INSIGHT: Avoiding a second wave critical to recovery, allaying longer term damage

Author: Nigel Davis

2020/06/10

LONDON (ICIS)--The latest World Bank economic forecast suggests that the current recession will be almost three times as steep as that in 2009, and the deepest since the Second World War.

It assumes countries emerging from coronavirus-induced lockdowns by mid-year.

The downgraded forecasts would not be expected to make easy reading.

“With advanced economies contracting, China experiencing record-low growth, and EMDE [emerging market and developing economies] growth savaged by external and domestic headwinds, the global economy is expected to shrink by 5.2% this year in a baseline forecast,” the World Bank said.

In such an environment, the stimulus injected into sectors of the economy points to where the coronavirus impact may be alleviated the fastest.

But most countries in the world are expected to fall into recession this year, and the World Bank expects per capita output to fall in the largest fraction of countries since 1870.

CHEMICALS: CHALLENGED
This highlights the challenge for chemical producers that have come to rely so heavily on global growth and on market demand functioning in a relatively straightforward manner.

Where is market demand now and how will it develop or change over the coming months and into next year and beyond?

The World Bank forecasts EMDE GDP to contract by 2.5% in 2020, a trough not seen since aggregated data first became available in 1960.

Many millions will fall back into poverty, it added, because the pandemic will hit EMDE countries that are deeply integrated into global supply chains and globally interdependent are set to suffer.

The forecast makes the point that commodity exporting EMDE’s will be hard hit from weaker China growth and the collapse in demand for commodities, particularly oil.

Placing chemicals into this fractured landscape with demand patterns widely distorted is the main challenge.

China is by far the largest market for chemicals and a major producing nation, but the reduction in spending power globally means that market demand will change even if those markets are able to return to functioning again to a degree of normality relatively soon.

The economic trough forecast by the World Bank, and on Wednesday by the OECD – which suggests that the global economy will contract 6% this year – will have mid- and long-term consequences that will have to be tackled.

Raising the poorest out of extreme poverty is one mighty challenge as is the revitalising of economies worldwide to help restore and then at least maintain adequately functioning businesses and civil society.

Business could bounce back relatively smartly although supply/demand balances will need to be rethought and scenarios re-imagined and this will happen against the backdrop of China continuing to increase petrochemical production capacity significantly.

SECOND WAVE
There is widespread, deep concern about the likelihood of rising rates of infection from coronavirus later in the year, after lockdowns have ceased and, in the northern hemisphere, winter sets in.

Whether there is a resurgence of the virus, or whether further lockdowns are required to tackle its spread, remains to be seen but this is not a scenario envisaged by everyone.

Some believe future widespread lockdowns will not be necessary largely because the mortality rate for younger people is low but also as testing and treatment improves.

Analyst at European investment bank Credit Suisse, for instance, have suggested this might be the case and the argument lends some support to their bullish longer term equity strategy.

They add, however, that most investors are expecting a ‘U’ shaped recovery. Credit-Suisse economists expect a return to pre-virus levels of GDP by mid-2022.

TWO SCENARIOS
The OECD on Wednesday said that it had taken the unusual step of presenting two, equally likely, scenarios.

A return to lockdowns might mean that global economic output plunges by 7.6% this year, before climbing back 2.8% in 2021.

Europe would be particularly badly hit while the healthcare systems of emerging economies face the particular challenges of strained healthcare systems.

The economic output of China and India is seen to be relatively less affected.

In its more optimistic scenario – in which a second wave of infections is avoided – global GDP is forecasted to fall by 6% in 2020.

The OECD adds that it expects the crisis to leave long-lasting scars, specifically, a fall in living standards, high unemployment, and weak investment.

It will be a long time before output reaches pre-crisis levels under both scenarios, it says, even after an initial rapid resumption of economic activity.

Front page picture: Bangladeshi citizens queue up to claim unemployment benefits in Bangkok, 4 June
Source: Sakchai Lalit/AP/Shutterstock 

Insight by Nigel Davis

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