| WORLD ECONOMIES REOPEN TO A NEW KIND OF NORMAL |
After almost two months of lockdown, most countries are eager to get back to some form of normalcy.
China, the world’s second largest economy, and the first to get out of the lockdown and restart its economy, is a good indicator of what the rest of the world can expect in terms of recovery.
The Chinese economy contracted by 6.8% year on year in the first quarter, its deepest fall since 1976 and year-on-year inflation remained elevated at 4.9%. However, the overall labour market and balance of payments were basically stable. The country’s CNY index, which measures the value of the currency against a basket of currencies, had appreciated by 2.92% in the first quarter.
It is clear that the economy will require more fiscal and monetary stimulus. In May, the People’s Bank of China (PBoC) released its 1Q20 monetary policy implementation report, which highlighted the support measures introduced during the quarter and the direction of the monetary policy going forward.
The removal of the phrase “no flood-like stimulus”, which was present in the fourth quarter of the 2019 report issued in February, suggests that China may be prepared to step up its monetary policy support to aid economic recovery.
Meanwhile, European countries are also looking to ease restrictions and slowly resume economic activity.
The European Union saw a 3.5% decline in the first quarter, according to Eurostat, the statistical office of the European Union. These were the sharpest declines observed since time series started in 1995. In March 2020, the final month of the period covered, COVID-19 containment measures began to be widely introduced by member states.
In tandem, the European Central Bank said it is easing credit conditions and banks’ access to ultra-cheap liquidity in order to support the economy during the crisis. While there were no tweaks to the asset purchase programmes, ECB president Christine Lagarde offered ample signals of her willingness to act, if needed.
In the United States, the Congressional Budget Office (CBO) expects the country’s real GDP to contract by about 12% during the second quarter, equivalent to a decline at an annual rate of 40% for that quarter, while the unemployment rate will rise to 14%. The world’s largest economy contracted 4.8% in the first quarter.
“In the third quarter, economic activity is expected to increase, as concerns about the pandemic diminish and state and local governments ease stay-at-home orders, bans on public gatherings, and other measures restraining economic activity,” CBO said in its April report. “However, challenges in the economy and the labour market are expected to persist for some time. Interest rates on federal borrowing are expected to remain quite low in relation to rates in recent decades.”
In addition, a flare-up in the US-China trade relationship is adding to global risks.
"The dispute has implications for growth," said S&P Global Ratings chief economist Shaun Roache. "US officials have remarked that COVID-19 has encouraged them to redouble efforts to reduce supply-chain dependency on China.”
US president Donald Trump has also suggested that Washington could impose additional tariffs on Chinese imports and has continued to tighten rules governing the transfer and trade of technology products.
REGIONAL OUTLOOK
Like the rest of the world, most Gulf and MENA states have enforced strict measures and rolled out stimulus packages to withstand the impact of the virus, which has sapped investor and consumer sentiment.
With oil prices falling more than 50% this year, a number of oil-dependent MENA economies are feeling a greater impact as they try to support their citizens at a time of anaemic growth.
The International Monetary Fund believes the economic impact will be substantial, with the region contracting in 2020 by an average of 3.1%.
“Most countries have revised growth down by more than 4 percentage points in one year, equivalent to removing USD 425 billion from the region’s total output,” the IMF said. “For nearly all countries, these revisions are higher than those seen during the global financial crisis in 2008 and the oil price shock of 2015.”
Collectively, the Gulf region has allocated more than USD 100 billion to mitigate the impact of the coronavirus, led by Saudi Arabia. This amounts to nearly 30% of GDP in Bahrain and Oman, more than 10% of GDP in Kuwait, Qatar and the UAE and around 8% of GDP in Saudi Arabia, according to Fitch Ratings.
“Fiscal policy in the GCC tends to be pro-cyclical with the oil price, but consolidation this year will be hampered by and deepen the recession in the non-oil economy stemming from measures to contain the coronavirus outbreak,” Krisjanis Krustins, a director at Fitch Ratings, said in a report. “We forecast a non-oil recession ranging from a decline of 1% in Kuwait to 5% in Oman.”
Dubai also postponed its six-month World Expo 2020 event, which was set to start in October. The event, being held in the Middle East for the first time, was expected to generate robust economic activity in the country and cascade across the wider region. The showcase event is now expected to be held in October 2021.
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