Risk of recession looms

Many countries could be plunged into recession if the coronavirus extends into the summer.  The European Commission (EC) recently revised its 2020 forecasts downwards, for example.

“Assuming an extension of the health crisis up to the beginning of June or beyond, the fall in economic activity in 2020 could be comparable to the contraction of 2009, the worst year of the economic and financial crisis,” the EC said.

It has activated the so-called general escape clause, which relaxes fiscal rules for member states so that they can take measures to stimulate the economy without attracting penalties from the Commission. “We have already made clear that governments can spend what they need to tackle this emergency,” EUʼs economy chief Paolo Gentiloni said in a statement. “These are not normal times and there can be no business as usual.”

Predictions

European Central Bank president Christine Lagarde is reported to have told EU leaders that euro-area output will shrink by 2 per cent in 2020 if the lockdown that has happened in many countries lasts for one month – which now looks unlikely – and by 5 per cent if it lasts three months.

Speaking to BBC Radio 4’s Today Programme in late March, the former Bank of England governor Lord Mervyn King said the UK was now heading for recession. Lord King, who was in charge of dealing with the 2008 financial crisis, said the consequences of COVID-19 will be much worse this time around.

“It’s a deliberate attempt to reduce the level of economic activity, so in that sense, a recession is bound to happen,” he said. “But we should think of this as a wanted response to a very severe health crisis which no one really anticipated.  You cannot blame the Government for creating this contraction and activity. It is absolutely necessary.”

Back to 1931?

“We estimate that world GDP will fall by at least 4 per cent this year, clearly with a huge margin of error,” the Centre for Economics and Business Research (a think-tank) said. “If this is correct, the fall will be more than twice as large as in 2009 during the financial crisis and will be the largest drop in GDP in one year since 1931 other than in years affected by war.”

It said it was important to enable people to spend as soon as the worst period of the virus had passed, “Our modelling suggests that if the scale of the reduction in real disposable incomes in economies emerging from the effects of the virus can be kept below 5 per cent, it ought to be possible to see a sizeable bounce back as pent up supplies and demand come on stream to overcome the impact of reduced spending power. The aim of the authorities should be to enable people to spend when they are able to.”

 

 

 

 

 

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