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Global economy experiencing unprecedented shock

This report provides an outlook for the global economy in the midst of COVID-19 and is produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide an unparalleled ability to forecast economic trends.

Global economy experiencing unprecedented shock

  • Coronavirus to make 2020 the biggest global recession in post-war history
  • China’s experience paints a glum picture for the rest of the world
  • Advanced economies to face the biggest contractions in second quarter

The global economy is about to enter the deepest recession in living memory. The full extent of the contraction in activity in early 2020, which was triggered by containment measures to combat the global spread of COVID-19, remains uncertain. There can be no doubt though that the effects will be massive. Oxford Economics’ baseline forecast projects that world GDP will contract by about 10% in H1, roughly double the impact of the global financial crisis in 2008.

World GDP

China lockdown leads to massive economic disruption

As the pandemic originated in China, its economy was the first to suffer a sharp contraction in activity as a result of the COVID-19 outbreak and forewarns what is in store for the rest of the world. The Chinese economy contracted by an estimated 10.7% over Q1, relative to Q4 in 2019.

Wuhan province’s lockdown began in late January and lasted about 11 weeks, but the length of lockdowns across China varied according to the severity of the outbreak, with the shortest lasting just four weeks. Lockdowns in China were starting to ease through March and then the lockdown officially ended in Wuhan, the starting point of the outbreak, in early April. In January and February combined, industrial gross value added plunged by 13.5% on the same period a year earlier, while the value of retail sales fell by 20.5% over the same period as firms were forced to close and consumers remain at home.

An improvement in economic activity was evident as containment measures eased. In March the official Purchasing Managers Index (PMI) rebounded to 52 (a score of above 50 indicates expanding business), from February’s record low of 35.7. The annual pace of industrial gross value added was -1.1% y/y in March, showing the clear improvement from February but underlining that the return to ‘normal’ would not be immediate.

While the Chinese industrial sector saw a gradual revival in activity, it has not been the same across all sectors. Although people have generally returned to work, voluntary social distancing persists, meaning that non-essential spending on activities that involve social interaction have been slower to rebound. Retail sales fell by -15.8% y/y in March, only a modest improvement on the -20% in January-February.

China: Key Cyclical indicators

While weak external demand will affect China in Q2, the ongoing return to more normal levels of domestic spending and a policy-driven boost to infrastructure spending should ensure that China records a healthy rebound in GDP in Q2 – Oxford Economics has pencilled in a 9.3% quarter-on-quarter rise. While this appears to be a healthy short-term rebound, it will still leave the level of GDP in Q2 about 5% lower than they had expected in January, before the scale of the crisis was fully appreciated.

Developed markets can expect a similar experience in Q2

Having seen events unfold across Asia in January and February, most European countries and the US prepared with various levels of success. As a result, many governments have been forced to implement lockdowns of varying stringencies, causing most businesses to scale down their operations, if not shut down altogether.

In Q1 2020, both the US and eurozone economies contracted sharply on the quarter by 1.2% and 3.8%, respectively. Underlying these results were some truly staggering data from both the industrial and retail sectors. Industrial production in the US contracted by over 5% in a single month in March, the largest monthly decline since World War II. In April, US and European business surveys, such as the PMIs, have plunged well below the previous lows pointing to far worse to come. Households are also feeling the squeeze. Consumers in the US drastically reined in spending as a result of stricter lockdowns, unprecedented layoffs and plummeting confidence; resulting in a drop in retail sales of over 8% in March.

Given that most lockdowns outside Asia only began in March, the exceptionally weak GDP readings were driven by, at most, just one month of economic strict containment measures. The worst is yet to come in the second quarter of the year, with further contractions in GDP forecast of 11% in the US and the eurozone. These are deeper recessions than anything seen in modern times.

The enormity of the crisis is perhaps best reflected in the staggering labour market data that has emerged over March and April.

  • In the US, more than 26m people have filed for unemployment benefits since lockdowns began.
  • More than a million jobs were lost in Canada, causing the unemployment rate to rise by over 2 percentage points in March; the largest one-month rise during the global financial crisis was just 0.6 percentage points.
  • In Germany the unemployment rate rose by 0.8pp to 5.8% in March, the largest one-month rise in almost 30 years.

US: unemployment claims

The good news is that peak lockdown may have been reached at a global level. The levelling off in the number of new COVID-19 cases is already triggering some relaxation in lockdown rules in parts of Europe. Some US states are also starting to loosen restrictions. Most others have partially begun to unwind their lockdown measures in May with further easing expected in June.

COVID-19 cases

But for now, policymakers seem to prefer a slow removal of restrictions to minimise the risk of a renewed flare up in the number of COVID-19 cases, implying a slow return to more a normal level of economic activity. The transition to normal may be further tempered by individuals voluntarily choosing to shun situations where close contact with strangers is likely, as seen in China.