Connect with us

Markets

Chart: The Downward Spiral in Interest Rates

Published

on

During the onset of an economic crisis, national governments are thought to have two chief policy tools at their disposal:

  1. Fiscal Policy
    How the central government collects money through taxation, and how it spends that money
  2. Monetary Policy
    How central banks choose to manage the supply of money and interest rates

Major fiscal policy changes can take time to be implemented — but since central banks can make moves unilaterally, monetary policy is often the first line of defense in settling markets.

As the ripple effect of the COVID-19 pandemic rages on, central banks have been quick to act in slashing interest rates. However, with rates already sitting at historic lows before the crisis, it is possible that banks may be forced to employ more unconventional and controversial techniques to try and calm the economy as time goes on.

The Fed: Firing at Will

The most meaningful rate cuts happened on March 3rd and March 15th after emergency meetings in the United States.

First, the Federal Open Market Committee (FOMC) cut the target rate from 1.5% to 1.0% — and then on Sunday (March 15th) the rate got chopped by an entire percentage point to rub up against the lower bound of zero.

Fed rate cuts historical

As you can see on the chart, this puts us back into familiar territory: a policy environment analogous to that seen during the recovery from the financial crisis.

ZIRP or NIRP?

It’s been awhile, but with interest rates again bumping up against the lower bound, you’ll begin to see discussions pop up again about the effectiveness of zero interest rate policy (ZIRP) and even negative interest rate policy (NIRP).

Although the latter has been used by some European banks in recent years, NIRP has never been experimented with in the United States or Canada.

Here’s a quick primer on both:

NIRP and ZIRP

With rates sitting at zero, it’s not impossible for the Fed and other central banks to begin toying more seriously with the idea of negative rates. Such a move would be bold, but also seen as highly experimental and risky with unforeseen consequences.

Global Rate Slashing

Since only the beginning of March, the world’s central banks have cut interest rates on 37 separate occasions.

The only exception to this rule was the National Bank of Kazakhstan, which raised its key rate by 2.75% to support its currency in light of current oil prices. Even so, the Kazakhstani tenge has lost roughly 15% of its value against the U.S. dollar since February.

Here’s a look at cumulative interest rate cuts by some of the world’s most important central banks, from January 1, 2020 until today:

Central Bank Moves YTD

Going into the year, rates in developed economies were already between 0% and 2%.

Despite not having much room to work with, banks have slashed rates where they can — and now out of major developed economies, Canada has the “highest” interest rate at just 0.75%.

Helicopters on the Horizon

With central banks running out of ammo for the use of traditional measures, the conversation is quickly shifting to unconventional measures such as “helicopter money” and NIRP.

Life is already surreal as societal measures to defend against the spread of COVID-19 unfold; pretty soon, monetary measures taken around the globe may seem just as bizarre.

Put another way, unless something changes fast and miraculously, we could be moving into an unprecedented monetary environment where up is down, and down is up. At that point, it’s anybody’s guess as to how things will shake out going forward.

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Comments

Markets

Shapes of Recovery: When Will the Global Economy Bounce Back?

Economic recovery from COVID-19 could come in four shapes—L, U, W, and V. What do they mean, and what do global CEOs see as the most likely?

Published

on

The Shape of Economic Recovery, According to CEOs

Is the glass half full, or half empty?

Whenever the economy is put through the ringer, levels of optimism and pessimism about its potential recovery can vary greatly. The current state mid-pandemic is no exception.

This graphic first details the various shapes that economic recovery can take, and what they mean. We then dive into which of the four scenarios are perceived the most likely to occur, based on predictions made by CEOs from around the world.

The ABCs of Economic Recovery

Economic recovery comes in four distinct shapes—L, U, W, and V. Here’s what each of these are characterized by, and how long they typically last.

  • L-shape
    This scenario exhibits a sharp decline in the economy, followed by a slow recovery period. It’s often punctuated by persistent unemployment, taking several years to recoup back to previous levels.
  • U-shape
    Also referred to as the “Nike Swoosh” recovery, in this scenario the economy stagnates for a few quarters and up to two years, before experiencing a relatively healthy rise back to its previous peak.
  • W-shape
    This scenario offers a tempting promise of recovery, dips back into a sharp decline, and then finally enters the full recovery period of up to two years. This is also known as a “double-dip recession“, similar to what was seen in the early 1980s.
  • V-shape
    In this best-case scenario, the sharp decline in the economy is quickly and immediately followed by a rapid recovery back to its previous peak in less than a year, bolstered especially by economic measures and strong consumer spending.

Another scenario not covered here is the Z-shape, defined by a boom after pent-up demand. However, it doesn’t quite make the cut for the present pandemic situation, as it’s considered even more optimistic than a V-shaped recovery.

Depending on who you ask, the sentiments about a post-pandemic recovery differ greatly. So which of these potential scenarios are we really dealing with?

How CEOs Think The Economy Could Recover

The think tank The Conference Board surveyed over 600 CEOs worldwide, to uncover how they feel about the likelihood of each recovery shape playing out in the near future.

The average CEO felt that economic recovery will follow a U-shaped trajectory (42%), eventually exhibiting a slow recovery coming out of Q3 of 2020—a moderately optimistic view.

However, geography seems to play a part in these CEO estimates of how rapidly things might revert back to “normal”. Over half of European CEOs (55%) project a U-shaped recovery, which is significantly higher than the global average. This could be because recent COVID-19 hotspots have mostly shifted to other areas outside of the continent, such as the U.S., India, and Brazil.

Here’s how responses vary by region:

RegionL-shapeU-shapeW-shapeV-shape
Global (N=606)32%42%16%11%
U.S. (N=103)26%42%23%9%
Europe (N=110)29%55%12%4%
China (N=122)25%43%11%21%
Japan (N=95)49%26%23%1%
Gulf Region (N=16)57%26%17%-

In the U.S. and Japan, 23% of CEOs expect a second contraction to occur, meaning that economic activity could undergo a W-shape recovery. Both countries have experienced quite the hit, but there are stark differences in their resultant unemployment rates—15% at its peak in the U.S., but a mere 2.6% in Japan.

In China, 21% of CEOs—or one in five—anticipate a quick, V-shaped recovery. This is the most optimistic outlook of any region, and with good reason. Although economic growth contracted by 6.8% in the first quarter, China has bounced back to a 3.2% growth rate in the second quarter.

Finally, Gulf Region CEOs feel the most pessimistic about potential economic recovery. In the face of an oil shock, 57% predict the economy will see an L-shaped recovery that could result in depression-style stagnation in years to come.

The Economic Recovery, According to Risk Analysts

At the end of the day, CEO opinions are all over the map on the potential shape of the economic recovery—and this variance likely stems from geography, cultural biases, and of course the status of their own individual countries and industries.

Despite this, portions of all cohorts saw some possibility of an extended and drawn-out recovery. Earlier in the year, risk analysts surveyed by the World Economic Forum had similar thoughts, projecting a prolonged recession as the top risk of the post-COVID fallout.

It remains to be seen whether this will ultimately indeed be the trajectory we’re in store for.

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Markets

The $88 Trillion World Economy in One Chart

The world’s total GDP crested $88 trillion in 2019—but how are the current COVID-19 economic contractions affecting its future outlook?

Published

on

The $88 Trillion World Economy in One Chart

The global economy can seem like an abstract concept, yet it influences our everyday lives in both obvious and subtle ways. Nowhere is this clearer than in the current economic state amid the throes of the pandemic.

This voronoi-style visualization from HowMuch relies on gross domestic product (GDP) data from the World Bank to paint a picture of the global economy—which crested $87.8 trillion in 2019.

Editor’s note: Annual data on economic output is a lagging indicator, and is released the following year by organizations such as the World Bank. The figures in this diagram provide a snapshot of the global economy in 2019, but do not necessarily represent the impact of recent developments such as COVID-19.

Top 10 Countries by GDP (2019)

In the one-year period since the last release of official data in 2018, the global economy grew approximately $2 trillion in size—or about 2.3%.

The United States continues to have the top GDP, accounting for nearly one-quarter of the world economy. China also continued to grow its share of global GDP, going from 15.9% to 16.3%.

RankCountryGDP% of Global GDP
#1🇺🇸 U.S.$21.4T24.4%
#2🇨🇳 China$14.3T16.3%
#3🇯🇵 Japan$5.1T5.8%
#4🇩🇪 Germany$3.9T4.4%
#5🇮🇳 India$2.9T3.3%
#6🇬🇧 UK$2.8T3.2%
#7🇫🇷 France$2.7T3.1%
#8🇮🇹 Italy$2.0T2.3%
#9🇧🇷 Brazil$1.8T2.1%
#10🇨🇦 Canada$1.7T2.0%
Top 10 Countries$58.7 trillion66.9%

In recent years, the Indian economy has continued to have an upward trajectory—now pulling ahead of both the UK and France—to become one of the world’s top five economies.

In aggregate, these top 10 countries combine for over two-thirds of total global GDP.

2020 Economic Contractions

So far this year, multiple countries have experienced temporary economic contractions, including many of the top 10 countries listed above.

The following interactive chart from Our World in Data helps to give us some perspective on this turbulence, comparing Q2 economic figures against those from the same quarter last year.

One of the hardest hit economies has been Peru. The Latin American country, which is about the 50th largest in terms of GDP globally, saw its economy contract by 30.2% in Q2 despite efforts to curb the virus early.

Spain and the UK are also feeling the impact, posting quarterly GDP numbers that are 22.1% and 21.7% smaller respectively.

Meanwhile, Taiwan and South Korea are two countries that may have done the best at weathering the COVID-19 storm. Both saw minuscule contractions in a quarter where the global economy seemed to grind to a halt.

Projections Going Forward

According to the World Bank, the global economy could ultimately shrink 5.2% in 2020—the deepest cut since WWII.

See below for World Bank projections on GDP in 2020 for when the dust settles, as well as the subsequent potential for recovery in 2021.

Country/ Region / Economy Type2020 Growth Projection2021E Rebound Forecast
United States-6.1%4.0%
Euro Area-9.1%4.5%
Advanced economies-7.0%3.9%
Emerging economies-2.5%4.6%
East Asia and Pacific-0.5%6.6%
Europe and Central Asia-4.7%3.6%
Latin America and the Caribbean-7.2%2.8%
Middle East and North Africa-4.2%2.3%
South Asia-2.7%2.8%
Sub-Saharan Africa-2.8%3.1%
Global Growth-5.2%4.2%

Source: World Bank Global Economic Prospects, released June 2020

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Subscribe

Join the 200,000+ subscribers who receive our daily email

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Popular