While the Fund’s latest World Economic Outlook praised the “swift and sizeable” response in countries like the UK, Germany, Japan and the US, it said no country would escape the downturn.
“It took three and a half years, from August of 1929 to March of 1933, to go from robust full employment to the depths of the Great Depression. It looks like we’re going to get there in less than three and a half months,” said Lawrence White, an economics professor at New York University. “The speed of the descent is unprecedented.”
Last week, about 5-million people have filed for unemployment claims for the first time. That brings to total 22-million jobless Americans – in 1-month – across the country.
The world has changed dramatically in the three months since our last update of the World Economic Outlook in January. A rare disaster, a coronavirus pandemic, has resulted in a tragically large number of human lives being lost. As countries implement necessary quarantines and social distancing practices to contain the pandemic, the world has been put in a Great Lockdown. The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes.
This is a truly global crisis as no country is spared. Countries reliant on tourism, travel, hospitality, and entertainment for their growth are experiencing particularly large disruptions. Emerging market and developing economies face additional challenges with unprecedented reversals in capital flows as global risk appetite wanes, and currency pressures, while coping with weaker health systems, and more limited fiscal space to provide support. Moreover, several economies entered this crisis in a vulnerable state with sluggish growth and high debt levels.
For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession. For this year, growth in advanced economies is projected at -6.1 percent. Emerging market and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0 percent in 2020, and -2.2 percent if you exclude China. Income per capita is projected to shrink for over 170 countries. Both advanced economies and emerging market and developing economies are expected to partially recover in 2021.
“Bad recession” ahead, says Jamie Dimon, CEO of JPMorgan Chase
JPMorgan Chase CEO Jamie Dimon predicts the U.S. will soon enter a “bad recession,” adding that banks will likely see financial stress similar to what they experienced in 2008 during the global financial crisis.
Dimon said his bank — the country’s largest — was preparing for economic growth plunging as much as 35% in the coming weeks and months. The nation’s unemployment rate could reach 14% — which would be the highest rate since the Great Depression — and may not peak until the end of this year.
JP Morgan Chase has just revealed its first-quarter profit, and it’s not good. The American bank, ranked by S&P Global as the largest bank in the United States and the sixth largest bank in the world by total assets, only earned 78 cents per share – compared to US$1.84 expected from analysts. Its profit of US$2.87 billion was a jaw-dropping 69% drop from a year earlier.
Wells Fargo, another American bank that was once Warren Buffet’s “Big Four” investments, reported a profit of just 1 cent per share – against analyst expectations of 33 cents per share. All American banks are affected, one way or another, due to the Coronavirus pandemic. Banks like JPMorgan and Wells Fargo are bracing for a severe recession.
Giant banks are setting aside truckloads of money for credit losses. Besides closing hundreds of branches, JPMorgan has set additional credit reserves of US$6.8 billion as provision for loan loss, pushing the total credit costs to US$8.3 billion, as its customers are struggling to pay their debts. Even then, CFO (Chief Financial Officer) Jennifer Piepszak warned it may not be enough.
To get an idea of how critical the situation has become, JPMorgan’s profit from its consumer unit plunged 95% to just US$191 million due to loan loss provision in credit cards. Coming from the nation’s biggest bank, it says a lot about the coming recession and the potential impact as the Covid-19 literally affects every single sector of the U.S. economy.
On the same day JPMorgan posted its disappointing first-quarter profit, IMF (International Monetary Fund) dropped a bombshell – the global economy will suffer the worst financial crisis since the 1929 Great Depression. The world could only watch powerlessly as the Coronavirus leaves its trail of destruction in 210 countries and territories.
It was only in January that the IMF had forecast a global GDP ((gross domestic product) expansion of 3.3% for this year and a growth rate of 3.4% in 2021. Back then, it was cautious about the state of the global economy primarily due to concerns about new trade tensions between the U.S. and the EU, as well as the fragile “Phase One” trade deal between the U.S. and China.
But today, those trade wars or tensions look like child’s play. From a global economic expansion of 3.3%, the IMF now expects a contraction by at least 3% instead in 2020. In essence, it means a loss of 6.3% in the worldwide economy. The huge slash in growth was derived as more institutions warn that the “Great Lockdown” due to the Coronavirus pandemic is bringing massive damage to the economy.
Gita Gopinath, the IMF’s chief economist, said – “It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.” That means the coming recession meltdown will be worse than the 2008-09 Financial Crisis, also known as the Great Recession.
Last week, the World Trade Organization (WTO) said the global trade will contract by between 13% and 32% this year due to the Covid-19 pandemic. It further said that nearly all regions will suffer “double-digit” declines in trade volumes, with exports from North America and Asia to be hit the most. The lockdown measures implemented by most of the countries have stalled business activities.
The IMF also reveals a disturbing data – more than 90 of the organization’s 189 members have already asked for financial assistance. The rich economies of the West will shrink by 6.1% on average. In the Europe, Italy and Spain, two most infected countries in the region, will suffer the worst economic punishment where their GDP is predicted to contract by 9.1% and 8% respectively.
The GDP of UK will drop by 6.5% this year – the deepest plunge for a century, according to the IMF. But according to the British official independent fiscal watchdog the Office for Budget Responsibility (OBR), the country’s economy could shrink by a record 35% with unemployment skyrockets to 3.4 million by June – based on a 3-month lockdown followed by 3 months of partial restrictions.
Overall, the OBR estimated the UK economy will contract by 12.8% for the year. While the European Union is expected to tumble by 7.5%, the U.S. is not spared. The IMF predicts that the American economy will contract by 5.9% this year. The exception will be India and China, the country where the Coronavirus reportedly first started, but has since won the war against the pathogen.
Even though the Chinese economy will also fall, according to the IMF, its economy will still grow by 1.2% in 2020 (from 6.1% last year). India, on the other hand, will see its economy growing by 1.9%, down from 4.2%. Still, while the impact of the pandemic has been more serious in developed countries, the rich nations were better equipped to cope, says the IMF.
For example, the U.S. can always print more money to pay its citizens as in the case of the recent historic US$2 trillion stimulus package. The IMF predicts that a partial recovery could only happen in 2021. The global contraction of 3% was nevertheless the best case scenario. In the worst case, the global economy would shrink by around 11% rather than 3%.
Source : Finance Twitter
Ray Dalio: ‘We’re Heading Into A Great Depression’
Ray Dalio believes we are hitting a depression similar to that of the 1930s, which will take years of financial and economic reconfiguration and human ingenuity to recover from, as he discussed in a Wednesday Ted Connects talk.
“We’re not going to go back the way it was,” said Bridgewater Associates founder Ray Dalio in the virtual TED talk. “We’re going to restructure our economy and restructure our financial system” over the next couple of years in order to recover.
Ray Dalio’s Bridgewater Associates has $160 billion in assets under management, making Dalio the 46th richest person in the world with an $18 billion net worth.
Dalio’s biggest worry is that restructuring will not be done in a civil, bipartisan way to “both increase the size of the pie and divide it well,” warning of partisan politics preventing effective solutions, “damaging”—rather than repairing—the economy.
The key to success as an individual investor is to “know how to diversify well and in a balanced way,” he said. “The greatest mistake of all investors is to think that what has done well lately is a better investment; cash is almost always the worst investment.”
He also thanked the Chinese for their work on coronavirus, noting that doing so was political: “The Chinese, in many ways, are helping with things that are needed to manage this crisis.”
Dalio flagged the opportunity for entrepreneurship as the catalyst for recovery: “The greatest force through time is human inventiveness. The greatest force of that is reinventiveness.”
Crucial quote: “This is not a recession; this is a breakdown. You’re seeing the same thing that happened in the 1930s.”
Key Background: The coronavirus has hit the economy with catastrophic results: 10 million Americans filing for unemployment in the last two weeks of March alone, incredible volatility in the stock market and all businesses deemed “nonessential” shuttered, with 97% of Americans under stay-at-home orders. The difference between the coronavirus crisis and other economic crises is that this one is caused by a public health emergency, making it an economic and societal problem without a history-tried solution.
“This is a huge, unprecedented, devastating hit,” said Federal Reserve Chair Janet Yellen to CNBC, expecting GDP to decrease 30% in the second quarter.