No one is coming to save the global economy this time

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Summary List Placement

The coronavirus depression will be much worse than the last worldwide recession, because this time no country is strong enough to rescue the global economy.

The story of the Great Recession goes like this: the US and Europe were crippled while working to clean up their devastated banking system, the global services sector suffered without its biggest player — the US consumer engine — but global economic growth didn’t completely fall off a cliff because other countries kept money moving around the planet.

Over in China policymakers enacted a massive stimulus to skip over the recession entirely. The country’s GDP grew 9.4% in 2009. India chugged along as if the crisis barely happened, with its GDP growing 7.9% in 2009.

But this time there is no corner of the globe that has been left untouched by the pandemic or its effects. And so, there’s no country that can reasonably chug along and keep things from getting truly disastrous.

Economists over the Institute of International Finance (IIF) recently wrote in a recent note that it was the growth of these two countries that lifted the global economy while the US economy was on its knees. That is why global GDP only fell to -0.4% in in 2009. Conversely, without their help the economists estimate that global GDP to fall to -3.8% this year.

Holding out for a hero

The high growth countries that kept the global economy from free fall aren’t coming to save us this time. Nobody is.

India is now on its 170th day of lockdown to slow the spread of the coronavirus. Credit rating firm Moody’s expects economic growth to fall 11.5% in 2020.

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And while the worst of China’s lockdowns have passed (for now), it’s expected GDP growth of around 3.2% for 2020 is a far cry from a decade ago. Plus, this time around China’s policymakers are being much more cautious with their stimulus In some part this is because the government is concerned it may have to institute another lockdown. 

Policymakers are also being cautious because China is still dealing with a massive debt hangover from 2009. Skipping a recession doesn’t come cheap. China spent half a trillion dollars avoiding the financial crisis, and in the years that followed it built up a massive, opaque shadow banking system that it has since been trying to tamp down since 2015. This year China’s total debt – corporate, household, and government — climbed to 303% of GDP. 

So while the government is pulling some levers it pulled to spur economic activity during the financial crisis — like encouraging infrastructure investment — China’s central bank, The People’s Bank of China, has said it sees no need for additional emergency stimulus in 2020. 

With weak demand coming from China and India, Latin America will sell fewer commodities, and the whole of Asia will slow, the IIF notes. We cannot expect exceptional growth from there.

Could the European Union could save us? The rapid response of Eurozone countries to the pandemic seemed to be a …read more

Source:: Business Insider


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