By Dr. Rajkumar Singh
The global economy is likely to shrink by almost one percent this year due to the COVID-19 pandemic, and world output could contract further if imposed restrictions on economic activities extend to the third quarter of the year.
Growing restrictions on the movement of people and lockdowns in Europe and North America are hitting the service sector hard, particularly industries that involve physical interactions such as retail trade, leisure and hospitality, recreation and transportation services.
As businesses lose revenue, unemployment is likely to increase sharply, transforming a supply-side shock to a wider demand-side shock for the economy. In the worst-case scenario, global GDP could shrink by 0.9 per cent in 2020 instead of growing a projected 2.5 percent. World output could contract further if imposed restrictions on economic activities extend to the third quarter of the year and if fiscal responses fail to support income and consumer spending.
Urgent and bold policy measures are needed, not only to contain the pandemic and save lives, but also to protect the most vulnerable in our societies from economic ruin and to sustain economic growth and financial stability.
Status in developed and developing countries
The severity of the economic impact—whether a moderate or deep recession—will largely depend on the duration of restrictions on the movement of people and economic activities in major economies and on the actual size and efficacy of fiscal responses to the crisis.
According to the report, a well-designed fiscal stimulus package, prioritizing health spending to contain the spread of the virus and providing income support to households most affected by the pandemic would help to minimize the likelihood of a deep economic recession. The adverse effects of prolonged restrictions on economic activities in developed economies will soon spill over to developing countries via trade and investment channels.
A sharp decline in consumer spending in the European Union and the United States will reduce imports of consumer goods from developing countries. In addition, global manufacturing production could contract significantly, amid the possibility of extended disruptions to global supply chains. Developing countries, particularly those dependent on tourism and commodity exports, face heightened economic risks.
The sudden stop in tourist arrivals will hurt the tourism sector in small island developing States (SIDS) that employs millions of low-skilled workers. And the decline in commodity-related revenues and a reversal of capital flows are increasing the likelihood of debt distress for many commodity-dependent economies. Governments may be forced to curtail public expenditure at a time when they need to ramp up spending to contain the pandemic and support consumption and investment.
The pandemic is disproportionately hurting millions of lower-wage workers in service sectors, who often lack labour protections and work in close physical proximity to others. Absent adequate income support, many will fall into poverty, even in most developed economies, worsening already high levels of income inequality. The effect of school closures could make the educational divide more pronounced, with possible long-term consequences.
Containment of Covid-19 and sustainable development
The report finds that as the COVID-19 pandemic worsens, deep-seated economic anxiety—fuelled by slower growth and higher inequality—is increasing. Even in many high-income countries, a significant proportion of the population do not have enough financial wealth to live beyond the national poverty line for three months.
In hard-hit Italy and Spain, for instance, an estimated 27 per cent and 40 per cent of the population, respectively, do not have enough savings to allow themselves not to work for more than three months. While we need to prioritize the health response to contain the spread of the virus at all cost, we must not lose sight how it is affecting the most vulnerable population and what that means for sustainable development.
Our goal is to ensure a resilient recovery from the crisis and put us back on track towards sustainable development In this fast-moving environment, we need to think in scenarios. In this regard there are four scenarios of how the virus, the lockdown measures and consequently the different economies could evolve. Needless to say, even these scenarios cannot try to fully predict reality, but we hope they can provide a benchmark for both the extremes and the middle-ground.
Possible scenarios of the future
In the first place it is assumed that the lockdowns has managed to flatten the curve, although not entirely. Given socio-economic tensions and the significant economic fallout, the first European governments decided to begin relaxing the lockdown measures from the end of April. Others followed in May. The return to normality is gradual, and social distancing continues for at least the entire summer.
A proportion of those who can work from home continue to do so for the foreseeable future. Meanwhile, places, where we can socialise begin to open with strict distancing rules in place. Global travel remains restrictive, but a combination of vaccine development, more widespread testing capacity and higher surge capacity within critical healthcare services.
The second possibility starts off in much the same way, with a gradual easing of lockdown measures in May and June. However, in this scenario, the virus returns in the autumn and despite more widespread testing efforts and contact tracing, the new spread pushes most economies back into lockdown.
Crisis management is more experienced than in Spring 2020 and containment measures could be more tailor-made, keeping some regions and sectors up and running. For indicative purposes, we’re assuming it will take until April 2021 before the virus is back under control and economies, as well as societies, begin to return to normality. Gross Domestic Products (GDP) growth would be lower in 2020 but higher in 2021 than in our base case scenario. However, it may well take until late-2022 before most economies have returned to their pre-crisis levels.
In the third scenario, which is also the ‘best’, the Western world follows in the footsteps of China by ending the lockdowns as soon as the curve of new infections has been flattened. A quick return to normality it is assumed has been materialized already from the end of April.
This scenario also assumes that the virus doesn’t come back again in the winter, either because a larger-than-expected proportion of people have already had the virus and built immunity, or because control measures become much more effective. Even so, some economic losses would not be offset immediately. But government measures like guarantees, liquidity support and short-time work schemes foster a quick and strong rebound, notwithstanding some differences across countries depending on when the lockdown measures end.
However, to give a sense of how the last or worst-case scenario for the global economy might look, we assume here that the lockdown measures last until the end of the year. Things will return to normal from 2021, if a vaccine is developed and deployed over the winter months. The recovery here may be a little faster and stronger than in the other scenarios, as the virus is assumed to be completely under control.
Needless to say, this is an extreme scenario with lots of economic, social and political turmoil. In this scenario, most economies would experience an unprecedented and almost unimaginable contraction in 2020 of around 50% quarter-on-quarter annualized. The year 2020 would go down in the history books as the year with the most severe recession on record, seeing most economies shrinking at double-digit rates for the year as a whole.
Author: Dr. Rajkumar Singh, Professor and Head, University Department of Political Science, B.N.Mandal University, Madhepura, Madhepura-852113, Bihar, India.
(The opinions expressed in this article are solely those of the author and do not necessarily reflect the views of World Geostrategic Insights)