With just some few days left to end the year, and since the outbreak of the Covid-19 virus, available data reflects a grim outlook for the global economy. More than one million lives, and still counting, have been lost to the grip of the pandemic and the global economy is estimated to contract by 4.4 percent in 2020. Millions of jobs have already been lost, another millions of livelihoods at risk of collapse and an estimated 130 million more people likely to plunge into extreme poverty levels should the virus persist.
In no uncertain terms, the coronavirus pandemic has woken us all up to the realities pertaining to the frailties of human life, and the associated mammoth pandemic-induced economic fallout. However, world economic powers such as the US, Germany, France, UK, and Least Developed Countries (LDC) alike are experiencing new and quicker-than-expected resurgence of Covid-19 cases at alarming rates and, for many, the nightmares of imminent lockdowns and shutdowns are an unwelcomed reality.
Prior to another surge of the coronavirus cases in recent times, several episodes of relaxed restrictive measures in advanced economies and emerging markets- U.S, Germany, Japan, China meant that Global GDP growth was going to rebound due to the upscale of economic activities in the third quarter.
However, the resurgence of the virus threatens this fragile recovery and has the tendency to ascent the negative outcomes the spread of the virus and harsh control measures have on the global economy. As a consequence, economic growth projections, which have frequently been revised downwards in 2020, including 2021 are likely to change the more in coming months.
Analysis of the global economic outturn pre-Covid resurgence
Early this year, in January 2020, the IMF projected global growth to rise from an estimated 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent in 2021.
In a broader sense, the issues that culminated in an uptick in the growth projection included improvements in market sentiments, coupled with quite low manufacturing activity and global trade, a broad-based shift towards accommodative monetary policy, favorable outcome from the US-China trade negotiations, and a decline in fears of a no-deal Brexit, among others.
Furthermore, U.S GDP was expected to fall by 0.3 percentage points and further decline in 2021 to 1.7 percent. The Euro area was projected to pick up by 0.1 percentage points and reach a high of 1.4 percent in 2021. China’s growth was also forecasted to fall to 6.0 percent from 6.1 percent, and that of Japan was predicted to decline to 0.7 percent from 1 percent in 2019.
In the April update of the World Economic Outlook (WEO), the IMF projected the global economy to contract sharply by 3 percent, a figure much higher than the 2008/2009 financial crisis. At this time, uncertainties about the nature of the novel coronavirus and the emerging high costs of the treatment of large numbers of infected people in developed economies and emerging markets like U.S., France, Spain, UK, and China constituted this projection.
Consequently, lockdowns and shutdowns of economic activities, closure of borders, among various other measures were introduced in most economies around the globe to contain the spread of the virus. Baseline forecasts of the global economic growth were projected at 5.8 percent in 2021, as it was assumed that by then, the pandemic would have begun fading out in the second half of 2020 and containment efforts could be gradually relaxed.
In June, however, the growth forecast for the global economy was -4.9 percent in 2020, 1.9 percentage points below the April 2020 projection. This refraction from the target anticipated was due to the escalation in the spread and negative impact of the pandemic on economic activity in the first half of 2020 as well as high level of uncertainties.
The net effect of these conditions was an adverse impact on the incomes and livelihood of households, job losses among, and reduced capabilities of vulnerable groups and the poor. Thus, the IMF pegged global growth at 5.4 percent in 2021.
This notwithstanding, in economies with declining infection rates, a slower recovery path of GDP was anticipated as businesses were going to begin operations observing social distancing rules, supply-chain breakages were going to relink gradually, although not fully- low productivity and vice versa.
This turn of events had a heavy toll on individual economies in a varied sense. For instance, the GDP of advanced economies was forecasted to contract by 8.0 percent in 2020; the U.S experienced a downturn of 8.0 percent; Japan grew by -5.8 percent; the United Kingdom (-10.2%), Germany (-7.8 %); France (-12.5 %).
For emerging markets and developing economies, the decline in growth was revised to 3.0 percent, which is 2.8 percentage points higher than the revision for advanced economies (1.8 percentage points).
Resurgence expected to further slowdown short-to-medium term economic gains
According to the IMF, global growth was projected at 5.2 percent in 2021, a little lower than in June 2020. New projections as of October 2020, however, predict a 0.6 percentage points improvement in that of June 2020, but behind the 2021 projection by 0.8 percentage points. Owing to the gradual ease of restrictions and return to the new normal business environment,
“The revision reflects better-than-anticipated second quarter GDP outturns, mostly in advanced economies, where activity began to improve sooner than expected after lockdowns were scaled back in May and June, as well as indicators of a stronger recovery in the third quarter.”- IMF
However, a more recent data from UNCTAD for November 2020, hints that global GDP will decline at around 4.3 percent in 2020 which is 0.1 percentage point lower than IMF’s projection for October, with an expected global recovery of 4.1 percent in 2021. Growth projections for developed economies is projected at -5.8 percent in 2020, 2.3 percentage points above that of the second quarter.
Essentially, developed economies are likely to be more affected in 2020 than developing economies, which are expected to end the year with a growth of -2.1 percent, which is less than that of the developed economies. A much weaker recovery is expected in 2021 at 3.1 percent as compared to a positive growth of 5.7 percent, the report highlights.
Furthermore, an outlook of global growth in the medium term is projected to slow down to about 3.5 percent, after 2021. This forecast implies only little progress toward achieving the 2020 to 2025 path of economic activity projected before the pandemic for both advanced and emerging markets and developing economies.
Unsurprisingly, there are regional disparities in growth trends. With the exception of China and the Republic of South Korea who are both forecasted to make a positive outturn, albeit weak growth in 2020 at 1.3 percent and 0.1 percent, respectively, the other Asian economies will be experiencing negative growth rate. The U.S. is expected to experience significant negative growth at (-5.4) percent, Germany at -4.9 percent, UK and Northern Ireland at -9.9 percent.
Prolonged duration of Domestic and External Shocks
The economic fallout from the Covid-19 pandemic is characterized by large domestic and external shocks that affects the global economy. From the domestic side, these shocks may include restrictive measures (lockdown) to contain the virus; the scare of contracting the virus may also dampen consumer demand; decline in consumers’ purchasing power; loss of income (eg. loss of jobs); uncertainties about the evolution of pandemic.
More so, changes in consumer behavior or preferences due to restrictions imposed might hit certain sectors of economy real hard, such as the tourism and Micro, Small and Medium Sized entreprises which mostly employ many vulnerable groups.
On the external side, global merchandise trade will be adversely impacted. According to the UNCTAD report, global merchandise trade was projected to fall in the second quarter by an unprecedented 19 percent year-on-year.
Oil prices had a nose dive, and international tourist arrivals also significantly declined by 65 percent in the second quarter of 2020, remittance flows also largely declined in the period throughout the first to third quarters of 2020. Taken together, these factors have grave implications for the income of global economies, especially LDCs as it translates to lower export levels, lower export prices and lower income receipts from tourism as well as remittance receipts.
Debt levels of across countries are also expected to increase significantly beyond high risk levels should the pandemic persist. Already, the first wave of the pandemic has plunged most developing countries into unsustainable debt burden levels. Therefore, making further borrowing for health-related, social and economic expenditure to mitigate the impact of a second wave of the pandemic remains an unviable option, UNCTAD warns
“With depressed economic activity through most of 2020 and a likely slow recovery in 2021, even servicing existing external debt obligations will represent a challenge for many developing economies.”- UNCTAD
The severity of debt levels is evidenced by the G20’s commitment to offer suspension of debt servicing to poorest countries extending to mid-2021, on debt service payments on official bilateral loans to 73 developing economies in receipt of International Development Association financing and/or classified by the United Nations as LDCs. However, without additional debt relief beyond the temporary suspension of debt service payments, the current debt distress situations among countries may worsened the more.
There’s hope for a vaccine, but the likelihood of recovery remains uncertain
Health wise, global efforts to obtain a vaccine are yielding positive outcomes, as three vaccines by Pfizer-BioNtech, Moderna and Sputnik V pharmaceutical companies have shown to be about 95% effective in late-stage clinical trials. Other vaccine breakthroughs that are being made include AstraZeneca/ Oxford Covid vaccines which is currently 70% but hopeful to rise to 90% in the shortest possible time.
While this is very welcoming, there are uncertainties regarding whether vaccinations of populations all over the world in 2021 would abruptly end the economic fallout. The surging coronavirus cases in both advanced and emerging economies and developing economies are imposing fresh restrictions.
Economists are divided as to whether the economic fallout from the containment measures introduced would spark a slow recovery of economies or the recovery would be immediate. Economists at UNCTAD believe that, although there is confidence that an end to the health pandemic is in sight, the viability of a vaccine will not halt the spread of economic damages, which are likely to be felt long into the future. According to them, the inequalities and vulnerabilities across the globe risk worsening the distribution and access to the vaccine even after the vaccine becomes available.