COVID-19 to Plunge Global Economy into Worst Recession since World War II
The swift and massive shock of the coronavirus pandemic and shutdown measures to contain it have plunged the global economy into a severe contraction. According to World Bank forecasts, the global economy will shrink by 5.2–6 % this year. That would represent the deepest recession since the Second World War, with the largest fraction of economies experiencing declines in per capita output since 1870.
Economic activity among advanced economies is anticipated to shrink 7% in 2020 as domestic demand and supply, trade, and finance have been severely disrupted. Emerging market and developing economies (EMDEs) are expected to shrink by 2.5% this year, their first contraction as a group in at least sixty years. Per capita incomes are expected to decline by 3.6%, which will tip millions of people into extreme poverty this year.
The blow is hitting hardest in countries where the pandemic has been the most severe and where there is heavy reliance on global trade, tourism, commodity exports, and external financing. While the magnitude of disruption will vary from region to region, all EMDEs have vulnerabilities that are magnified by external shocks. Moreover, interruptions in schooling and primary healthcare access are likely to have lasting impacts on human capital development.
“This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges. Our first order of business is to address the global health and economic emergency. Beyond that, the global community must unite to find ways to rebuild as robust a recovery as possible to prevent more people from falling into poverty and unemployment.”
Under the baseline forecast — which assumes that the pandemic recedes sufficiently to allow the lifting of domestic mitigation measures by mid-year in advanced economies and a bit later in EMDEs, that adverse global spillovers ease during the second half of the year, and that dislocations in financial markets are not long-lasting — global growth is forecast to rebound to 4.2% in 2021, as advanced economies grow 3.9% and EMDEs bounce back by 4.6%. However, the outlook is highly uncertain and downside risks are predominant, including the possibility of a more protracted pandemic, financial upheaval, and retreat from global trade and supply linkages. A downside scenario could lead the global economy to shrink by as much as 8% this year, followed by a sluggish recovery in 2021 of just over 1%, with output in EMDEs contracting by almost 5% this year.
The U.S. economy is forecast to contract 6.1% this year, reflecting the disruptions associated with pandemic-control measures. Euro Area output is expected to shrink 9.1% in 2020 as widespread outbreaks took a heavy toll on activity. Japan’s economy is anticipated to shrink 6.1% as preventive measures have slowed economic activity.
“The COVID-19 recession is singular in many respects and is likely to be the deepest one in advanced economies since the Second World War and the first output contraction in emerging and developing economies in at least the past six decades. The current episode has already seen by far the fastest and steepest downgrades in global growth forecasts on record. If the past is any guide, there may be further growth downgrades in store, implying that policymakers may need to be ready to employ additional measures to support activity.”
Analytical sections address key aspects of this historic economic shock:
- How deep will the COVID-19 recession be? An investigation of 183 economies over the period 1870–2021 offers a historical perspective on global recessions.
- Scenarios of possible growth outcomes: Near-term growth projections are subject to an unusual degree of uncertainty; alternative scenarios are examined.
- How does informality aggravate the impact of the pandemic? The health and economic consequences of the pandemic are likely to be worse in countries with widespread informality.
- The outlook for low-income countries: The pandemic is taking a heavy human and economic toll on the poorest countries.
- Regional macroeconomic implications: Each region is faced with its own vulnerabilities to the pandemic and the associated downturn.
- Impact on global value chains: Disruptions to global value chains can amplify the shocks of the pandemic on trade, production, and financial markets.
- Lasting scars of the pandemic: Deep recessions are likely to do long-term damage to investment, erode human capital through unemployment, and catalyze a retreat from global trade and supply linkages.
- The implications of cheap oil: Low oil prices that are the result of an unprecedented drop in demand are unlikely to buffer the effects of the pandemic but may provide some support during a recovery.
The pandemic highlights the urgent need for health and economic policy action, including global cooperation, to cushion its consequences, protect vulnerable populations, and strengthen countries’ capacities to prevent and deal with similar events in the future. It is critically important for emerging market and developing economies, which are particularly vulnerable, to strengthen public health systems, address challenges posed by informality and limited safety nets, and enact reforms to generate strong and sustainable growth once the crisis passes.
Emerging market and developing economies with available fiscal space and affordable financing conditions could consider additional stimulus if the effects of the pandemic persist. This should be accompanied by measures to help credibly restore medium-term fiscal sustainability, including those that strengthen fiscal frameworks, increase domestic revenue mobilization and spending efficiency, and raise fiscal and debt transparency. The transparency of all government financial commitments, debt-like instruments and investments is a key step in creating an attractive investment climate and could make substantial progress this year.
East Asia and Pacific: Growth in the region is projected to fall to 0.5% in 2020, the lowest rate since 1967, reflecting disruptions caused by the pandemic.
Europe and Central Asia: The regional economy is forecast to contract by 4.7%, with recessions in nearly all countries.
Latin America and the Caribbean: The shocks stemming from the pandemic will cause regional economic activity to plunge by 7.2% in 2020.
Middle East and North Africa: Economic activity in the Middle East and North Africa is forecast to contract by 4.2% as a result of the pandemic and oil market developments.
South Asia: Economic activity in the region is projected to contract by 2.7% in 2020 as pandemic mitigation measures hinder consumption and services activity and as uncertainty about the course of the pandemic chills private investment.
Sub-Saharan Africa: Economic activity in the region is on course to contract by 2.8% in 2020, the deepest on record.
Global Debt Monitor: Sharp Spike In Global Debt Ratios
Pandemic-driven recessionary conditions pushed global debt-to-GDP to a new record of 331% of GDP ($258T) in Q1, up from 320% in Q4 2019. Debt in mature markets reached 392% of GDP (vs 380% in 2019). Canada, France and Norway saw the largest increases. EM debt surged to over 230% of GDP in Q1 2020 (vs 220% in 2019), largely driven by non-financial corporates in China.
The fallout from the global spread of Covid-19 has already produced cascading sudden economic stops that disrupted markets in record speed, triggering negative feed-back loops and requiring unprecedented policy support. In response to the economic shock and the potential damage to both corporations and households, policymakers of all major economies launched massive packages of monetary and fiscal stimulus, increasing the overall level of indebtedness in their countries.
If history is any guide, periods following recessions or acute financial stress often trigger rapid spikes in debt ratios. This tends to be a result of GDP contraction and demands for liquidity support and supplemental fiscal spending, which requires additional borrowing from all sectors, especially governments and corporates. In the early 2000s, the burst of the global tech bubble triggered a short recession that led to a significant increase of debt ratios in advanced economies, from 206% of GDP to 235%. Similarly, after the great financial crisis of 2008-09, debt ratios in advanced economies skyrocketed from 232% to 273% of GDP in a short period of time.
According to the Bank for International Settlements (BIS), total credit to the non-financial sector (households, corporates and governments) of advanced economies amounted to USD 132 trillion (Tn) by the end of 2019, representing 275% of their gross domestic product (GDP). The total amount included USD 35 Tn of debt to households, USD 44 Tn to non-financial corporates and USD 53 Tn to governments. The US, the Euro area and Japan concentrate a large share of the total debt of advanced economies. This includes USD 54 Tn or 254% of GDP for the US, USD 35 Tn or 262% of GDP for the Euro area and USD 19 Tn or a staggering 381% of GDP for Japan.
Such debt levels and ratios have been increasing rapidly in recent months and are expected to increase substantially over the short-term. This will be driven by high credit demand from governments and corporates. A massive increase in budget deficits (more than 10% of GDP in most of the advanced economies) would normally produce large spikes in bond yields and credit contraction to the private sector, tightening financial conditions. This would be detrimental to the highly leveraged corporate and government sector, as it would increase the overall debt burden. Thus, additional debt has been partially funded (directly or indirectly) by central banks, in an attempt to hold interest rates down even during a fiscal expansion.
While the current crisis indeed requires extraordinary policy support, both the malaise (Covid-19 shock) and the cure (policy support) will accelerate existing imbalances of major economies, particularly debt issues in the US, the Euro area and Japan. Debt levels were already elevated in these countries before the pandemic, and expansionary monetary and fiscal policies are creating an additional increase of overall indebtedness.
With interest rates now at or close to zero in all three major advanced economies, and with debt ratios reaching all-time highs, monetary policy cannot be “normalized” until debt ratios improve. Moving forward, given the levels of government and corporate indebtedness, central banks will not be able to respond to the business cycle as they are used to. If the recession deepens or a new recession unfolds, there is no policy room for additional support without heavy coordination with fiscal authorities. If a recovery ensues and the economy overheats, there would be no room for rate hikes to contain inflation without severe negative effects on the balance sheets of corporates, households and sovereigns. As debt levels grow, higher interest rates generate ever more pressure on debtors, due to the increase in costs to roll over or service existing debt.
All in all, the debt situation of advanced economies is elevated. High and rising indebtedness is expected to produce challenging conditions in the near future. However, the problem is not unsolvable. Appropriate responses will require sensible policy measures such as austerity, debt restructuring and re-distribution. Such measures are necessary to prevent disruptive outcomes for creditors and debtors alike. Inadequate policy responses would be rather detrimental for the majority of households, corporates and governments.
Rebirth of Global Economy Post-COVID-19 will Require ‘Concrete, Radical’ Ideas, Action on Finance.
That means recalibrating total 372 Tn USD of gobal mainstream asset universe.
The COVID-19 pandemic, and the global recession it has triggered, are of course causing immense human suffering around the world. Unless we act now, we could face years of depressed and disrupted economic growth. Those who suffer most will be the less equipped to respond. Extreme poverty and hunger are set to increase drastically, health‑care systems in many countries are already at breaking point and a generation of children is missing out on their education.
The pandemic threatens not just to put the 2030 Agenda for Sustainable Development on hold, but to reverse progress that has already been made. And that is why, since the beginning of the crisis, there has been a calling for a rescue package amounting to at least 10 per cent of the global economy.
It is interesting to see that developed countries are basically doing it with their own resources or printing money when their currencies can be accepted in all circumstances but the problem is to make sure that developing countries will have the resources, or will be provided with the resources, to be able to have similar packages to rescue their economies.
Four weeks ago, global leaders convened to identify ways to finance the recovery and to build back better.
Representatives from different countries — about 50 Heads of State and Government — have now stepped forward to lead an effort that brings together Governments, international financial institutions, United Nations agencies, private sector creditors and more. They are examining options to address key challenges from global liquidity and debt vulnerability; to eroding illicit financial flows and recovering better.
We need concrete, radical and implementable solutions.
This is a human crisis. But, it also became a development and financing crisis — it is the first developing emergency. Developing countries face vastly increased demands for public spending exactly at the same time as tax and export revenues, inward investments and remittances are plummeting.
As we craft a comprehensive global response, action on finance must be central. If countries lack the financial means to fight the pandemic and invest in recovery, we face a health catastrophe and a painfully slow global recovery.
We are on the cusp of a widespread debt crisis, with many countries faced with an impossible choice between servicing their debt or protecting their most vulnerable communities and fighting the pandemic. Debt defaults can have devastating social consequences. And many countries simply do not have access to financial markets to be able to service their debt.
The “Group of 20” debt service suspension for the poorest countries was a welcome start. But, much more needs to be done. Support must be expanded and determined by vulnerability, rather than just gross domestic product (GDP). We absolutely need to address the debt concerns of the — mostly — developing countries and a large number of middle-income countries that have lost the capacity to access financial markets.
We also need to start thinking about durable solutions on debt that will create fiscal space for investments in recovery and the Sustainable Development Goals.
Beyond the fiscal shock, the COVID-19 crisis has impacted all the components of external finance: Direct investment, exports and remittances. Official development assistance (ODA) is under pressure as developed countries themselves deal with the fallout of the crisis. Uncertainty and a further retreat to inward‑looking policies and protectionism could turn today’s sharp decline into a prolonged period of weak external financing.
Moreover, as the pandemic disrupts supply chains and trade, there is a danger that some manufacturing will move back to developed countries, further reducing developing countries’ resources, and raising fundamental questions about their integration into the global economy. These questions need bold and creative answers.
Along with some of the most prominent and innovative economists involved in reimagining our world we have launched decisive and effective responses to the post pandemic world.
We need the insights and perspectives of all.