A Decrease in Consumption is Slowing the Global Economy

May 14, 2020
333 Views

The Coronavirus Pandemic has hit the global economy hard, with widespread shutdowns, a decimated tourism sector, and decreased domestic output across most nations.

Economists are now starting to develop a clearer picture of how bad the damage is, with one official at the International Monetary Fund (IMF) warning that the global economy will contract sharply this year.

Gita Gopinath, the Chief Economist at the IMF, said this week that the global economy is on track to decrease by 3% this year. However, she also warned that there could be more bad news coming. At a conference held by the Financial Times, she told attendees that “the outlook will worsen”. Gopinath said that the key driver in the downturn is a lack of consumption.

If patterns continue, the global economy could contract by 6% in 2020, with a 0% growth rate in 2021.

Consumption is Key to the Wider Economy

In the United States, the economy is consumer-driven. More than two-thirds of GDP is linked to consumer spending. With the highest unemployment rate seen since the Great Depression and tens of millions of layoffs in recent weeks, consumers aren’t willing to spend.

Households have been saving their incomes for worsening conditions. In April, the savings rate of households was over 50% more than what analysts expected.

There are a few conditions that will need to be met before consumers start to feel confident again, especially in the U.S.

  • Employers will need to reopen and start hiring again.
  • The cost of groceries and basic goods will need to fall close to pre-pandemic levels.
  • Job availability will need to increase.

The government attempted to inject some life into the consumer economy with recent stimulus checks. However, with just $1,200 allocated for each qualified individual, this short term measure is unlikely to have a significant impact.

States are beginning to reopen now, but people aren’t confident about job prospects and the wider economy.

There’s also the fact that Coronavirus infections and deaths are still increasing. As of today, there are 84,763 deaths, and more than 1.4 million confirmed cases of the virus in the U.S.

With news on treatments and vaccines being painfully slow, many consumers don’t see a quick end to the current conditions.

What Should Investors Do?

The good news for investors is that the current conditions are likely to be relatively short-lived when considering the lifetime of a portfolio.

There are still strong stock picks available, with some of them rallying during the pandemic. Tech companies and consumer-facing businesses that can still operate during COVID-19 are seeing the most confidence. Pharmaceutical companies involved in treatment and vaccine research have also seen growth in recent weeks.

As always, picks should be carefully researched. Investors need to look long-term to find stocks suited to an upside once the health crisis is overcome.

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