World’s biggest economies are heading for a recession

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The FINANACIAL — There are signs that some of the world’s top economies could slump as coronavirus outbreak compounds pre-existing weaknesses. Japan’s economy shrank at an annual pace of 6.3% last quarter. The closely-watched ZEW Indicator of Economic Sentiment in Germany decreased sharply.

The rising cost of the coronavirus outbreak for business and the world economy is expected to become clearer this week as major firms issue trading updates and China reports the toll on its manufacturing sector. China’s president Xi Jinping warned at the weekend that the coronavirus would have a “relatively big impact on the economy and society.” Adding that it would be short-term and controllable, Xi said the government would step up efforts to cushion the blow, The Guardian wrote.

China’s economy was already under pressure from the two-year-old trade war with the U.S., which saw companies in China start to shift production to Southeast Asian nations in pursuit of lower costs and to avoid the U.S.-China tariffs. The coronavirus crisis has highlighted for foreign companies the dangers of keeping all of one’s “eggs in one basket,” Wuttke said, according to Forbes.

The world’s third-largest economy (Japanese) shrank 1.6% in the fourth quarter of 2019. The decline from the third quarter is the biggest contraction since 2014. The drop was even more severe — a 6.3% plunge — when measured as an annualized rate. Japan had made efforts before the outbreak to shore up its economy. Analysts at Oxford Economics pointed out that a massive $120 billion stimulus package announced by the government in December should help put a floor under growth. But they added that the outbreak risks delaying the recovery, CNN reported.

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Analysts say the widening fallout from the epidemic, which is damaging output and tourism, could have a significant impact on Japan if it’s not contained in coming months. “There’s a pretty good chance the economy will suffer another contraction in January-March. The virus will mainly hit inbound tourism and exports, but could also weigh on domestic consumption quite a lot,” said Taro Saito, executive research fellow at NLI Research Institute. The weak data also comes amid signs of struggle in the wider region with the coronavirus, leaving Japan vulnerable to a recession – defined as two consecutive quarters of contraction, according to Reuters.

Japan’s economy was also hurt by super-typhoon Hagibis, which struck the country last October. The biggest storm to strike Japan in decades killed at least 90 people, causing widespread flooding and damage to property and infrastructure.Takeshi Minami, chief economist at Norinchukin Research Institute, says this was one reason Japan’s economy shrank so sharply last quarter, along with the sales tax hike, The Guardian wrote.

The result also raises the possibility that with the virus outbreak still spreading, Prime Minister Shinzo Abe may have to consider another round of extra spending to support growth, little more than two months after his most recent stimulus package. The virus has already stopped the visits of hundreds of thousands of Chinese tourists to Japan at the beginning of Japan’s Olympic year, hitting an important source of spending revenue. The longer the outbreak disrupts production and domestic demand in Japan’s biggest trading partner, the more likely Japan’s exporters will suffer and parts supplies may dry up, Yahoo Finance.

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Then there’s Germany. The biggest economy in Europe ground to a halt right before the coronavirus outbreak set in, dragged down by the country’s struggling factories. The closely-watched ZEW Indicator of Economic Sentiment in Germany decreased sharply for February, reflecting fears that the virus could hit world trade. Bank of America economist Ethan Harris points to the number of smaller economies that are hurting, too. Hong Kong is in recession and Singapore could soon suffer a similar fate. Fourth quarter GDP data from Indonesia hit a three-year low, while Malaysia had its worst reading in a decade, he noted to clients on Friday, as reported by CNN Business.

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