The sharp drop in remittances may not be as bad as expected after all
The coronavirus pandemic has had many implications to the world economy. It has killed more than 400,000 people and led to the worst recession since the Great Depression. It has also led to the layoffs of millions of people in the developed, developing, and emerging markets. As a result, it has led to a dramatic decline in global remittances, leading to negative impacts on developing countries.
A fall in remittances may not be as bad as expected
In April, the World Bank reported that global remittances would fall by about 20% this year. This meant that the total remittances this year would be about $445 billion. The report identified countries in Europe and Central Asia to be the worst affected. Other casualties were countries in Africa, Caribbean, and East Asia.
However, there are signs that the situation will likely be better than expected. For example, the World Bank based its report on the fact that the global economy would take a longer period to recover. Indeed, most analysts were ruling out a so-called V-shaped recovery, where the economy drops sharply and then recovers.
Stock market performance and key data
But there are signs that a V-shaped recovery will happen. First, looking at the stock market, we see that most indices have recovered. In the United States, the Nasdaq, which tracks the technology industry has turned positive for the year. Other indices like the Dow Jones, S&P, and the DAX are a few points to turn positive.
Second, the recently released employment data from the United States show that the economy is going back to work. The numbers showed that the economy created more than 2.5 million jobs in May. Analysts were expecting the economy to lose more than 8 million jobs.
Third, other economic numbers have been relatively better than expected. The manufacturing and services PMI numbers, which measure the activity in the two sectors have bounced back.
These better-than-expected economic data sends a signal that the world economy will recover faster than what analysts were expecting. As a result, it will lead to more remittances to support the developing economies.
Mexican remittances are increasing
Another sign that the remittances will have a smaller decline is data from Mexico. In a recent report, the Bank of Mexico reported that remittances increased by 35.8% in March. Analysts at BBVA were expecting the remittances to fall by 21%. Part of the reason for that was the sharp decline in the Mexican peso due to the virus and low crude oil prices.
Therefore, as more Americans go back to work, there is a likelihood that these remittances will start climbing. Meanwhile, cross border transactions by leading companies like Western Union and MoneyGram have been rising, which is also a positive factor for remittances. Additionally, as shown below, more Americans are searching for the keyword “send money abroad.”
Finally, more countries are starting to take more action to promote these remittances. In a recent announcement, the UK and Swiss governments called for more global action on remittances. The two countries called for action to lower remittances fees, ensuring that transfers remain accessible during the lockdown, and for states to ensure that funds reach the recipients.
There are other reasons why remittances could increase including the recent acquisition of MoneyGram by Western Union and the large stimulus packages that have been announced by Europe, Japan, and the US.