In December 2019, the first case of COVID-19 was identified in Wuhan, the most populous city in central China. It is a virus that affects the respiratory system with a high degree of contagion and low mortality. Since the recognition of the outbreak, several measures of socia isolation, suspension of activities and productive stoppage have been implemented. The impacts it has generated have put the world economy from the perspective of an even more complex economic and social crisis than that expected at the end of 2019.
The world is dragging a low growth trend since 2010, a 2.8% annual average. The end of 2019 was marked by various expressions of social discontent fed up with economic policies in Hong Kong, Iran, France, the United Kingdom, Spain. They also recurred in Latin America, where the strongest social manifestations happened in Ecuador, Argentina, Chile, Colombia, and Haiti. Before the pandemic, the accumulation model, based on the free market, was expected to face a social crisis triggered by the unacceptable social costs of privatization of public services, the flexibilisation of labour legislation, the financialisation of savings and pensions, the concentration of wealth, and the pre-eminence of private capital in the allocation of resources.
With the outbreak, from mid-January China began to implement measures of isolation, city paralysis, border closures, and factory closures. These measures slowed down the Chinese economy with impacts on its level of economic growth that spilled over to the US, Canada, and Mexico. This happens as it is their leading supplier and its third-largest export market after each other. China supplies strategic inputs for five productive branches: aeronautics, pharmaceuticals, automotive, telecommunications, and electronics.
Despite the paralysis of the Chinese economy, the COVID-19 has reached a degree of almost global contagion, with more than 229 thousand confirmed cases, 148 countries and 9.3 thousand deaths worldwide ¬ (March 19, 2020). Although it has a low mortality rate, the impact on the world's social, political, and economic life has been profound. At the end of January, the International Monetary Fund was still talking about a slow recovery in world growth of 3.3%, compared to 2.9 in 2019. However, only on 12 February, the world's leading stock markets collapsed. Nobody calculated the magnitude of China in the global production chains. China is the backbone of the world economy.
After the world's most dynamic economy came to a standstill, its exports were canceled, and its imports restricted. Instantly, international trade was reduced, and production in global value chains began grinding to a halt. The impact was immediate on the economies linked to it. The first to feel it was the financial markets and the more developed countries. Since February 12, the leading stock exchanges have not stopped their fall, the S&P 500 has accumulated a 26.1% decline, the German DAX 35.3%, the Japanese NIKKEI 27.1%, and the British FTSE 30.6%. To date (19.3.2020), the decline continues despite all the attempts by the Fed and the ECB to stop it. (See Chart 1) It has reduced the federal funds rate to between 0 and 0.25% and injected $700 billion through the sale of treasury bonds, and the European Bank, which has injected E750 billion.
Commodities also fell. In early March, the Organization of Petroleum Exporting Countries (OPEC) proposed to halt the 25% drop in oil prices caused by the slowdown in production. The idea was a decrease of 1.5 million barrels per day from March 4 on to July 2020. Russia, for its part, refused to reduce its production, given that more than 50% of Russian exports depend on oil (between crude, refined, and gas). The result was that Saudi Arabia announced an increase in its production to compensate for the fall in its exports. This exacerbated the price drop as between January 6 and March 18, it fell 60%, from $68.9 to $28.1 a barrel. Saudi Arabia, OPEC, and Russia are all in dispute with the United States. The low prices hurt it more because of its low productivity and its reliance on expensive shale gas and oil. If they manage to keep the prices down, the US shale industry will go bankrupt. It will then be rescued.
The scenario for Latin America before the COVID-19 outbreak was very complicated. ECLAC recognized in December 2019 that the region was showing a generalized and synchronized economic slowdown. It noted that six consecutive years of low growth had been completed and an estimated 1.3% average growth expected in 2020. However, the outbreak of COVID-19 has made everything worse.
China is the leading import partner for Brazil, Chile, and Peru; the second for Argentina and the third for Mexico and Colombia. It is also the leading export partner for Brazil, Chile, Peru, and the second most important for Mexico, Colombia, and Argentina. With this degree of interconnection, its stagnation adversely impacted production, investment, employment, income, and consumption of households with falling expectations. Since the beginning of February, the Mexican Stock Exchange (BMV) accumulated a fall of 21.1%, Chile's of 37.2%, and Brazil's (BOVESPA) of 41.6%. (see graph 2)
The reference price of oil accumulated a 63% fall between January and March. It is worth pointing out that the exportation of oil is fundamental for Venezuela, where it constitutes 92% (80% crude and 12% refined) of total exports. It is also basic for Trinidad and Tobago 54.6%; Bolivia 32%; Colombia 33.3% (28% crude and 5.3% refined); Ecuador 29%; Brazil 8.7% and Mexico 5.2%. The reduction of the price will impact the level of tax revenue, of the budget expenditure, of public investment and, therefore, the rhythm of production and consumption of the next years.
The virus has exposed the deep structural limits of the world economy and revealed the vulnerabilities of the accumulation model based on the free market and productive global chains. While China became the heart of these chains, China's one-quarter slowdown will cut the low growth forecast for Latin American and global economies in the one-half year. The speed with which China reactivates will help, but it does not mean that the rest of the world will revive at the same pace. The global recession is on the board by all accounts. The economic and financial damage unleashed by the COVID-19 will force decision-makers to rethink the axis of growth and accumulation for the coming years. This process will be slower and more complicated than with the 2007-09 crisis.