{"id":2191,"date":"2020-09-29T10:04:39","date_gmt":"2020-09-29T08:04:39","guid":{"rendered":"http:\/\/alpha-credo.com\/?p=2191"},"modified":"2020-09-29T10:04:39","modified_gmt":"2020-09-29T08:04:39","slug":"optimistic-too-soon","status":"publish","type":"post","link":"https:\/\/alpha-credo.com\/hr\/optimistic-too-soon\/","title":{"rendered":"Optimistic too soon?"},"content":{"rendered":"

Slowly approaching the last quarter of 2020 global economy is still facing great uncertainty \u2013 will there be a second wave? How will countries respond? Will the swift growth continue?<\/em><\/strong><\/p>\n

Looking at the results of a survey carried out by the Pew Research Center (2020), we can observe that in some countries, people perceive more negative outlook of the economy during the coronavirus outbreak than amid the Great Recession in 2008. For example, people in Australia, Spain, Italy, and the UK are certain that the economic situation in their country is far worse opposed to 2008. Overall results show that 80% of people believe their country’s economy is fairing badly, compared to 2008 when 72% of respondents provided the same answer. Interestingly, the survey also shows that people are more optimistic about their national economies improving in the next 12 months as they were at the start of the Great Recession.<\/p>\n

Given the real state of the economy, one can understand why people are more pessimistic than in 2008. The global output collapsed in the second quarter of 2020 with declines of more than 20% in some advanced and emerging-market economies. However, people must be careful about being too optimistic about what the future holds. As the global economy might have experienced a swift bounce, it still has a long way to reach previous output levels. The economy did in fact lost quite some momentum since June according to OECD. The same report also shows that the levels of corporate investments and international trade will remain weak which will likely hold back the pick-up in production in the export-oriented economies.<\/p>\n

Even though the world economy is slowly recovering, we must therefore be cautious when predicting the future. Recovery is still highly uncertain and will depend on how successful the countries will be in keeping their borders and business activity open. Overall, the global GDP is set to decline by 4,5% this year and might pick up by 5% in 2021. Even though the global economy is projected to pick up in the next 18 months, the pace of recovery will differ across economies. The only economy that is set to grow in 2020 is China as it did face the pandemic earlier than the rest of the world. All in all, most of the countries will certainly not reach the output of 2019 before the end of 2021. According to the same OECD publication, the countries that will power the recovery vehicle are China, the United States, and a few of the European ones.<\/p>\n

OECD provides two recovery scenarios (see figure below). In the first \u2013 optimistic scenario \u2013 consumer and business confidence could improve if the countries would be able to prevent new pandemic outbreaks or there would be signs of effective treatment or vaccine. Such a scenario would increase demand and fuel growth. The second scenario \u2013 a double hit scenario \u2013 predicts a slower recovery. This scenario is becoming more of a reality in the recent days. The number of coronavirus cases is growing, and the vaccine will not be available before the second half of the next year according to the pharmaceutical companies. Such scenario would put plenty of companies under great stress for an extended period of time. Consequently, business investments would weaken, demand would fall and financial market participants would become more risk-averse. In the second scenario, the global economic activity will still be lagging behind the fourth quarter of 2019 by 2 \u2013 3 percentage points in 2021.<\/p>\n

\"\"

\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0OECD World GDP Projection, 2020<\/p><\/div>\n

OECD predicts that precautionary savings will for some time continue to be elevated by continued high uncertainty, weak confidence, and employment declines. Spending will of course pick up only if economies would be able to prevent potential virus outbreaks. Uncertainty is also likely to cause companies with high debt to hold back their investments for an extended period of time. Sectors that were the most affected by the shutdown and were till now powered by the help of government interventions, are the ones that have the highest probability of becoming insolvent if the demand would not pick up. In addition, the Financial Times (FT) warned that we have entered the zombie economy where companies that are overleveraged and are forced to allocate most of their revenues to service debt, are only prolonging their inevitable insolvency. The European Commission in fact calculated that in a relatively optimistic scenario, corporate Europe would lose 720 billion EUR by the end of 2020 \u2013 FT warns that the economy in fact performed worse than those calculations assumed. In the stress scenario, losses are expected to approximately double.<\/p>\n

To sum it up, we believe that the global economy will take a slower path towards recovery due to the fact that there are no signs of effective treatment or vaccine reaching the wider public in the upcoming two quarters, and COVID cases increase. Due to uncertainty, companies will most likely raise their precautionary savings and plenty of investments will be postponed, slowing down the global output. Accumulating debt in order to survive, companies will have to put more focus on servicing debt than their suppliers. High level of dilligence is needed in conducting new business with existing or new partners. Corporate zombies are on the rise.<\/p>\n

\n

This article was written by the team at ALPHA CREDO<\/p>\n

Sources:<\/p>\n

Sandbu, M. (2020). The corporate zombies stalking Europe. The Financial Times. Available here<\/a>\u00a0<\/em><\/p>\n

OECD (2020). OECD Economic Outlook, Interim Report September 2020, OECD Publishing, Paris. Available here\u00a0<\/a><\/em><\/p>\n

Mordecai, M., Schumacher, S. (2020). In many countries, people are more negative about the economy amid COVID-19 than during Great Recession. Pew Research Center. Available here<\/a>\u00a0<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Slowly approaching the last quarter of 2020 global economy is still facing great uncertainty \u2013 will there be a second wave? How will countries respond? Will the swift growth continue? Looking at the results of a survey carried out by the Pew Research Center (2020), we can observe that in some countries, people perceive more […]<\/p>\n","protected":false},"author":5,"featured_media":901,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[7],"tags":[],"yoast_head":"\nOptimistic too soon? - Alpha Credo<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/alpha-credo.com\/hr\/optimistic-too-soon\/\" \/>\n<meta property=\"og:locale\" content=\"hr_HR\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Optimistic too soon? - Alpha Credo\" \/>\n<meta property=\"og:description\" content=\"Slowly approaching the last quarter of 2020 global economy is still facing great uncertainty \u2013 will there be a second wave? How will countries respond? 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