Coronavirus pushes economy into ‘unknown territory’ – recession could be ‘unavoidable’

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Europe is heading towards an ‘unavoidable’ recession as coronavirus halts productivity and spending on an unprecedented scale, a respected economics expert has warned.

Professor Gabriel A Giménez Roche of NEOMA Business School in France believes severe economic problems cannot be avoided as the pandemic forces a number of the continent’s economic powerhouse into lockdown.

Parts of Italy, Germany, Spain and France are all enforcing shutdowns, and while Boris Johnson has so far resisted calls to implement a similar shutdown, social isolation has been advised across the country.

The result has been an extreme halt in productivity within company operations, as well as tumbling markets, rising unemployment and lower consumption.

Travel virtually stopped, with most flights grounded and many borders closed, and job losses have already begun despite the concerted efforts of governments to prop up their economies – including the UK’s £330bn-and-counting support measures.

But Giménez Roche says recession now appears unavoidable.

He said: “Our worst fears are becoming a reality as we now realise that a recession is looming.

“Even if activity resumes after the end of the coronavirus crisis, the prolonged lack of activity will cause a significant cut in the generation and circulation of cash flows that will not be remedied just by a resumption of operations.

“No matter what measures are taken at the dawn of the coming recession, there will be long months of economic turmoil. Nevertheless, it is obvious that exceptional measures, never seen since the 19th century, are to be expected.”

To relieve this impending situation, central banks around the world have already announced their commitment to injecting money into the markets, but this injection is blind at the moment, since it remains to be determined which sectors will need it most when the time comes.

Giménez Roche said: “The announced injections from banks may prove to be insufficient, as the magnitude of the coming economic recession will largely depend on the duration and reach of the current health crisis – we are all in unknown territory right now.”

He believes governments across Europe must take advantage of the support from central banks to rebalance budgets, streamline taxation and regulations, and adopt strict rules of budget responsibility.

Whatever action comes though, a third of firms believe a recession is now on the way – and predict it will impact globally, not just in Europe.

Nearly half of UK firms expect the country to go into recession, and 37% say it will occur across the world, according to research by trade finance provider Stenn Group.

Company President Dr Kerstin Braun said: “Governments around the world are having to act forcefully to prevent the economic hit from Covid-19 deepening, taking a coordinated approach and opening the liquidity pipe for both fiscal and monetary support.

Dr Kerstin Braun, President of Stenn Group.
Dr Kerstin Braun, President of Stenn Group.

“While a low interest rate provides an important cut in borrowing costs for businesses and consumers at this delicate moment, the coronavirus outbreak will be a real test of the health of the UK and US economies. Lowering rates alone isn’t enough to be effective in offsetting the economic impact of Covid-19. We already know the Chinese economy is going to be hit in the first and second quarter.

“For us, the plunge in oil coupled with the economic damage of Covid-19 marked the beginning of a global recession. Our research showed that at the beginning of the year, half of UK and US businesses predicted a recession and a third predicted an international global crisis, and just three months into 2020 and we’re starting to see this play out.”

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