Research & Analysis

COVID-19: Cumulative impact on world economy

The Coronavirus pandemic has spread with distressing speed, blighting millions of people and bringing economic activities to a near-standstill as countries have imposed tight restrictions on all sort of activities in order to halt the spread of the virus. As the health and human toll raises, the economic damage is already evident and epitomizes the largest economic shock the world has experienced in decades. The whole world is struggling to contain the Coronavirus pandemic and its economic impact.

In view of this pandemic, numerous countries across the world resorted to lockdowns to ‘flatten the curve’ of the infection. These lockdowns meant restraining millions of citizens to their homes, shutting down businesses and ceasing almost all economic activity across the globe.

According to International Monetary Fund (IMF), the global economy is expected to shrink by over 3 per cent in 2020 – the steepest slowdown since the Great Depression of the 1930s. The pandemic has propelled the global economy into a recession, which led to the shrinking of economy and eventually ceasing the growth.

As per an assessment of World Economic Forum (WEF), supporting Small to Medium enterprises (SMEs) and larger businesses is crucial for maintaining employment and financial stability. Many advanced economies in the world have gradually started rolling out support packages over the period. In India, Finance Minister Nirmala Sitharaman has announced some details of the Atmanirbhar Bharat Abhiyan package, to provide relief to Medium, Small and Micro Enterprises (MSMEs) in the form of an increase in credit guarantees. India’s economic stimulus package is 10% of its GDP. However, the World Economic Forum records, “ There is concern that the size of packages may prove insufficient for the duration of the crisis; that disbursement may be slower than is needed; that not all firms in need would be targeted; and that such programmes may be overly reliant on debt financing.”

The Global Economic Prospects for June 2020 describe both the instantaneous and near-term stance for the impact of the Coronavirus pandemic and the long-term damage it has dealt to prospects of growth. Over the longer outlook, the deep recessions triggered by the pandemic are anticipated to leave lasting scars through lower investment, a destruction of human capital through lost work and schooling, and fractionation of global trade and supply linkages. For evolving markets and developing countries, many of which face formidable vulnerabilities, it is critical to strengthen public health systems, address the challenges posed by informality, and implement reforms that will support strong and sustainable growth once the health crisis further dwindles. The advanced economies are expected to shrink by around 7 percent. This weakness will spill over to the outlook for emerging markets and developing economies, which are forecasted to contract by 2.5 percent as they cope with their own domestic outbreaks of the virus. This would represent the weakest showing by this group of economies in at least sixty years.

“The crisis highlights the need for urgent action to cushion the pandemic’s health and economic consequences, protect vulnerable populations, and set the stage for a lasting recovery.”

Emerging market and developing economies will be battered by economic breezes from multiple quarters, pressure on weak health care systems, loss of trade and tourism, deteriorating remittances, subdued capital flows, and tight financial conditions amid mounting debt. Even this austere outlook is subject to great uncertainty and significant downside risks. This scenario would envision global growth reviving, notwithstanding modestly, to 4.2% in 2021. Businesses might find it hard to service debt, heightened risk aversion could lead to climbing borrowing costs, and bankruptcies and defaults could result in financial crises in many countries. Under this downside scenario, global growth could shrink by almost 8% in 2020.

Looking at the speed by which the crisis has overtaken the global economy over the past few months may provide a clue to how deep the recession will be. The sharp pace of global growth forecast downgrades points to the possibility of yet further downward revisions and a need for additional action by policymakers in coming months to support the economic activity. A predominantly concerning facet of the outlook is the humanitarian and economic toll the global recession is taking on economies with extensive informal sectors that make up an estimated one-third of the GDP and about 70% of total employment in emerging market and developing economies. Policymakers must contemplate innovative measures to deliver income support to workers and credit support to the businesses.

Global synchronization and cooperation of the measures required to slow down the spread of the pandemic, and of the economic actions needed to alleviate the economic damage, including international support, provide the greatest chance of achieving public health goals and enabling a vigorous global recovery.

 

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