Also stock markets they understood that it is recession. But still they are trying to understand how serious is and what ascent there will be after. Because it's the most anomalous ever seen and therefore unimaginable. By now, with the closure of businesses that is extending throughout the western world, it is no longer only those who live in Italy who are really realizing it.
THEanomaly is of two types with the same root: la rarefaction of social activitiesboth professional and recreational. Thus we have the first type of anomaly: the reduction to a minimum of social relations has caused a double and simultaneous shockof supply and demand. People abstain both as workers and consumers, and production and purchases of goods collapse together.
As if the Jewish precept to stop working on the Sabbath, lo Shabbat (when even operating the light switch is within 39 melachot prohibited), had become universal practice. Observance of Islamic Friday and Catholic Sunday is limited to prayer in the mosque and in the church.
The second anomaly follows as a result: it is a recession that first of all it affects the services, because travel and social activities are goods provided by the tertiary sector. Normally, the latter suffers little from the ups and downs of the economy. While the manufacturing is cyclical par excellence, because it manufactures those goods (durable consumption and investment) whose demand fluctuates greatly depending on the economic weather.
This second anomaly has an important implication: lost GDP is not recovered, if not minimally. In fact, those who give up going on a trip, going to a restaurant or cinema, going to the hairdresser or the gym, once the crisis has passed, do not intensify these activities to recover what they had to give up. For one simple reason: the lack of time and of physical possibilities (eating twice as much is not possible). A Proustian search for lost time becomes impossible.
The tertiary sector is strongly labor intensive. This means that the decrease in its activity lowers employment and wage bill and therefore household income, except in cases in which this is not supported by the intervention of social safety nets (unemployment benefits, layoffs, paid absences).
By now there are no longer only anecdotal clues of the current recession, but statistical evidence. For example, in plummeting services PMI indices, above all, and manufacturing in China and in the closest geographically and commercially and productively linked nations: from Taiwan to Singapore, from South Korea to Japan, from Vietnam to Australia. Elsewhere the epidemic arrived later and the effects are also beginning to be seen later, in the March numbers. Like the vertical fall of the IFO index: German business confidence has plunged as in 1991, much more than in 2008-9, and is at the levels of August 2009.
How violent it is this recession? Very very much, because the activities really stop: due to lack of demand, due to lack of semi-finished products, due to the closure of the borders which make transport difficult and due to the lack of transporters (who refuse to go to the most infected areas). Again, Chinese data speak loud and clear: -13,5% annual industrial production in January-February (combined to avoid the distortions of the lunar new year), -20,5% retail sales and -24,5% gross fixed investments. And the German ones mentioned.
In some industries, activity drops by 100% (hotels close, flights are canceled like events, and so on). It's more of a tsunami than a recession.
The first estimates say that in China's GDP falls by 1,5% in the first quarter, instead of increasing by 1,5%. That is a difference of three percentage points. But it could turn out to be much worse, because it is not yet known how much activity is really recovering in March in those provinces.
If the same were to happen elsewhere, subtracting three points of GDP from the world economy would mean having zero growth in 2020. A very rare fact that is finally starting to be taken into account. Goldman Sachs now talks about a 5% non-annualized decline in US GDP in the second quarter. The European Commission estimates a 1% contraction of Eurozone GDP for the whole of 2020 (from +1,4% previously forecast). But the risks are all to the downside.
Perhaps this is the meaning of "leap year, fatal year".
The sequence of Chinese events is being replicated in Western economies where the infected and dead from SARS-Cov2 are now counted. Italy is worse off than France, Germany, the United Kingdom and Spain. But the time is proving that too it happens there what we see here. Luckily, the lag gets shorter, so we'll have less delay in spreading the shock and restarting.
Le tsunami waves they lose strength as they move away from the telluric epicenter. The same happens for the economic consequences of the epidemic. But also in USA more than one point of GDP will be missing, with a significant effect that would also extend to the outcome of the presidential elections on 3 November. There Trump's reelection she's suddenly become much less certain.
Il oil crash and actions they sprinkle salt on the wound. For the first, because it has the immediate effect of reducing the domestic demand for exporting countries and to block investments in the oil sector. For the latter because they generate a poverty effect which leads to more parsimony.
And after the recession? It will be definitely a rebound, even strong. But it won't be in V. In fact, the recessive echo will extend to subsequent quarters. Because some losses in supply and demand are, as mentioned, permanent, because those are set in motion typical mechanisms of a recession on the labor market and on finance (unpaid debts), because the international tourism it will be affected for a few quarters, because it will take time for people to go back to their usual lives, because some behaviors adopted during the epidemic will remain (more teleworking and online shopping).
Because countries are not all hit simultaneously as in 2009 (when there was a short and sharp shock), but fall one at a time like bowling pins, even if the reaction times have shortened. In short, the worst is ahead of us. So far we have painted the devil less ugly than he will turn out to be.
PS: the data is starting to help understand what will happen, and tell us how the economy was before the contagion. In this, useful information is provided by: the USA was running great (see February's excellent labor market data), the Eurozone was trying to exit from stagnation, and therefore was more fragile and exposed to the economic consequences of the epidemic; mostly Italy, but it is, unfortunately, not new.
