- The world's central banks and the IMF, which were remaining optimistic, are no longer upbeat.
- There is a higher chance of bankruptcies in the service and hospitality sectors.
- The US economy is expected to fall 25% in the second quarter.
The world is trying to fight the coronavirus pandemic. In North America, both the US and Canada extended directives of social distancing until the end of April. Russian President Vladimir Putin just gave everyone who is not considered essential business a week off with pay. However, as much as US President Donald Trump tries to be upbeat and claim by June 1st the economy will jump start, this is not feasible for a myriad of reasons and it is highly unlikely it will rebound by the fall of 2020.
Around the globe economists have started providing their forecasts for world economies. Looking at these models, it is not likely the world will return to sustainable growth after the decline it is presently experiencing. The world’s central banks and the International Monetary Fund, which were remaining optimistic, are no longer upbeat. They are recognizing that the world economy will lose at least 2% of gross product and will experience a more stable recession.
However, the stability of the recession is still in dispute. The decline in the year is calculated in the context of the fact that in the second half of the year everything will go into steady growth.
There is a higher chance of bankruptcy in the service and hospitality sectors. It will be highly challenging to win back something in the third quarter, but it is very likely domestic economies will have to bear the burden of the consequences of mass bankruptcies. However, the West and the US are not taking such calculations into consideration at this time with their projections. Previous statements from the IMF that this is not a recession were replaced by a confident conclusion from the IMF the world has entered recession.
Central banks continue to use known models that were applied during 2008 crisis. The US Federal Reserve and European central bank have introduced quantitive easing amidst the Coronavirus pandemic. Quantitative easing, in this case, involves large-scale asset purchases. Usually, it is a monetary policy where a central bank buys predetermined amounts of government bonds or other financial assets in order to inject money directly into the economy. The feds measures are surpassing their records from the 2008 crisis.
US economy is expected to fall 25% in the second quarter.
The shutdowns that are happening around the world will not be able to solve the causes of the crisis, and the consequences of the suspension will be much more serious than just a decline in economic indicators. After all, the reason for the crisis is not the lack of liquidity in the global economy, which is enough to inflate one bubble after another. The flood of liquidity will not disperse the contradictions that forced the withdrawal of real production from the economically developed countries, which over the decades turned into markets for services and capital services, the economy of banks and funds, restaurants, hotels and entertainment events. The inflow of liquidity will not able to lead to the return of real production to Europe, the United States, and Japan.
As for when the crisis will hit, the situation is even worse. Within two weeks we will see frantic attempts to save one after another large enterprises in Europe and America, news about record loans and other measures to save flagships, whose stability before the crisis was controversial, and now even more. In the US and Canada unemployment has skyrocketed.
The drop in the real economy will be hitting the service sector; the US service sector is approximately 70% of the economy.
Thereafter the industrial sector will start feeling additional pressure. The consumer spending decline will cause additional issues and further impact unemployment.
A bankruptcies within smaller scale businesses will start hitting, as service based businesses will not be able to stay closed for long. The tourism industry will be hit hard this summer, including the cancellations of sports events and festivals. If the quarantine lasts longer than April 30th in the US, it will start negatively impacting smaller banks and either bailouts start to happen or they will have to be amalgamated and swallowed by conglomerate US banks. However, Bank of America is permanently closing certain branches at this time too. The push for artificial intelligence technology in the banking sector and smart ATM’s will have an impact and will contribute to the unemployment numbers.
That will be followed by the dumping of assets and further bankruptcies. It will also cause a pension funds crisis, which governments will have to find a way to repay.
The unprecedented volume of budget inflows into the economy will require closing budget gaps, which central banks will inject needed finances to cover. This will also domino into a public debt scenario and through the fall could lead to a hyperinflationary shock in the US.
History tends to repeat itself and quantitative declines assisted in the economy stabilization needed after 2008 crisis. Smaller banks went bankrupt, mortgage-backed securities were merged as low-quality assets. There is no such thing as a liquidity limit. Support and incentive measures will be applied in as many quantities as necessary, without restrictions and with little or no close monitoring.
In the US, a large number of unemployed people, whose income will be significantly reduced even with state aid (which includes dumping money from helicopters according to Bernanke’s cookbook) will not be able to hold out for very long.
If outsized public finances pour into markets, banks, funds and large businesses, expect a hyperinflationary shock when this money reaches the consumer sector in the beginning of fall. The US economy will notice inflationary growth by June, while the hyperinflation scenario will hit in September. This will also be dangerous because at the same time the crisis of public finances will begin, which may occur simultaneously with another acute phase of the coronavirus and the lack of funds to stop it.
At the same time the US will have a presidential election in the fall. It would be important to see how Trump’s administration will navigate the hyperinflationary crisis, as this can make or break his re-election.
It is highly plausible Trump’s administration will announce large infrastructure projects and large support for individual enterprises and strict control over inflation.
It is highly likely coronavirus in the US would be defeated by June. Afterwards, the biggest issue will be the economic crisis and the negative effects of the liquidity and stimulus packages.
It will be a tumultuous year for the US and global economies.