CRU Webinar: Virus to Impact Global GDP

CRU looked at how the virus is impacting the global economy in a webinar, “How COVID-19 is Affecting CRU’s Outlook for 2020,” presented last week.

China’s economy is on a V-shaped recovery aided by policy stimulus, says CRU. Workers are gradually returning to work after quarantines and production is reported to have increased to 30-60 percent of normal levels, depending on the industrial sector.

The auto industry in China has been heavily impacted as the largest producer of autos at 26 million units per year, or one-third of global supply. After two years of contraction, hopes of a recovery in 2020 were dashed by the virus.The impact on the China auto industry has wide reach globally due to the number of Chinese components that are used in auto production. Supply line disruptions due to plant closures, labor shortages and transportation restrictions will cause shortages in auto and other industrial sectors. The electronics sector is expected to be hit hard in the near term.

So far, construction delays have been an issue only in China due to labor supply. Demand for metals used in construction is also down. If lockdowns spread to other regions, such as Italy’s recent announcement, disruptions could occur elsewhere for the industry.

The airline industry has withdrawn earnings reports and fears a possible contraction as passenger volumes falls.

Financial markets have been volatile as the virus continues to spread. The Federal Reserve took the unusual action of slashing interest rates by 0.50 percent in an attempt to stabilize the economy. Last weekend, oil prices plummeted 30 percent to less than $40, compared to a peak of $69/bbl in January, triggering a 15-minute halt in trading on Monday as the Dow and S&P 500 both fell 7 percent.

Most commodity prices have fallen reflecting fear of weak demand, said CRU. Steel prices are expected to be lower globally in the short term. Gold, considered a safe haven in times of uncertainty, saw pricing increase.

CRU notes that different policy action is required for different social and economic maladies. Interest rate cuts are considered a blunt tool in the arsenal of potential actions.

A number of policy actions have been taken globally to mitigate the economic fallout from the Covid-19 crisis. In the U.S. this includes the federal rate cut, $8.3 billion in funding to combat the virus and, more recently, a proposed payroll tax reduction, increased sick leave time for hourly workers and financial assistance for the airline and tourism industries.

Based on growth of the virus and weak industrial production data, CRU lowered its global GDP forecast to 2.3 percent from 2.5 percent pre-Covid 19. CRU expects the forecast will be revised lower as new data becomes available. In a worst-case scenario, GDP could go as low as 1.5 percent, below the 2.0 percent mark accepted as a definition of global recession.

Key takeaways from the CRU webinar include:

• Fear continues to run high, and global cases are expected to rise further.

• Labor and production are resuming in China.

• Covid-19 will lower global growth in 2020.

• The extent of the downward revisions to GDP are uncertain, but a global recession cannot be ruled out.

• Some policy makers have responded, others are expected to follow.

• Monetary policy has limited effect; targeted fiscal policy will also be needed.

• Sentiment continues to drive financial market volatility.

• Commodity sectors (transport, electronics) will be hit hard in the near term.