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Covid-19 makes 2020 a year of uncertainty for the world economy

Covid-19 makes 2020 a year of uncertainty for the world economy

Tuesday 10, 03 2020
In 2019, the global economic growth was only about 2.9%, which has been the lowest level since 2008 when the markets were hit hard by the financial crisis.

According to the analysis website Valdaiclub, in 2019, most of the major economies in the world faced increased risks and this makes the prospect of 2020 even more unstable, especially in the context of the Covid-19 epidemic spreading globally

A gloomy future for the global economy

In 2019, the global economic growth was only about 2.9%, which has been the lowest level since 2008 when the markets were hit hard by the financial crisis. Growth decreased by about 6.3% in the fourth quarter of 2019 compared to the same period last year in Japan.

In Germany, industrial output fell sharply by 3.5% in December 2019. The situation in France was also not bright as the country witnessed negative growth in the fourth quarter of 2019 and the industrial output figure was very bad when it dropped by 2.6%. Other major economies are also facing their own difficulties. The United States, which is the largest economy in the world, seems to be resilient.

However, real GDP growth of about 2.1% in the fourth quarter of 2019 is not enough to create a "push". China - the second-largest economy in the world, saw growth drop to only 6% in the fourth quarter of 2019, which is the lowest level in 27 years. According to the Financial Times of the UK, with debt levels already being at a record high level, the outbreak of Covid-19 respiratory infection increases the risk of the credit crisis in the context of low-interest rates.

The shock that the Covid-19 epidemic caused to markets around the world occurred in the time of the dangerous financial situation due to the global debt spiral. According to the International Finance Institute, the global debt to GDP ratio in the third quarter of 2019 reached an all-time high of over 322%, equivalent to nearly $ 253,000 billion. If the disease continues to spread, any risk of disruption in the financial system is likely to cause a new debt crisis.

Covid-19 makes 2020 a year of uncertainty for the world economy

Unpredictable consequences from Covid-19

The consequences of this epidemic on the global economy will be enormous but cannot be assessed accurately at this time, especially considering the "weight" of the world's second economy. During the SARS pandemic in 2003, China accounted for only about 8.5% of global GDP.

However, this rate has now increased to nearly 20%. First, there are immediate consequences as many places close down a series of industries. Production plunged and raw material consumption also decreased. China's GDP in the first quarter of 2020 is expected to be reduced by 2 percentage points and this means that global GDP will also be reduced by about 0.4 percentage points.

The direct impact on countries such as France and Russia, which currently export and account for large amounts of hydrocarbon production, is very noticeable. For France, the impact is even more severe with the decline of tourism and consumption.

Second, production activities outside the "World factory" are also affected by the added value produced in Europe that is related to China. About 60-80% of the pharmaceutical ingredients in pharmaceutical products are manufactured in China and India. Similarly, in the automotive industry, many parts, such as batteries for electric vehicles or electronic components ... are also made in China. Therefore, in addition to direct shocks, there are indirect shocks.

Value chains show China's presence in global production, not just in products made in the country. Finally, there will be a shock about "procrastination." For the affected countries (such as South Korea, Italy, and even the United States), the direct impact of this disease, as well as the panic effects caused by it, will have serious consequences for production. Affected countries outside of China will see production decline in the second quarter of 2020.

A study by the Organization for Economic Co-operation and Development (OECD) shows that the disease could cause the world economy to drop by 0.5 percentage points this year. In addition, this disease can also have serious financial consequences. Many companies will face cash flow problems due to declining sales. This will create the risk of "bad debt" for banks. Insurance companies will also have to compensate customers for disease risks.

To support the economy, central banks are forced to maintain low-interest rates. However, the efficiency of production enhancement will not be high. Otmar Issing, a former chief economist at the European Central Bank, said that the long central bank's low-interest rates also have broad consequences because they lead to inaccurate capital allocation. This helps banks and "zombie" companies - companies whose profits are not enough to pay interest - to continue living.

The latest report of the International Monetary Fund (IMF) on global financial stability details this point by a simulation showing that a severe recession equal to half the crisis in 2009 would be able to make companies with outstanding debts of about US $ 19,000 billion fail to pay debts.

​>> Vietnam’s banking industry affected by COVID-19


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