Fernando Alcoforado*
Coronavirus effects heighten fears of recession followed by depression in the world economy. Stock exchanges have had a difficult week around the world and, in Europe, the recession seems inevitable. The paralysis in China weighs heavily on the domestic growth of many countries because the supply chains of multinationals need components manufactured in Chinese factories to guarantee their production. Consumption in western countries will be strongly affected. Tourism, air transport, leisure are already suffering the consequences. A global recession followed by depression is approaching. In Europe, this seems inevitable. The world economy is on a tightrope and the coronavirus may be the “fatal coup” that will cause it to fall.
The world is paralyzed as the new coronavirus spreads. Airplanes that don’t take off, schools closed in Japan and France, and massive suspended events in Switzerland and other parts of the world. The world economy faces its greatest risk of recession followed by depression since the 2008 global financial crisis. Considering that each pandemic throughout history has always been followed by a global recession, there is no reason why it would be any different this time. Long before this coronavirus pandemic, the International Monetary Fund (IMF) warned that the global recovery would be “fragile” and could succumb to the slightest turbulence. The situation worsened further with the expansion of the coronavirus.
As the list of radical measures to try to stem the spread of coronavirus grows by the day, the epidemic originating in China is expanding globally. Since January, factories have stopped their activities in China and entire cities have been confined. Saudi Arabia has stopped receiving pilgrims heading to Mecca. In addition, in Italy there was a suspension of football league matches. Even the Tokyo Olympic Games are at risk of not being held. There are 101,988 infected by the coronavirus in the world and 3,491 died, according to an AFP report from official sources. Many looks are turned to the United States, where the coronavirus has so far not hit hard, although health officials hope this will happen soon. To avoid this scenario, President Donald Trump decided to suspend flights from Europe to the United States, which will contribute strongly to the increase in the global recession.
If there is contamination in the United States, the US economy would immediately fall into recession. Consumption, which accounts for 70% of economic activity in the United States, could be affected sharply. If the world’s largest economy falls into a recession, the rest of the planet would suffer the consequences. China’s global economy and China’s GDP (Gross Domestic Product) are expected to grow less than expected in 2020. The IMF projection is for a growth rate of 5.6% for China and 3.3% for the world economy in 2020. The outbreak of the coronavirus represents a major shock in the Chinese economy, as it has closed factories and stores, quarantined entire regions and left many citizens locked in their homes for fear of contagion, thereby reducing consumption and economic activity. It is worth remembering that China is the second largest economy in the world, with a share in global GDP of around 16%. The high successive declines that are currently registered on the Stock Exchanges all over the world are basically the result of investors’ expectations of a recession in the world economy caused by the coronavirus.
Coronavirus pandemic affects global supply chains, shakes stock markets, drives down oil prices and raises concerns about slowing Chinese, US and global economies. The advancing epidemic of the new coronavirus around the world has caused havoc in global markets and raised concerns among investors and governments about the impact of the spread of the virus on global supply chains, corporate profits and the growth of the global economy. Coronavirus effects heighten fears of deep recession in the world economy. Stock exchanges have had a difficult week around the world, and in Europe, the recession followed by depression seems inevitable. The paralysis in China weighs on the growth of the world economy because the supply chains of multinationals need components manufactured in Chinese factories to guarantee their production. Consumption in western countries will be strongly affected. A global recession followed by depression is approaching. In Europe, this seems inevitable.
It should be noted that an economic depression is characterized by an aggravated state of recession, which always has negative consequences for the world economy. There are differences between recession and economic depression. Recession occurs when there is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. Economic depression, in turn, consists of a long period characterized by a steep fall in GDP, numerous corporate bankruptcies, high unemployment growth, scarcity of credit, low levels of production and investment, reduced commercial transactions, high exchange volatility, with deflation (falling prices) or hyperinflation (rising prices) and crisis of confidence. The greatest economic depressions in history were those of 1815, 1873 and 1929. Among them, the most serious was, without a doubt, that of 1929.
The economic depression of 1929 occurred with the crack of the New York Stock Exchange when the shares of large companies fell sharply, losing almost all their financial value. The companies were forced to slow down their production. As a result, they promoted the mass layoff of workers. With the crash of the New York Stock Exchange, banks and investors lost large sums of money. The situation of the banks was made worse by the fact that debtors were unable to pay their debts. This, in turn, caused the profits of these financial institutions to decline. Many people who used banks, fearing their possible bankruptcy, removed their deposits and investments from them. Thus, several banking institutions went bankrupt. The total number of banking institutions closed during the 1920s and 1930s was 14,000, a gigantic index. About 30% of American workers who remained in their jobs were forced to accept cuts in their wages. Another existing problem was the great deflation – drop in the price of products and in the cost of living in general. The effects of the Great Depression of 1929 were felt worldwide because the economy was already sufficiently globalized, further increasing poverty and unemployment. World production was reduced by 40%, with a decrease in iron production reaching 60%, steel 58%, oil 13% and coal 29%. These effects reached different intensities in each country. This scenario can be repeated at the current moment.
We are, therefore, facing a fundamental crisis of capitalism as occurred with the depression of 1929. Our era is one in which the enormous and concentrated economic forces are being called upon to act in times of crisis. Those responsible for driving the world economy today do not have a solution in their hands. The governments of the central capitalist countries do not know how to save the system from the widespread economic debacle that is underway aggravated by the coronavirus. To resolve the current crisis, it would be necessary to make a profound change towards a new world economy. Macabre, in the 1930s of the 20th century, there was already a program for the solution of the crisis: the preparation of war. The world economic crisis that began in 1929 only ended with the outbreak of World War II. At present, will humanity have to face a new world conflagration to save the world capitalist system from the impending debacle?
And Brazil? The country’s economy is sensitive to what happens in China, its main trading partner and, also, in the United States. A general slowdown in the world economy will have a considerable effect on Brazilian exports and on the growth prospects of the fragile national economy, which has been stagnating since 2014, facing an endemic recession. If the prospects for the world economy towards the economic depression are catastrophic, they are also equally catastrophic for the Brazilian economy.
* Fernando Alcoforado, 80, awarded the medal of Engineering Merit of the CONFEA / CREA System, member of the Bahia Academy of Education, engineer and doctor in Territorial Planning and Regional Development by the University of Barcelona, university professor and consultant in the areas of strategic planning, business planning, regional planning and planning of energy systems, is author of the books Globalização (Editora Nobel, São Paulo, 1997), De Collor a FHC- O Brasil e a Nova (Des)ordem Mundial (Editora Nobel, São Paulo, 1998), Um Projeto para o Brasil (Editora Nobel, São Paulo, 2000), Os condicionantes do desenvolvimento do Estado da Bahia (Tese de doutorado. Universidade de Barcelona,http://www.tesisenred.net/handle/10803/1944, 2003), Globalização e Desenvolvimento (Editora Nobel, São Paulo, 2006), Bahia- Desenvolvimento do Século XVI ao Século XX e Objetivos Estratégicos na Era Contemporânea (EGBA, Salvador, 2008), The Necessary Conditions of the Economic and Social Development- The Case of the State of Bahia (VDM Verlag Dr. Müller Aktiengesellschaft & Co. KG, Saarbrücken, Germany, 2010), Aquecimento Global e Catástrofe Planetária (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2010), Amazônia Sustentável- Para o progresso do Brasil e combate ao aquecimento global (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2011), Os Fatores Condicionantes do Desenvolvimento Econômico e Social (Editora CRV, Curitiba, 2012), Energia no Mundo e no Brasil- Energia e Mudança Climática Catastrófica no Século XXI (Editora CRV, Curitiba, 2015), As Grandes Revoluções Científicas, Econômicas e Sociais que Mudaram o Mundo (Editora CRV, Curitiba, 2016), A Invenção de um novo Brasil (Editora CRV, Curitiba, 2017), Esquerda x Direita e a sua convergência (Associação Baiana de Imprensa, Salvador, 2018, em co-autoria) and Como inventar o futuro para mudar o mundo (Editora CRV, Curitiba, 2019).
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