Are we headed for an economic recession?

The COVID-19 pandemic is now on its fourth month and the economic impacts are surfacing and spreading. Some economists are already predicting a world economic recession with many country economies shrinking, with the consequent massive unemployment in the next 18 months. The isolations, quarantines, lockdowns in many cities and countries, that have caused losses to the travel, tourism, hospitality, and other service industries worldwide, and the loss of productive capacity and disrupted supply chain are just too much that the economy/Gross Domestic Product (GDP) of many countries will shrink in 2020.

Economic recession is defined in economics as two calendar quarters of negative GDP growth. The global GDP by the end of 2019 was already at $90 trillion and was expected to grow at 2.7% in 2020 to $92.5 trillion. If instead it falls below $90 trillion in the 2nd and 3rd quarter to $88 trillion and $86 trillion, then the global economy will be in a recession. Individual countries may not be in a recession but if the aggregate global economy/GDP declines, then we have a worldwide recession affecting every economy as the world is now more economically interconnected.

The Philippine economy/GDP at $400 billion was projected to grow by at least 6% in 2020 before COVID-19. Recent projection by the government is that it will still grow by 5%, as the economic fundamentals of strong private consumption, private and public investments, strong fiscal position, and adequate foreign exchange reserves will carry the economy. Private economists are less optimistic in that the pandemic will easily shave off at least 2% of the growth, that we would be lucky if we can hold on to a 2% to 3% GDP growth in 2020 and avoid a recession. This is a possible scenario as the high GDP growth rates of developing countries like Vietnam, Indonesia, the Philippines, and other developing countries which were at 5% to 8% in previous years, could absorb bigger percentage reductions. But if the economic fallout from the pandemic will be very large and long, even the 8% to 11% GDP growth rates that China had enjoyed for many years may not be able to absorb the contraction.

The demand side of the GDP is composed of consumption, private investment, and government expenditures. Realizing the reduction of the consumer and investment spending, governments will have to increase and accelerate operating and capital expenditures to compensate for the drop in private consumption and investments. For the larger economies like the US, China, Japan, UK, the EU countries, the governments will be infusing hundreds of billions up to trillions of dollars to their economies in terms of fiscal spending aside from monetary easing. The monetary easing is via pumping more liquidity into the financial system and lowering interest rates. These will make it easier and less costly for businesses to borrow to recover losses, make capital investments, and calm down the stock markets that have already lost trillion of dollars of its value in just three months. It is also good for the consumption component, that the private companies are maintaining their expenditures by supporting instead of laying off workers, assisting the supply/needs of health workers, and aiding SMEs. It is not only their moral duty but also an economic imperative for their company’s survival and prosperity.

Whether the above actions by the governments will prevent a global recession depends on the depth and length of the COVID-19 pandemic. If the “exponential contagion curve” will reach its inflection point, flattens, and starts to go down in 90 days, economic activities will revive in June. So, the 3rd and 4th quarters of the year will be recovery periods for the economy. If these quarters will show a positive GDP growth, then only the 2nd quarter GDP will contract and we have escaped a recession. There is a good probability that the Philippines could be one of these countries.