"Corona-Triggered Global Shock to Last Until Year-End"... Economic Recovery Drifts Away

[Image source=EPA Yonhap News]

[Asia Economy reporters Hyunwoo Lee and Hyunjin Jung] The economic shock caused by the novel coronavirus infection (COVID-19) is hitting the world hard. The COVID-19 fear that drove the US stock market into a panic last week has now swept through Asian markets this week. As the spread of COVID-19 in the US, Europe, and other regions shows no signs of abating and is prolonging, the worst-case scenario predicted by global investment banks (IBs)?that the economic recovery timeline will be delayed?is gradually coming true. With the prevailing view that the COVID-19 situation has effectively reached a pandemic state, it is widely expected that the demand shock will continue until the end of the year.

On the 8th (local time), global consulting firm McKinsey & Company released a report analyzing the economic impact of COVID-19 under various scenarios, predicting that in the worst case?where COVID-19 reaches a pandemic state and a recession occurs?the potential demand shock will persist until the end of this year. McKinsey prepared stress tests for three scenarios, considering the simultaneous occurrence of a pandemic and recession as the worst case. The recession triggered by the epidemic spread and stock market crash is increasingly becoming a reality.

◆ Is the worst-case scenario becoming reality? = The market has been anticipating economic impacts based on scenarios since COVID-19 first emerged in China in December last year and has continued to spread, increasing confirmed cases. The faster COVID-19 is contained, the less impact it will have on the economy. The problem is that since the end of last month, the virus has spread to Europe, the US, and Latin America, prolonging the crisis.

Through the worst-case scenario outlined in the report, McKinsey stated, "Even if economic activity in China, excluding Hubei Province?the epicenter of COVID-19?recovers to over 80% by the end of the first quarter, the spread of COVID-19 will continue in East Asia, the Middle East, and Europe through mid to late second quarter," adding, "Significant demand reductions in private consumption, exports, and the service sector are expected in global markets until the fourth quarter of this year." By industry, home appliances, semiconductors, and consumer goods are expected to recover relatively quickly in the second quarter, while automobiles and petroleum and gas-related products are projected to recover in the third quarter, and tourism and aviation industries are expected to recover by late third quarter or fourth quarter.

Not only McKinsey but other economic analysis institutions have also issued pessimistic forecasts. On the same day, the United Nations Conference on Trade and Development (UNCTAD) projected in its Investment Trends Monitor report that if the COVID-19 crisis is contained within the first half of this year, global gross domestic product (GDP) will decrease by 0.5 percentage points, and if it continues until the end of the year after the first half, the growth rate could decline by up to 1.5 percentage points. Regarding foreign direct investment (FDI), it analyzed that it could decrease by up to 15% compared to previous forecasts. UNCTAD also forecasted that the top 5,000 listed companies worldwide would see an average 9% decrease in expected earnings this year, with significant impacts on the automobile industry (-44%), airlines (-42%), and energy (-13%) sectors.

◆ Economic graph shifting from V-shape to U-shape... slower recovery = Global IBs are gradually revising their forecasts, expecting the economic recovery graph to shift from the traditional V-shape to a U-shape as the COVID-19 crisis prolongs. Typically, when an infectious disease outbreak causes economic damage and the economy quickly returns to growth, it is called a V-shaped recovery; if it maintains the same level as before the outbreak, it is a U-shaped recovery; and if it worsens compared to before, it is an L-shaped recovery. According to the Harvard Business Review, most economic curves after infectious diseases?from the 1918 Spanish flu to the 1958 Hong Kong flu, 1968 Asian flu, and 2002 Severe Acute Respiratory Syndrome (SARS)?have drawn V-shaped patterns.

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), said in mid-last month that "the most likely scenario we are considering is a V-shaped shock." She believed that the COVID-19 crisis would not prolong, and with the restoration of China's supply chains and increased production, the economy would quickly return to its normal trajectory.

However, S&P stated in a report on the 5th that if signs emerge that the spread of COVID-19 is contained by the second quarter, the timing of economic recovery will be delayed until the third quarter, resulting in a U-shaped recovery graph. S&P said, "A U-shaped recovery means a regional economic loss of $211 billion," and predicted significant damage in the service sector. Danske Bank, Denmark's largest commercial bank, also forecasted that the global manufacturing Purchasing Managers' Index (PMI) would fall more than initially expected, analyzing that "a U-shaped recovery is expected instead of a V-shaped rebound."

This content was produced with the assistance of AI translation services.