The Current State of the Coronavirus Economy
As of the 17th of July, neither the Bank of Canada nor the United States Federal Reserve has been able to release a public statement specifying the long term effects of this outbreak on the North American economy, but economists around the world have devised that some estimates and assumptions can be made about long-term effects of the coronavirus on the global economy.
Economists from the Fed, Goldman Sachs, and Morgan Stanley have all strongly believed since mid-march that a recession is likely inevitable, with US stocks hitting an all-time low since 1987. While many North American economists stated that contraction of the American and Canadian economies are unlikely, they have now changed their positions, predicting a disastrous Q2 for the global economy. At this point, it is no question that the outbreak, combined with the sharp decline in global oil prices, has decimated the world economy.
Due to public health concerns, as of April 1st, all provinces and states have officially entered quarantine, closing all non-essential businesses. As a result, in the United States, over 22 million new people have now filed for unemployment during the outbreak. It should be noted that this number was significantly higher than what economists had originally predicted, surpassing the estimation of 17 million new applicants by mid-April. Unsurprisingly, Canada is also facing near record-high unemployment, having lost 1 million jobs in just the month of March, the biggest drop since 1976. For the North American economy, this job loss has destroyed all the gain in jobs since the Great Recession.
While America has been deeply affected by the virus, Canada, experts predict, will take an even greater blow to its economy. The IMF has predicted earlier this week that the global economy will face the worst global recession since the 1930s, with the global economy shrinking by 3.0%, a drop 30 times bigger than the drop in 2009. While this figure may seem disastrous, Canada’s economy is predicted to shrink by more than double the figure, at 6.2%. Similarly, the United States will face a drop of 5.8%, the European Union 7.5%, Italy 9.0%, and 6.5% in China, marking the first contraction for China in decades.
As a result, central banks around the world have been taking action to lessen the impacts of the outbreak on the economy. Global interest rates have been plummeting to near all-time lows, with the United States Federal Reserve having slashed rates to a range between 0% and 0.25%. The Bank of Canada, despite keeping interest rates constant at 1.75% for 9 meetings in a row, making the country one of the world’s only central banks that refrained from cutting rates in 2019, has similarly made an unprecedented cut, down to 0.25% in March.
While the world’s central banks have not been making long term predictions of the outbreak’s effects on the economy, the IMF has come forward and predicted that by 2021, the economy will likely stabilize and see tremendous growth. The report produced by the IMF states that 2021 is predicted to see a global economic growth of 5.8%. While this is a very optimistic outlook for 2021, the report also states that prospects for a rebound next year are clouded by uncertainty. To make matters worse, a newer report from the IMF confesses that these prospects are becoming increasingly unlikely as the outbreak continues.
While the global economy could see growth in 2021, the outbreak could also cause an unprecedented global debt crisis as a result of uncontrolled government spending aimed at relieving the effects of the coronavirus on the economy. Early April, the United States Congress has recently devised an economic stimulus bill that would cost 2 trillion USD throughout the year 2020. The current US spending budget, before any government spending as a result of the virus, runs on a 1 trillion dollar deficit. If the US economy does shrink by 5.9% as expected and the bill is passed by Congress, the United States could have a 134% debt to GDP ratio. This ratio surpasses the number held by Greece at the time of its financial collapse, which was 126%. The major concern is that the United States will not be the only country that will be massively buried in debt as a result of the outbreak. While it still remains unclear just when people can return to their daily lives, one thing has proven itself to be evident: The coronavirus outbreak has plunged the world economy into the worst state in decades.
