Bleak Forecast Shows Worst Hit to Global Economy Since WWII

In spite of recent positive indicators, global economists predict the world economy will continue to shrink in 2020, further reining in Wall Street bulls. 

MANHATTAN (CN) — Investors looking to soar back into the bull market had their wings clipped somewhat by reports showing the somewhat inevitability of a contracting global economy this year. 

The news came after a six-day rally, spurred in part by a positive report showing unemployment starting to fall and by hopes the Federal Reserve will do whatever it can to keep markets liquid. Despite falling on Tuesday, futures on Wednesday indicated another uptick, though just a marginal one.

At the morning bell, however, the Dow Jones Industrial Average remained slightly negative as negative economic forecasts continue to damper their enthusiasm. The S&P 500 gained a few points, as did the tech-heavy Nasdaq, which has been more resilient than the other exchanges to downturn.

The Organization for Economic Cooperation and Development noted Wednesday in its biannual economic outlook that the global economy will shrink by at least 6% this year, the most dire economic crisis since World War II. 

As if that wasn’t bad enough, the group warned that, if a significant second wave of Covid-19 strikes, economic output could contract by at least 7.6%, with 40 million additional workers being laid off.

In the United States, a single wave of coronavirus will cause gross domestic product to drop 7.3% in 2020, the organization forecasts. But in the case of a double wave of the virus, that same modeling shows U.S. GDP would slide by 8.5% in 2020 and barely increase by 1.9% in 2021.

“The choice between health and the economy is a false dilemma,” OECD Secretary-General Angel Gurria said in a statement. “If the pandemic is not brought under control, there will be no robust economic recovery.”

Gurria said that governments foster “more resilient and sustainable growth” and not merely look to a return to normal. “Actually, normal is what got us where we are now,” he said, pointing to environmental concerns and income inequality.

Globally, GDP is expected to grow again next year, by 5.2% in a best-case scenario where Covid-19 is contained. If the virus continues to spread in a second wave, GDP would increase only by 2.8%, the OECD forecasts.

In March, the OECD had downgraded its global growth forecast to 2.4%, though at that time the virus had not yet struck most Western countries hard. 

The OECD forecast contrasted with last week’s jobs report by the Bureau of Labor Statistics, which showed nonfarm jobs actually rose by 2.5 million last month and the unemployment rate fell to 13.3%. 

Many questioned the May jobs report, however, and the BLS itself warned the response rate on the survey was 15% lower than usual and the unemployment rate could actually be 3% higher than reported.

The BLS released another survey on Tuesday that predictably showed hires in April hit a series low, at 3.5 million, while total separations — including quits, layoffs, and discharges — were the second-highest in the survey’s history.

Nearly half the total layoffs in March and April came from two industries: leisure-hospitality and retail trade, according to the Job Openings and Labor Turnover Survey, which looked more deeply at April’s employment situation. 

“These will be key industries to rebuilt given that one in five Americans worked in retail or leisure and hospitality pre-Covid,” Jessica Rabe of DataTrek wrote in a Wednesday investor’s note. “But they will also be the toughest industries to restore due to continued social distancing guidelines and capacity restraints for service sector establishments.”

Investors will be hoping for further calming words from Federal Reserve Chairman Jerome Powell, who will speak to reporters later Wednesday after a meeting of the Federal Open Markets Committee. Most experts say the Fed will not change its target interest rate for federal funds, but that it may announce other moves to counter the continued economic fallout.

“Any non-action by the Fed will be viewed as an effective tightening of monetary policy and could send stocks plunging in a profit-taking stampede after the huge gains over the past few weeks,” Boris Schlossberg of BK Asset Management wrote in a note. “But Mr. Powell is very likely to be circumspect and will most certainly assure the markets that the Fed remains in an ultra-accommodative mode and stands ready to provide liquidity when necessary.”

More than 7.2 million people have been infected by Covid-19 worldwide, while about 411,000 have died, according to data compiled by Johns Hopkins University. In the United States, 1.9 million are confirmed to have had Covid-19, while 112,000 have died.

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