Who will save the global recession

By Liu Qiudi

Issued in China News Weekly 941, March 30, 2020

As if without opening an online movie website, a "disaster film of the century" is right in front of our eyes.

In recent weeks, as the epidemic broke out in Europe and the United States, and spread throughout the world, the six godless investors and people in the affected areas looked at a beautiful paradise, and immediately turned into a gate of hell. As of March 20, US stocks had four meltdowns in 10 days, which subsequently caused the stock market fusing mechanism in 11 countries. Important global stock markets have experienced roller coaster-like plunges, skyrocketing, and plunges.

From China to South Korea, and then from Italy to the United States, governments of all countries have entered a "quasi-war state." The problem is that the enemy is omnipresent, and it even quietly lives in the bodies of our communities and fellow citizens. After experiencing the international financial turmoil from 2007 to 2008, who will save the global economic recession this time?

The Great Recession in the Eyes of Wall Street

The warning that the global economy may be in recession based on the Sino-U.S. Trade war last August is not an order of magnitude compared with the current economic shock based on the spread of the global epidemic-the current crisis is almost unprepared. Strikes like a tsunami.

Not only has the global economic recession already arrived, but its severity may exceed that of World War II, and it can be compared with the "Great Depression" that began in the United States throughout the 1930s in 1929.

A Reuters survey of 41 American and European economists from March 16 to 18 showed that of the 41 economists surveyed, 31 (76%) believed that the global economy was already in recession.

Overall, data that was listed as "worst case" by many Wall Street analysts a few weeks ago has now become the "intermediate case" of their analysis.

The current forecast for global GDP growth this year ranges from -2.0% to + 2.7%. Based on various data forecasts, the global economy will grow by 1.6%, about half of the 3.1% forecast by the Wall Street analyst survey in January. This is also the lowest year since the global financial crisis of 2007-2008. In fact, these data are likely to worsen as the epidemic spreads or gets out of control.

Bruce Kasman, director of global economic research at JP Morgan Chase, said: "The impact of the new crown pneumonia will lead to a global recession, as the economies of almost all countries contract during the three months from February to April." A report released on the 18th predicts that the US economy will contract by 14% in the second quarter.

Ethan Harris, head of global economics at Bank of America Merrill Lynch, believes that among the three major economies, the United States and the euro zone will experience negative growth, while China's growth is expected to be 1.5%. Harris said: "Our first article on the virus shock was titled 'Worse or Worse' and should now be revised to 'It's really Worse or Worse'. We now expect that the new crown virus will cause a global threat in 2020. Recession, similar in magnitude to the recessions of 1982 and 2009. "

The labor market is one way to understand the magnitude of economic shocks. Bank of America predicts that the US unemployment rate will double, with about 1 million job losses per month in the second quarter, totaling 3.5 million. The U.S. Department of Labor may announce on March 26 that the number of applications for unemployment benefits for the first time reached 3 million, more than four times the record of the 1982 recession. JP Morgan economists said on March 20 that this is only the first wave of new unemployment, and the future unemployment rate may surge from the current 3.5% to 20%.

And things will only get worse. Bank of America expects a trough in April, and then "the economy will resume growth very slowly, and by July the economy will become more normal." The only good news is: "Although the decline is large, we think it will be short-lived of."

Goldman Sachs chief economist Jan Hazius believes that the epidemic-driven recession will not be worse than the severe recessions of 1981-1982 and 2008-2009, but will be more severe than the mild recessions of 1991 and 2001 . He therefore lowered his global growth forecast for 2020 to 1.25% on March 18, because the outbreak in the United States and Europe has worsened, and China's data is also poor. He predicts that the GDP of the European Union, Japan and the United Kingdom will shrink completely this year.

The latest forecast released by Goldman Sachs on March 20 looks even more pessimistic: the United States may see an annual economic decline of 6% in the first quarter and an alarming 24% annual economic decline in the second quarter. Research by the Bridgewater Fund shows that the US economy will shrink at an annual rate of 30% in the next three months.

Morgan Stanley said that China is expected to bear the brunt of the economic contraction in the first quarter and then the rest of the world will be hit harder in the second quarter. It is estimated that China's economy will shrink by 5% in the first quarter and then resume growth in the rest of 2020. Although the US economy will shrink by 4% in the second quarter, the euro zone will face the largest decline, and annual growth will decline to -5%.

The chairman of the Yawen Capital Investment Committee, Stephen Isaacs, told CNBC that the New Crown virus crisis is "unprecedented" because the level of leverage and overbought stocks has reached record levels in the long-term bull market.

IHS Markit lowered its forecast for world real GDP growth in 2020 to 0.7% on March 18th—an indicator below 2.0% indicates a global recession.

Economists at Deutsche Bank point out that quarterly GDP declines in the first and second quarters of the world will "significantly exceed at least the record since World War II."

It is worth noting that even if the severely affected countries implement the closure of regional factories, shops, restaurants and schools, when will the inflection point of virus transmission arrive, what are its economic consequences, and whether the severely affected areas will continue to move or spread, these problems still exist. It is extremely uncertain, which may cause these estimates to be overturned and rewritten at any time.

"Tanglement" between stimulus policies and anti-epidemic targets

The prediction of the global economic recession caused by the new crown epidemic has put great pressure on policy makers in various countries. On the one hand, they are taking measures to limit business activities in response to the health crisis; on the other hand, they are rushing to inject sufficient stimulus measures, hoping that once the spread of the virus is controlled, demand will increase. Unfortunately, these two dynamics are likely to contradict each other.

In areas with severe epidemics, government policies should put “bail-out” first, allowing the catering and service industries that have been hit by quarantine and “social distance” directives, the aviation industry that has been severely shrinking due to virus transmission, and Tourism, as well as a large number of unemployed people, can weather the crisis. However, prematurely stimulating consumption, or resuming work prematurely to stimulate the economy, will prolong the impact of the virus on the economy and deepen the uncertainty that investors worry about.

The central banks and governments of the world's major economies have deployed large-scale fiscal and monetary stimulus plans in recent weeks, respectively, in an effort to ease economic turmoil caused by restrictions on travel and the closure of industry in response to the pandemic virus pandemic.

At the beginning of the outbreak in Wuhan, the Chinese government introduced dozens of measures to support enterprises severely affected by the outbreak, including the People's Bank of China set up a 300 billion yuan loan to major national banks and a number of disasters, including Hubei Local banks in severe provinces provided funding.

The People's Bank of China lowered the one-year medium-term loan facility (MLF) interest rate to 3.15% on February 17, and from March 16th, it lowered the target for banks that met the assessment criteria by 0.5 to 1 percentage point. Commercial banks will reduce the quota by an additional 1 percentage point, support the issuance of loans for inclusive finance, and release long-term funds of RMB 550 billion. Since the beginning of this year, the central bank's two RRR cuts have released 1.35 trillion yuan of long-term funds.

According to Al Jazeera, the Chinese government will release trillions of yuan in fiscal stimulus plans to stimulate infrastructure investment and launch special government bonds of up to 2.8 trillion yuan ($ 394 billion) to support it.

On the U.S. side, the Federal Reserve cut its target interest rate from 1.5% to 1.75% on March 3, and cut it by half a percentage point to 1% to 1.25%. This is the largest emergency rate cut since the global financial crisis in 2007-2008. The Federal Reserve again cut its target interest rate to 0% to 0.25% on March 15. The Fed also announced a US $ 700 billion quantitative easing program, similar to the one launched during the 2007-2008 financial crisis, and will purchase at least US $ 700 billion of bonds, of which at least US $ 500 billion will be US Treasuries, and the rest will be Mortgage-backed securities to stabilize home loans.

However, after announcing this series of measures, U.S. stock index futures still plunged, triggering a fusing mechanism to prevent panic selling. The Dow Jones Index fell nearly 13% on March 16th, the third largest single day in the index's 124-year history. Drop. At the same time, the market VIX "Fear Index" hit a high of 82.69 since its establishment in 1990 when it closed on March 16.

The White House, government agencies, and Congress have also announced various relief measures, including financial relief and paid sick leave for workers who are quarantined or caring for others, extending the tax cut-off date from April 15 to July 15, and related Payroll tax deductions.

The Federal Reserve announced on March 17 the purchase of up to $ 1 trillion in corporate commercial paper to ensure that credit continues to flow through the economy. On March 23, a new round of loan mechanism was launched, providing loans to large and small enterprises, providing financial support to municipalities, and buying hundreds of billions of dollars of government debt to prevent liquidity crunches from becoming payments to U.S. companies Capacity and credit crisis.

As of this writing, the Trump administration and Congress are negotiating an economic stimulus package that could total as much as $ 1.8 trillion in an attempt to reach an agreement that includes cash checks paid directly to Americans to bail out. In addition, the Small Business Administration will provide disaster loans to provide up to $ 2 million in funding for disaster-stricken businesses.

Following the Fed ’s move, the Bank of England lowered the benchmark interest rate by 0.5 percentage points to 0.25% on March 11, encouraging commercial banks to lend to SMEs, thereby reducing bank capital requirements to further increase credit. These measures are expected to total Allow lenders to provide nearly 300 billion pounds (about 2.48 trillion yuan) of new loans.

On March 12, the European Central Bank did not lower interest rates in accordance with market expectations. Instead, it announced measures to support bank lending and expanded the euro bond repurchase program by 120 billion euros (about 910.5 billion yuan). A week later, the European Central Bank announced a 750 billion euro stimulus package on the evening of March 18th, promising "no restrictions on our commitments to the euro."

Bank of America economist Michel Meyer believes that as the economy continues to face unknown territory, the government will take radical action to "redeem", and she emphasized that "in terms of policy response, we believe that the scale of stimulus should not be Cap. "

In fact, due to the severe epidemic situation in the major G20 countries, everyone is unable to protect themselves, coupled with the long-term tension between the Trump administration and the allies, governments of all countries have their own policies, and even compete for medical supplies. Lack of strategies for international collaborative division of labor.

A few days ago, an article in the US Foreign Affairs magazine pointed out that even if Washington is currently focusing on domestic resistance to the epidemic, the need for a coordinated global response cannot simply be ignored. Only strong leadership can address global coordination issues related to travel restrictions, information sharing, and the flow of key items.

Chen Yulu, deputy governor of the People ’s Bank of China, said on March 22 that it is too early to conclude that the world has entered a financial crisis. The People ’s Bank of China has been actively using “multilateral, regional and bilateral” channels to exchange with other central banks. Opinions, including the central bank's governor Yi Gang has repeatedly with the chairman of the Federal Reserve Board Jerome Powell, Managing Director of the International Monetary Fund Kristina George Ova, and general manager of the Bank for International Settlements Agustin Carsten Sri Lanka discusses strategies to deal with the epidemic.

This shows that the leaders of monetary policy still maintain policy coordination and communication. China is also coordinating policies to deal with the consequences of the pandemic virus pandemic through multilateral agencies such as the G20 and the International Monetary Fund. This is a positive phenomenon.

V-shaped rebound and "stop" the earth for 30 days

The global economic recession has already come, and there is still great uncertainty about the depth and duration of the recession. The Managing Director of the International Monetary Fund, George Ova, said on March 23 after a video conference with G20 finance ministers and central bank governors that the global economy will show negative growth in 2020 and experience at least as much as the global financial crisis, or even more serious. The economy is in recession but is expected to recover in 2021.

Although Deutsche Bank hopes that after a sharp decline in economic growth, a rapid V-shaped rebound will occur before the second half of 2020, the difficulty of curbing the epidemic makes such estimates difficult because the spread of infectious diseases may give major economies Bring a longer-term blow.

Deutsche Bank said, "We cannot resolve the uncertainty surrounding these predictions. These are unprecedented events and there is not enough historical basis to accurately infer our predictions."

Many businesses and investors expect that consumption curtailed by the epidemic will be released as the epidemic eases and is controlled, resulting in "retaliatory" or "compensatory" consumption. The question is, when will the epidemic be effectively controlled? The report of the HIS market research agency states that "the vast majority of the predicted risks tend to be negative and depend to a large extent on the government's response."

Although the global number of infections and deaths soars every day in a snowball manner, both IHS and Goldman Sachs predict that the number of global active cases will peak before the third quarter of 2020 and slow down from the second half of the year.

The IHS market report states: "Nevertheless, the result will be a U-shaped rather than a V-shaped recovery, as recent growth has plummeted and then the recovery will proceed slowly."

Former Goldman Sachs CEO Lloyd Bronckfinn predicted in an interview with US media on March 9 that, given the country ’s strong economy, banks ’large capital reserves and the controllable levels of debt in their financial system, once the authorities control the outbreak, The US stock market, commodities and other assets will rebound rapidly. These factors will ensure that the consequences will not be as severe as the 2008 financial crisis that occurred when he took control of Goldman Sachs, so the global economy will also recover after the epidemic.

But ten days later, at the time when market rumors about the Bridgewater Fund were flying around, Bridgewater founder and chairman Ray Dario said on CNBC in the United States on March 19 that the new crown virus pandemic could cause 120,000 to the global economy. Billions of dollars in losses, including US $ 4 trillion in losses that US companies may incur. Therefore, he believes that the US government's financial assistance must also reach trillions of dollars, and Dario believes that "many people will go bankrupt." At present, Bridgewater's funds lose between 10% and 20%.

From these different observations, it is necessary to focus on whether the United States can effectively control the epidemic in the near future. The longer the delay, the more difficult it is to ensure that the US economy can drive the recovery of the global economy.

What about China? Zhu Min, Director of the National Institute of Finance, Tsinghua University, pointed out at the "Global Financial Market and Economic Situation Analysis" web video conference held on March 17 at the China Development Forum that "the epidemic has now become a global problem. The solution to the epidemic must be resolved Global cooperation is needed. The political uncertainty and challenges of global cooperation brought by populism are also a major uncertainty we face today. "

Zhu Min observed that the Chinese economy has bottomed out and has begun to rebound. However, the biggest challenge for China's economic rebound is in the export sector. As the epidemic continues to spread exponentially throughout the world, it is expected that more countries will adopt a "citadel" or "lock-up" policy.

According to Zhu Min's estimation, the losses caused by the epidemic to China's consumption in January-February reached 1.38 trillion yuan, accounting for 1.2% of China's annual GDP. As the expected contribution of net exports to growth will be less than 0.1%, if China ’s GDP growth target is 5.5%, the final consumption will contribute 3.0%, and the final capital formation will contribute 2.4%. However, according to the previous example of SARS, it is difficult to resume growth after the impact of the epidemic. Therefore, future economic growth will mainly depend on the contribution of final capital formation.

Zhu Min also pointed out that the Chinese government has approved and approved nearly 6 trillion investment projects, including UHV, intercity high-speed rail, 5G, new energy, and other "new infrastructure". While boosting the economy, it can also achieve technological upgrading. purpose.

Obviously, at a time when the world's major economic engines are facing unprecedented challenges, the successful implementation of these stimulus policies should increase China's contribution to global economic growth.

In the United States, Bill Ackerman, founder and CEO of Pershing Square Capital, believes that long-term pain is worse than short-term pain, and he called on the CNBC television network to press the US government to immediately press the full "pause" button to allow all irrelevant functions Stopping for 30 days completely in exchange for reducing the time this crisis affects companies.

Ackerman emphasized that what frightens Americans and American companies now is that the blockade policy is gradually being rolled out, and no company can survive for 18 months without income. "But for the world, the only answer is to close the world for 30 days."

Ackerman believes that if Trump rescues the United States from the new crown virus, he will be re-elected in the US elections in November this year. The real meaning of this sentence is-if you can't do it, you won't be re-elected.

However, the Wall Street Journal editorial called for rethinking the business closure of the new crown virus, because "no society can maintain public health for the long term at the expense of its economic health." In contrast, the New York Times believes that Italy's experience has taught the world: initiatives to isolate the new crown virus and restrict people's activities must be taken as early as possible, instructions must be absolutely clear and strictly enforced.

The question is, is it too late to want the Earth to "stop spinning" for 30 days? In the case of the United States, it is imperative to expand the detection scope in major epidemic areas with reference to the Korean model, and mobilize medical supplies to prevent the collapse of the medical system, hoping to "flatten" the curve of case growth as soon as possible.

At the same time, regardless of whether it is facing a health crisis or reviving the economy, no economy can survive on its own, because without international cooperation, the risk of cross-border tourism will continue to rise before the discovery of specific medicines and vaccines, and the possibility of a comeback is not low. Locking the country means that the global supply chain has also “dropped” from one another, and many manufacturing and logistics companies still face severe conditions.

Therefore, it is not an economy that is tasked with saving the global economic recession, but transnational cooperation that can confront the virus challenge with the enemy.

Author:, Master of literature at Yale University, worked on Wall Street law firm partner Dr. Liu Qiudi law at Columbia University

"China News Weekly" No. 11 of 2020

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