IMF

COVID-19 Trade and Economic Fallout — Are current projections too optimistic?

The COVID-19 pandemic is not simply a global health crisis but also a global economic crisis of unprecedented proportions.

The WTO has projected that global trade will decline between 13 and 32 percent in 2020 before rebounding in 2021.  https://www.wto.org/english/news_e/pres20_e/pr855_e.htm.

The IMF in its April 2020 update of the global economy modified its projection to show global GDP contraction of 3.0% for 2020 with a 6.1% contraction by advanced economies (U.S., -5.9%; Euro Area, -7.9%; Japan, -5.2) and a 1.0% contraction for emerging markets and developing economies.  https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020.

Developments in global trade and the national economy for the United States and the rising severity of the pandemic in some of the emerging and developing countries will likely cause future downward revisions to the global trade and economic fallout occurring in 2020 and reemphasize the importance of global cooperation both in responding to the pandemic but also in posturing the world for an economic recovery in the second half of 2020 and beyond.

United States data through April as an example

Gross domestic product in the United States declined 5.0% in the first quarter of 2020 based on a May 28, 2020 second estimate provided U.S. Department of Commerce’s Bureau of Economic Analysis.  https://www.bea.gov/sites/default/files/2020-05/gdp1q20_2nd_0.pdf.

With more than 40 million people filing for unemployment benefits between mid-March and the end of May, the projection for second quarter GDP from at least one source on June 1, 2020 is an extraordinary contraction of 52.8%.  See https://www.frbatlanta.org/cqer/research/gdpnow.  This compares to the Congressional Budget Office’s projection of a 39.6% decline in the second quarter.  https://www.cbo.gov/publication/56335.  The CBO estimate uses a 3.5% decline in GDP for the first quarter and an annual projected decline of 5.6% for 2020.

With the current first quarter data GDP contraction in the U.S. at 5.0% and the most recent data from a model similar to that used by the Bureau of Economic Analysis projecting a 52.8% contraction in the second quarter, it is highly likely that the U.S. contraction in 2020 will exceed the 5.9% projected in the April IMF data.

Indeed, with the number of bankruptcies being reported in the U.S. and the large number of small and medium sized companies that may not be able to return to operation as reopening occurs, the economic rebound may not be as strong as current projections estimate either.  The continued large number of new cases in the United States may be a contributing cause as some states either delay the speed of reopening or face larger resurgence of cases once reopening occurs because of the continued high level of COVID-19 in the population.

While the number of cases in the United States has at least stabilized and has been  trending down, the rate of decline is far lower than that experienced in western Europe.  For example, the United States continues to have the largest number of new confirmed cases of any country in the world, many weeks after the U.S. peak.  Indeed in today’s European Centre for Disease Prevention and Control report on the COVID-19 situation update worldwide, as of 2 June 2020, the U.S. has 302,679 cases reported in the last fourteen days of the continuing to grow global total of 1,477,362 new cases in the last fourteen days.  European countries have relatively few (7,973 for Spain; 7,311 for Italy, 9,188 for France and 6,818 for Germany).  https://www.ecdc.europa.eu/en/geographical-distribution-2019-ncov-cases.  In a prior post, data were shown for various countries over the period December 31, 2019 – May 24, 2020.  Most European countries show reductions from their peak two week period of 80-90% while the United States has shown declines of only 23.5% through May 24 (slightly more through June 2, 26.0%).  See COVID-19 – new hot spots amidst continued growing number of confirmed cases,  https://currentthoughtsontrade.com/2020/05/25/covid-19-new-hotspots-amidst-continued-growing-number-of-confirmed-cases/.  To the extent that IMF projections are based on infection rates that decline more rapidly than the actual U.S. experience with COVID-19, that would be another reason to believe the IMF projected contractions for the U.S. are too low. 

On the trade front, the United States was doing well until mid-March.  But the COVID-19 challenges that resulted in government actions led to 1st quarter 2020 exports from the U.S. of goods being down 1.2%, services exports down 21.5% for a total contraction of U.S. exports of 6.7%.  U.S. imports of goods were down 11.5%, led by contraction of imports from China due to various additional duties imposed on Chinese goods.  U.S. imports of services were down 29.9% for total imports being down 15.5%.  See Bureau of Economic Analysis, News Release BEA 20-23, May 28, 2020 at 7, https://www.bea.gov/news/2020/gross-domestic-product-1st-quarter-2020-second-estimate-corporate-profits-1st-quarter.

The U.S. Department of Commerce, U.S. Census Bureau puts out a “Monthly Advance Economic Indicators Report”.  The April 2020 report was released on May 29th and showed estimated data for imports and exports of goods (seasonally adjusted).  April exports for the U.S. were down 29.9% with individual sectors being down 5.3% (food, feeds and beverages) to 70.8% (automotive vehicles).  Similarly, U.S. imports were down 20.6% for April with sectors varying from being down 5.6% (foods, feeds and beverages) to 57.0% (automotive vehicles).  https://www.census.gov/econ/indicators/advance_report.pdf.

Thus, U.S. trade contractions in April suggest that the range put forward by the WTO (13-32% for the year) is probably the correct range. 

Rising Number of COVID-19 cases in South America and in India

The IMF revised 2020 projections from April likely understate the negative effects that emerging and developing countries are experiencing.  Specifically, Latin America and the Caribbean are seeing major outbreaks of COVID-19 cases with the peak not yet reached in a number of important countries like Brazil, Peru, Chile and Colombia and also in Mexico.  Depending on developments in these major countries and the spread in others, the likely economic contraction in the region could be significantly higher than the 5.2% contained in the April 2020 projections by the IMF.  Brazil was estimated to experience a GDP contraction of 5.3% by the IMF, but recent estimates show a steadily growing projected contraction, latest figures showing 6.25%.  See https://www.statista.com/statistics/1105065/impact-coronavirus-gdp-brazil/.  With the COVID-19 cases still growing in Brazil, the contraction in GDP for 2020 will likely continue to worsen.

Similarly, India was projected to have GDP growth of 1.9% in 2020.  The country’s challenges with COVID-19 cases are just starting with the current total number of confirmed cases at just under 200,000 but with nearly half of the cases reported in the last fourteen days (97,567 of 198,706).   Indeed, some recent projections by Oxford Economics now have India’s GDP contracting in 2020.  See https://www.icis.com/explore/resources/news/2020/06/01/10513907/india-gdp-growth-slows-to-4-2-lockdown-stays-at-manufacturing-hubs.

Other countries are also seeing increasing case numbers and the global totals of new cases have not peaked as yet which likely mean greater numbers of cases than most models have anticipated.  If so global contraction could be significantly worse than the April estimates of the IMF.

High national debt levels are growing higher   

The collapse of economic activity even for a few months is reducing tax revenues, increasing government spending in many jurisdictions and worsening national debt levels.  For example, in the United States the Congressional Budget Office blog from April 24 estimated that the U.S. budget deficit in 2020 and 2021 will be $2.7 billion and $1.1 billion higher than earlier estimates and that federal debt held by the public is likely to grow from 79% of GDP in 2019 to 101% of GDP in 2020 and 108% of GDP in 2021.  https://www.cbo.gov/publication/56335.  The actual deficits and federal debt are likely to be significantly higher as the CBO estimates are based on forecasts for GDP contraction that already understates the severity experienced through the first quarter and assumes no further federal assistance will be required to pull the economy out of the steep contraction being experienced in the second quarter.  As governors across the country have made clear, the serious budget shortfalls being experienced by the states because of closed businesses, reduced revenues and increased expenditures are not sustainable.  If these 2020 shortfalls are not addressed through federal legislation, the outcome will be large reductions in state and local services and massive layoffs of state and municipal employees including police, fire, health care and teachers.  So either the budget shortfall of the federal government is understated because of additional stimulus funding needs or the expected recovery of the economy (and hence government revenues) is overstated because of the challenges for many states.

Virtually every country is facing budget challenges as they attempt to address the COVID-19 pandemic and its economic fallout.  See, e.g., articles on growing budget deficits for France, Italy, Brazil and India; https://www.reuters.com/article/us-health-coronavirus-France-budget/france-more-than-doubles-crisis-package-cost-to-100-billion-euros-idUSKCN21R2J2; https://www.nytimes.com/reuters/2020/05/22/world/americas/22reuters-brazil-economy.html; https://www.reuters.com/article/us-health-coronavirus-italy-budget-exclu/exclusive-italy-sees-2020-budget-deficit-near-10-of-gdp-source-idUSKBN21Y2U9; https://economictimes.indiatimes.com/news/economy/indicators/indias-fiscal-deficit-may-shoot-to-6-2-of-gdp-in-fy21-fitch-olutions/articleshow/74928660.cms?from=mdr#:~:text=NEW%20DELHI%3A%20India’s%20fiscal%20deficit,Fitch%20Solutions%20said%20on%20Wednesday.  

Budget shortfalls, the need to borrow more money and the pressure to reduce national, regional and local services all affect the ability of nations to contribute to international institutions, to provide financial assistance to the poorest countries and to facilitate short-, medium- and longer-term growth.

Conclusion

The global COVID-19 pandemic is creating economic havoc in addition to the heavy health toll on countries around the world.  A global challenge of this magnitude hasn’t been faced since World War II.  The projections that have been made by multilateral and national organizations have been for huge contractions in world trade and in global economic growth.  Unfortunately, the estimates at least on global GDP contraction are likely too optimistic both in terms of the severity of the second quarter 2020 contraction and the anticipated level of  second half 2020 recovery.  Moreover, there is likely to be significantly more national stimulus programs needed to help economies recover increasing already huge national debts for many countries and the likely greater need for trade financing and debt support for many developing and least developed countries because of the severity of the global trade and GDP contraction. 

The challenges being faced affect the health and livelihood of billions of people but are occurring at a time of reduced trust in multilateral institutions, increased trade frictions between major nations and groups of nations and a lack of strong leadership within and among nations.  

How severe the damage to the world turns out to be from the pandemic will depend on –

(1) whether countries come together to ensure open markets;

(2) whether countries both coordinate information about and promote expanded production of essential medical goods to ensure adequate and equitable availability to all at affordable prices,

(3) whether countries support efforts of both public and private players on the development of effective vaccines and therapeutics and facilitate the sharing of information while ensuring equitable availability to all at affordable prices where breakthroughs occur,

(4) whether countries support multilateral organizations’ efforts and individually support the bolstering of health care infrastructure of least developed countries and some developing countries where COVID-19 cases could easily overwhelm internal capabilities;

(5) whether countries cooperate for a strong global recovery by pursuing stimulus programs that don’t distort markets and create other challenges to global participation, and by providing multilateral organizations with the resources to address debt and trade financing needs of the poorest among us.

There are some efforts to address each of the five items above although the U.S. announced withdrawal from the World Health Organization handicaps efforts reviewed in (3). 

More needs to be done and could be done with greater cooperation among the top 50 countries in the world.  However, we may be at the maximum of what is the art of the possible at the moment.  For the 7.8 billion people living on earth in 2020, let us hope that more is possible quickly. 

 

 

 

 

 

 

Transparency on trade actions surrounding the COVID-19 pandemic

Global confirmed cases of COVID-19 will reach two million today, April 15, with the actual number likely much higher and with deaths over 125,000. Nearly every country on earth has at least some confirmed cases.

Different countries and territories are at different stages in dealing with COVID-19 infections, with China, South Korea and Singapore seemingly well past the worst of the first wave of infections. Countries in Europe and various states within the United States are also seeing the rate of infection flatten or even decline following weeks of stay-at-home orders, social distancing and drastic changes to daily life. Hot spots are shifting both within countries (e.g., the United States) and to different countries.

The economic cost of closing down portions of economies has been unprecedented with the IMF characterizing the hit on global GDP to be the worst since the great depression of the 1930s. https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020. To avoid even worse economic fallout, countries are pouring huge sums into their economies to prevent massive bankruptcies, limit unemployment and provide expanded social safety nets. Press reports suggest at least $8 trillion has been committed with more being considered in various countries.

For countries who are witnessing likely GDP reductions of as much as 35% in one of the first two quarters of 2020, governments are mapping out scenarios for reopening closed portions of their economies if they have been recent epicenters or engaged in phased reopening if apparently largely past the first phase. Such planning is occurring at the subnational, national or trading bloc level (EU) with little apparent effort to coordinate efforts around the world. Where plans are being discussed publicly, common elements appear to be expanded and harmonized testing (both for the infection and for antibodies), ability to do tracing of individuals who have been in contact with individuals found to have the virus to secure quarantining, capacity of the healthcare system to handle cases, and adequacy of supplies. Concerns about privacy interests are also part of the discussion/needs for democracies. See, e.g., European Commission roadmap released April 15, 2020, https://ec.europa.eu/commission/presscorner/detail/en/ip_20_652; https://ec.europa.eu/info/sites/info/files/communication_-_a_european_roadmap_to_lifting_coronavirus_containment_measures_0.pdf

For most of the developing and least developed countries, the pandemic has yet to show its full force. Many of these countries have inadequate healthcare infrastructure and don’t have the internal manufacturing capabilities or financial resources to handle the pandemic without assistance if they become an epicenter.

The world has seen limited actual coordination of efforts by major players despite commitments by G20 countries although funding for multilateral institutions like the IMF have been increased to facilitate expanded efforts for the weakest countries. There also seems to be an exchange of information and some cooperation in the research efforts underway to find a vaccine.

Many countries who have been hard hit by the pandemic were slow to recognize the extent of the challenge and often slow in implementing comprehensive actions which has exacerbated the challenges, the loss of life and the harm to their economies. This has led to some lack of transparency at least in the early days and perhaps a reluctance for greater cooperation.

The pandemic’s spread has led to extraordinary gaps in supply availability versus short term demand requirements. For example, the OECD indicated that China, which manufactures half of the world supply of masks, found demand for masks at the peak of the crisis in China at ten times the beginning manufacturing capability of the country. Even after ramp up of production, demand in China was twice as large as the dramatically expanded manufacturing capabilities until the country’s infection rate declined. With both the EU and the US going through huge expansions of COVID-19 cases in March and into April, the global shortage problem has been continued and magnified despite additional capacity expansions occurring in other countries.

With no current vaccine to deal with the infections, countries faced with expanding case loads have often shifted to imposing export restraints to prevent loss of scarce supplies, encouraging expanded production, and using other tactics to address domestic demand even if reducing supply to other countries or even if local actions are counterproductive because of global supply chains and similar actions by others. Export restraints have been imposed by close to 70 countries or territories and include actions by China, the EU, the United States and many others, though restraints are arguably temporary and may have exceptions depending on the country applying the restraints. And countries who had export restraints at one point, may be significant exporters later (China) or had been exporters to hard hit countries prior to ramp up of internal demand (e.g., U.S. to China).

Importance of transparency in times of crisis

Each government attempts to provide some level of transparency to its citizens and businesses on actions it is taking. Members of the WTO have committed to providing information on trade measures taken to respond to COVID-19 and groups of countries (G20) have supported that effort. As of April 14th, WTO Members had provided 49 notifications of trade actions related to COVID-19 that either restricted goods or liberalized movement of goods https://www.wto.org/english/tratop_e/covid19_e/covid19_e.htm. While this is a start, there are likely dozens or hundreds of other actions that have not been notified as yet (including actions that may have been withdrawn after a period of time). The lack of full transparency by WTO Members is unfortunate and prevents other Members to understand the reality around the world or to understand potential best practices by other trading partners.

Some business trade associations have put together data bases of actions addressing particular actions important to their members. For example, the Baltic and International Maritime Council (“BiMCO”) has compiled and updates port restrictions/requirements including ability of crew to depart cargo ships in ports, etc. https://www.bimco.org/ships-ports-and-voyage-planning/crew-support/health-and-medical-support/novel-coronavirus—implementation-measures. Similarly, IATA has collected and updates data on requirements for airlines (passenger and air cargo) by country. https://www.iata.org/en/programs/safety/health/diseases/government-measures-related-to-coronavirus/. The data compiled is obviously important for the ships and planes moving cargo internationally. So transparency exists because of efforts of business associations. Unfortunately, one does not see any effort by governments to harmonize requirements across countries to simplify and reduce the costs of moving essential goods.

It does not appear that there are readily accessible data on all suppliers globally of essential medical goods, capacity expansions, current bottlenecks, product availability, etc. It is not clear if such data could be compiled by industry associations or by governments. Presumably such information would be important for a global effort to maximize availability of products to all countries during the pandemic, identify ongoing shortages, prioritize where additional products are needed and so forth. The lack of such information has to be a major shortfall in the transparency needs to effectively deal with the pandemic.

Individual governments, of course, address internal needs on an ongoing basis through notices, regulations, etc. Many of these actions could be notified to international organizations (e.g., to the WTO) in addition to being available domestically. Expanding notifications would improve transparency and potentially encourage other governments to adopt best practices of other countries.

In the United States, many agencies, as well as the White House, are involved in different aspects of keeping goods moving during the pandemic or in restricting the export of such goods. For example, to look just at a few of the agencies involved in the United States, the State Department has made announcements on ensuring H-2 visas for farm workers. https://travel.state.gov/content/travel/en/News/visas-news/important-announcement-on-h2-visas.html. Homeland Security and Customs and Border Protection have taken various actions to expedite clearance of essential goods or implement Administration restrictions on the export of goods. https://www.fema.gov/news-release/2020/04/08/fema-covid-19-supply-chain-task-force-supply-chain-stabilization; https://www.cbp.gov/newsroom/coronavirus. The Department of Agriculture and the Food and Drug Administration have issued various notices addressing special needs for agricultural goods with the collapse of food service sector which supplies restaurants (e.g., temporary waiver of requirements for country of origin information or certain labeling requirements for goods originally destined for food service that are being sold at retail). https://www.usda.gov/coronavirus; https://www.ams.usda.gov/content/usda-announces-labeling-flexibilities-facilitate-distribution-food-retail-locations; https://www.fda.gov/emergency-preparedness-and-response/counterterrorism-and-emerging-threats/coronavirus-disease-2019-covid-19. FEMA, EXIM and others are all playing roles as well.

Conclusion

The COVID-19 pandemic has created extraordinary challenges for the health of the world’s peoples and has imposed unimaginable costs to the global and national economies. As countries work through their individual challenges, there are a spectrum of options to pursue that will reduce or expand the human and economic costs of the pandemic. International organizations are only as strong as their member governments permit them to be. Many observers have lamented the lack of global leadership. Such lack of leadership handicaps the ability and likelihood of countries to minimize the damage from the pandemic and to prepare better for future challenges. Transparency should be the bare minimum we receive from the world’s governments. While there is certainly some transparency on COVID-19 and trade actions being taken (better in some countries than others), we are not maximizing the benefits that broad-based transparency would make available for countries individually or acting collectively. There is still time for a better effort. There are real costs for failing to do all that can be done on this issue.