After the outbreak: look to the future
27 May 2020: In the wake of a new report predicting a 10% slump in global GDP, ICAEW has called for governments and businesses to take a new approach to rebuilding rather than returning to a pre-crisis state.
Leading economists have laid down a bleak economic outlook for 2020, predicting the biggest global recession in post-war history, with an economic bounce-back in the second half of this year failing to make up lost ground and global GDP not expected to return to pre-crisis levels until mid-2021.
A new report from ICAEW partner Oxford Economics provides an outlook for the global economy in the midst of COVID-19 and projects that world GDP will contract by about 10% in the first half of 2020 – twice as harsh as the 2007/08 financial crisis.
The report, Coronavirus global outlook: after the outbreak, also states that the scale of government interventions intended to prevent further long-term damage are expected to push up government debt levels in most advanced economies by between 10% and 20% of GDP in 2021, the report warns.
From a business perspective, a standout figure flagged by the report is from UN DESA: ‘World trade is forecast to contract by nearly 15% in 2020 amid sharply reduced global demand and disruptions in global supply chains’
Commenting on the study, ICAEW stated that a global response to this global pandemic is critical. The accountancy institute called for governments, businesses and individuals to “learn from the last decade and look beyond our borders and the self-interests of our individual national to solve the current problems”.
“The emerging consensus from economists and scientists alike is that tackling the crisis will involve a three-pronged approach that takes into consideration nature, society and the economy,” continued ICAEW’s response. “If we try to repair the colossal damage of the current crisis by returning to where we were, we are setting ourselves up to fail.”
Forecasting in a time of crisis
While forecasting in times of such upheaval is incredibly difficult, the authors of the report reiterate that the general trajectory is true.
Financial reporting will by necessity require an increased focus on the future. As the crisis will result in more impairments, organisations will need to look at cashflow projections and economic forecasts to develop this new way of approaching the topic.
For ICAEW members trying to assess the outlook for their operations, strategic planning or disclosure to the markets, one challenge from an accountancy perspective is whether overly pessimistic forecasting is likely to amplify any crisis. Will the greater focus on forward-looking information brought on by coronavirus create self-fulfilling prophecies?
It still remains important for SMEs and large corporates alike to look at a number of different forecasts, especially given the current levels of uncertainty.
The slow unwinding of lockdown measures by policymakers signals a slow return to a more normal level of economic activity with Oxford Economics warning that China’s lockdown lead and ensuing economic disruption preempts the economic fate of other developed nations.
Despite a relatively healthy 9.3% GDP rebound in the second quarter of 2020, Chinese GDP is expected to be 5% lower than originally hoped before the scale of the health crisis was fully appreciated. Advanced economies, especially those in Europe, are likely to see the most protracted recovery due to the larger scale of the COVID-19 outbreak and the need for more stringent lockdowns, the analyst warns.
The headline figures belie patchy recovery with some sectors recovering faster than others. The hospitality sector is an obvious casualty, as individuals may continue to avoid non-essential activities such as visits to bars, restaurants and cinemas. However, the end of lockdown will allow some pent-up household spending to be released. Spending in the second half of 2020 may be further boosted in oil-importing economies due to the recent collapse in the oil price.
Meanwhile, Oxford Economics is confident that some of the exceptional monetary and fiscal policy support unveiled around the world designed to minimize long term damage will pay off. In the near term the risks around economic forecasts hinge on the speed at which lockdown restrictions are eased at the risk of a second virus wave, the report warns.