COVID-19 to direct most G20 countries to recession

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Following the coronavirus outbreak, The Economist Intelligence Unit (The EIU) has revised its growth forecasts for all countries across the world. The results paint a bleak picture. Across the G20, all but three countries will register a recession this year. The global economy will contract by 2.2%.

The US economy will contract by 2.8% this year. The administration’s initial response to the coronavirus was poor, allowing the illness to spread quickly on US soil. In addition, just as the economic risks related to Covid-19 began to mount, the agreement between Saudi Arabia and Russia to cut oil production collapsed, sending oil prices tumbling.

The combination of the coronavirus epidemic, and the slump in global oil prices, means that investment will contract sharply this year (especially in the energy sector), and export growth will sag.

The impact on China’s economy of the Covid-19 outbreak is set to be much deeper than that of SARS. Assuming that the virus does not flare up again (we believe that new outbreaks will occur in large cities in coastal provinces in April, after migrant workers return to work), we expect China’s real GDP growth to stand at only 1% in 2020 (compared with an estimated 6.1% in 2019). The slowdown will be concentrated in the first quarter of the year, and will still be felt in the second quarter. Growth will recover in the second half of the year, when China typically produces most of its GDP.

The euro zone will be one of the hardest hit regions, posting a full-year recession of 5.9%. Germany (-6.8%), France (-5%), and Italy (-7%) will register full-year recessions. In Germany, the huge manufacturing sector (which represents a fifth of the economy) is highly export oriented, which means that the country is particularly exposed to both supply chain disruption and weak global demand. As a result, the recovery that we are expecting in other euro zone countries in the second half of 2020 will materialize much more slowly in Germany.

Agathe Demarais, The EIU’s Global Forecasting Director, notes: “The global economic picture is looking bleak, with recessions in almost every developed economy across the world. We assume that there will be a recovery in the second half of the year, but downside risks to this baseline scenario are extremely high, as the emergence of second, or third waves of the epidemic would sink growth further.” “Finally, the combination of lower fiscal revenues, and higher public spending, will put many countries on the brink of a debt crisis.”

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