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Covid 19 – Updates on international economic conditions and the end of the health crisis

Covid 19 – Updates on international economic conditions and the end of the health crisis

While all of the advanced economies are paralyzed and all indicators are flashing red because of the lockdown, the WPBC gives you a picture of the situation at the end of April 2020 with the prospects for emerging from the crisis.

Covid 19 – Updates on the international situation – the strategies adopted to fight the pandemic

In order to combat the spread of Covid-19, governments have adopted various strategies. In the euro zone, the measures taken have largely been to stop all non-food related retail activity, the closing of public places, the shutdown of production not necessary for the supply of essential goods and the confinement of populations: as of 11 March in Italy; March 14 in Spain, March 15 in France.

Outside the euro zone, in the United Kingdom and the United States, confinement measures were taken later, starting in the last week of March. Japan did not take drastic measures until April 7, but a sharp drop in attendance at cinemas, restaurants and bars was observed as of February.

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Covid 19 – Updates on the international situation – immediate consequences for the economy

On the economic front, the IMF praises “rapid and substantial” measures to protect the most vulnerable people and businesses. They stressed that “the crucial difference” to the crisis of the 1930s is the existence of multilateral institutions such as the IMF and the World Bank, capable of providing immediate financial assistance to help the most vulnerable countries. The G7 has also expressed support for the temporary suspension of debt services for poor countries.

The OECD estimates the drop in activity for its zones at 50% for construction and business services and 75% for other activities directly affected by the lockdown (retail trade, accommodation and food services, transport services).

In total and according to these assumptions, the drop in Gross Domestic Product would be around 25% in the United States and in France, around 26% in Italy and the United Kingdom and would reach almost 30% in Germany.

There was a shutdown of certain activities (transport, hospitality and food services, clothing, non-food related retail trade, etc.), which represents a significant share of household consumption (30% in the United States and France, around 35% in Italy, the United Kingdom and Germany for example).

In the Latin America and Caribbean region, the recession will be barely less marked (-5.2%). For the Middle East and Central Asia, the IMF expects a 2.8% drop in GDP. China and India are expected to be the sole to generate growth (+ 1.2% and + 1.9% respectively).

Emerging countries are also affected, with activity declines of up to 5-10% of GDP in Russia, Brazil, Turkey and other emerging countries

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Covid 19 – Updates on the international situation : what medium-term impacts for economies

The International Monetary Fund (IMF) has announced a global recession of 3% this year, despite “considerable” uncertainty around economic forecasts.

In an “optimistic” scenario, activity in the construction and real estate industry would remain at 80% compared to 50% in the pessimistic scenario.

Activity in the industry branches, excluding pharmaceuticals and foodstuff, would remain at 20% in the first scenario against 0% in the second one.

Finally, the retail activities would maintain a production of 50% in the two scenarios.

Thus, in the case of a two-month lockdown, annual GDP growth would decrease by 8 to 13 percentage points in France, Italy and the United Kingdom, by 8 to 14 points in Spain. Germany revises its growth forecast from 1.5% to 1%.

In Italy, according to the National Statistical Institute (Istat), the Italian industry branch would lose 59% of its turnover against 37% in services and 45% in trade.

In Spain, the think tank Funcas estimated a quarterly impact of the Covid-19 with a 2.2% drop in GDP in the first quarter followed by a 7.7% drop in the second one.

In the United Kingdom, the CEBR (Center for Economic and Business Research) estimates the daily loss of activity due to the coronavirus at 31%. In the United Kingdom, almost a million people have applied for the universal social benefit, a potential rise in unemployment to 7%, which according to Capital Economics could reach 10% by mid-April, a level not seen in the last 26 years.

In the United States, the OECD estimates a 25% drop in GDP. The consequences on employment are already visible: 701,000 jobs were lost in March according to the Bureau of Labor Statistics, job losses are higher in two weeks than during the entire duration of the 2007-2009 crisis and could already translate into an unemployment rate of at least 12%. The Saint-Louis Federal Reserve even fears an unemployment rate increase of up to 30%.

Finally, short-term economic data from China provide some points of comparison and some prospects for the country which has experienced the earliest containment and has already significantly but cautiously relaxed certain restrictions on activity. These elements suggest a sharp drop in Chinese economic activity (industry and services) in the first quarter, down to –10 or even –20%.

Covid 19 – Updates on the international situation – what are the reasons for hope?

For advanced economies, economic recovery will require more fiscal stimulus measures. This stimulus will be more effective if they are “coordinated,” said Gita Gopinath, professor of economics at Harvard. She further believed that the issue of state debt should be addressed once the pandemic is over. “For now, the crisis requires the action of governments,” she said.

According to Tony Horell CEO of Colliers International “the good news is that the rebound we expect from each of these factors (trade and tourism) is relatively short and that the recovery should be strong.” The Colliers International model forecasts a significant recovery in the third and fourth quarters, with global volumes returning to levels observed before the onset of the Covid-19 crisis.

“I think there are many reasons to be cautiously optimistic. Governments and central banks reacted faster, and on a larger scale than they did during the 2008 financial crisis, and the global weight of capital is much greater than 10 years ago; investors will want to diversify their portfolio” says Olivier Koodseike, Associate Director of Colliers International.

For its part, the ECB says it will not set any limits on measures to preserve the economy of the eurozone and has launched a program to buy bonds worth 750 billion euros. The IMF, for its part, is strengthening a debt relief trust fund to help allow eligible low-income countries to cope with the pandemic. The US central bank is also reverting to a policy of buying public debt and the credit valves are open to the maximum with a practically zero key rate in order to strike hard against the sharp contraction in consumption.

“We must put the effects of the health crisis on the real estate market into perspective after the end of the lockdown. In major cities around the world and in large urban centers with high employment rate or strong buying power, demand for residential or investment real estate will remain strong for goods with high refuge and heritage value “declares Michel Platero, President  Grand Paris Real Estate Federation

For Jean-Marc Torrollio,, president of French Real Estate Association, “historically, in times of crisis as we experienced in 2007, but also in 2001 and the beginning of the 1990s, we have rarely seen an overabundance of supply compared to demand. This is why the collapse in prices is not the scenario I would favor. ”

André Perrissel

English translation by Agnès Scott

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