28 April, 2020
World Recession Likely to Begin in Q2 and Q3 This Year
A world recession looks
likely to begin in the second and third quarter of this year, depending
on how quickly China and developed countries bring Covid-19 under
recession will be more severe than that of 2008/2009. However, the
liquidity of global central banks might enable the world economy to
emerge from the crisis "not completely broken," with many companies and
jobs saved in the process.
These are some of the observations of Nedbank Chief Economist Nicky Weimar, in an interview
with the Dolphin Bay Brief on the economic outlook for South African and the world.
are currently at the risk-averse stage, in which investors flee
emerging markets for those in developed economies, seen as safer, Nicky
said. However, there is a possibility that once the dust settles and the
blind panic passes, investors will start to search for yield again.
"When this happens, emerging markets like South Africa, with deep and liquid financial markets, stand to benefit most."
current estimates are for China's GDP to contract by 10-15% in the
first quarter and Europe's and the United Kingdom's GDPs to shrink by
over 20% in the second quarter, then by another 10% in the third
these estimates turn out to be a fair reflection of the impact of
shutdown, then a global recession is unavoidable.
liquidity provided by global central banks will not mitigate the impact
on the real economies of the world during shutdown. It will, however,
provide the liquidity necessary to cushion the financial fallout,
hopefully helping to protect the capital of listed companies and
enabling the banking sector to support its clients - households and
businesses - with their cashflow problems during the disruptions.
smaller businesses and jobs will be lost in the fallout, but hopefully
the slide will not be so deep that all capacity is destroyed."
where Covid-19 originated, is ahead of the curve in controlling the
outbreak, Nicky observed. "The country has declared success. Factories
and shops have reopened, and cargo trade has resumed. Social distancing
is still in
place and there have been a few cases of imported corona, but overall
life appears to be returning to normal in China."
However, infection rates are growing elsewhere.
economic recovery off a low base is anticipated late this year. It is
important to state, however, that nobody really knows the quantum
effects of shutdown, or how long it will take the world to end the
spread of the virus."
on the likelihood of a full-blown global depression, Nicky said,
"Anything, of course, is possible. The debt burdens of both advanced and
emerging economies were high, inflated by interventions during the 2008
crisis, before Covid-19 broke out. I would, however, venture a guess
and say that what we are more
likely to see when we emerge from a recession is a short-term rebound, a
relief rally if you like, followed by a moderate loss of momentum and
relatively modest growth in the years ahead."
South African government has little fiscal space to manoeuvre. It could
consider a short-term reduction in certain taxes, but overall, its
focus should be on reprioritising spending towards health care and
preventative measures, which, by and large, it is already doing. "Of
course, a country like SA will never be quite as efficient as China or
Germany in containing the spread of the virus. Most of the heavy
lifting at this stage is being done by the Reserve Bank (SARB)."
SARB cut the interest rate by 1% in March this year in response to the crisis. In a second
emergency response, which saw the bank move its May meeting to April, it cut the rate by another 1% to a record low of 4.25%.
has also injected substantial liquidity into the money and bond
markets. "This alone will help the banking sector steer clients through
crisis," Nicky said.
commented that "things can only reach a new normal." As Finance
Minister Tito Mboweni has said: "Ideology has gone out of the window."
commentators have observed that this is the perfect opportunity for
President Cyril Ramaphosa to push through unpopular reforms, especially
regarding the bailouts and futures of state-owned enterprises. "Many of
us are hoping he doesn't squander the
opportunity," said Bertus.
economic downturn in emerging economies, and most markedly South
Africa, is driven largely by confidence and sentiment, Bertus said.
"Apart from financial markets showing losses, nothing has changed except
people's confidence in future earnings. This lack of confidence is
creating a self-fulfilling prophecy in a way. If the markets took a
long-term view, acting not out of fear but looking at the real value of
investments, it would provide support to the economy."
Source: Dolphin Bay Chemicals