.

The unemployment rates jumped in the United States to 10.4 percent from 3.7 percent; Italy jumped to 12.7 percent from 10 percent; France went up to 10.4 percent from 8.5 percent; Canada jumped to 7.5 percent from 5.7 percent; the United Kingdom went up to 4.8 percent from 3.8 percent, Germany to 3.9 percent from 3.2 percent, and Japan to 3 percent from 2.4 percent, as reported by the IMF in June.