Aggregate EMDE activity is expected to contract by 2.5 percent in 2020—6.6 percentage points below previous forecasts, and the worst rate since at least 1960, the earliest year when aggregate GDP data are available. The projected fall in activity is broad-based, with nearly 80 percent of EMDEs expected to register negative growth this year. All EMDE regions will be affected. Forecast downgrades are larger and the recessions are deeper in EMDEs with the most severe COVID-19 outbreaks or those most susceptible to global spillovers, such as economies that are heavily dependent on tourism, economies deeply embedded in global value chains, and major exporters of industrial commodities .
Growth in EMDEs is projected to rebound in 2021, to 4.6 percent, supported by the expected pickup in China and a recovery of trade flows and investment. Excluding China, EMDE growth is envisioned to recover at a more modest pace next year, reflecting headwinds for commodity exporters amid subdued commodity prices and a weak rebound in services. Economies dependent on tourism will be subject to an additional drag on growth. Through its effect on investment, as well as the loss of human capital among idled and furloughed workers, COVID-19 is likely to dampen long-term growth prospects and productivity.
The fallout from COVID-19 will be particularly severe in countries with widespread informality and limited safety nets. In the average EMDE, informal activity accounts for one-third of output and two-thirds of employment. In EMDEs with large informal sectors, workers and firms have limited options to buffer temporary income losses, while also being more vulnerable to adverse health impacts. Additionally, temporary workers in the formal economy suffer from gaps in social safety nets and social protection. Growth in LICs is projected to fall to 1 percent in 2020—the lowest rate in more than 25 years.
Among fragile LICs, activity will slow to a crawl, reflecting the pandemic’s severe disruption to activity in countries least equipped to lessen its impact. The expected growth pickup in LICs in 2021 assumes that both domestic activity and external demand recover as the pandemic fades, weakness in private investment that has been a feature of the past decade. In previous epidemics, investment declined by nearly 10 percent five years following the event, reflecting substantial risk aversion amid heightened economic uncertainty. In many EMDEs, deep recessions will weigh on potential output for a prolonged period.
The pandemic has also disrupted schooling at all levels, with many EMDEs having fully or partially closed their education systems in an effort to contain its spread. Extended school closures, along with disruptions to early childhood development programs, are expected to set back learning, raise dropout rates, and slow human capital development .
Among exporters of industrial commodities, growth is projected to be spurred further by investment in new production capacity while continued reforms to improve business environments will aid the recovery in some others.
Per capita income growth and poverty.
Even before the pandemic, it was increasingly unlikely that the Sustainable Development Goal (SDG) of reducing global extreme poverty to 3 percent of the global population over the next decade would be achieved. This goal is now even further out of reach. Household incomes are expected to be weighed down by sharp income losses from diminished employment opportunities and lost earnings due to illness, as well as reduced remittance receipts.
As a result, per capita incomes among more than 90 percent of EMDEs are expected to contract in 2020, markedly affecting living standards and causing many millions to fall back into poverty. The crisis is also likely to worsen inequality, as various factors render the poor more vulnerable to the effects of the pandemic, including their limited access to health care and lack of resources to cushion income losses.
Per capita income losses are forecast to be steepest in ECA, LAC, MENA, and Sub Saharan Africa. These four regions are home to many oil exporters, which will be severely affected by the precipitous fall in oil prices. Commodity exporters, particularly those in Sub-Saharan Africa, typically have sizable populations living in extreme poverty. Falling per capita incomes in Sub-Saharan Africa—home to 60 percent of the world’s extreme poor—are likely to further concentrate global poverty in the region. In some countries, constrained fiscal revenues due to commodity prices remaining lower over the long term are likely to further weigh on needed development spending—particularly on health, education, and infrastructure—pushing even more SDGs out of reach.
The pandemic is pushing the global economy into recession, with a projected contraction of 5.2 percent in 2020—the worst rate in post-war history. Any numerical forecast for the period ahead, however, is subject to unprecedented levels of uncertainty.
Regardless of the weighting methodology, this year’s contraction will be highly synchronized internationally, with mitigation measures, financial crises, a further drop in commodity prices, and a slower recovery due to lasting impacts on consumers and firms and a retreat from global value chains. These factors could lead to a substantially greater loss of output in the near term.
Lockdowns and other restrictions, while necessary to slow the spread of the virus, have been accompanied by a sharp reduction in economic activity. Their gradual removal is expected to pave the way for a partial recovery in the second half of the year. On this assumption, the world economy is projected to contract by 5.2 percent in 2020. If this forecast materializes, the fall in global output would be more than double that of the 2009 global recession. The severity and speed of the disruptions to the global economy have been reflected in the strikingly steep downgrades, for advanced economies and EMDEs, by all major forecasters.
Within one month, as widespread restrictions were implemented in large segments of the world economy, consensus forecasts for global growth in 2020 were downgraded by more than 5 percentage points—a magnitude of forecast downgrades that took nine months in the wake of the global financial crisis. The projected depth of the 2020 global recession depends on the weighting methodology used to compute the rate of global growth. Major advanced economies—in particular, the Euro Area—are expected to contract precipitously this year. In contrast, some large EMDEs—most notably China—are projected to continue to expand, albeit more slowly than previously anticipated. As a result, advanced economies are expected to shrink by 7 percent in 2020, while EMDEs are envisioned to contract by 2.5 percent.
Global output is projected to shrink 4.1 percent in 2020 using PPP weights, consistent with the baseline contraction of 5.2 percent using market exchange rates.
Regardless of the weighting methodology, this year’s contraction will be highly synchronized internationally, with sharp disruptions to real and financial activity in many economies and across many sectors. Historically, global recessions have tended to be followed within a year by a global recovery—characterized by a broad-based rebound in activity—as was the case immediately after the global financial crisis. While a global recovery is envisioned in 2021, it is likely to be subdued. Output is not expected to return to its previously expected level.
This reflects the fact that the pandemic will likely lead to a slow and incomplete return to activities that require face-to-face interaction, such as tourism, as some degree of social distancing continues. Many firms, households, and governments are weathering the 2020 global recession by relying on savings and debt; as a result, a period of deleveraging is likely to follow as they rebuild precautionary savings and strengthen their balance sheets. At the same time, the large and sudden loss of income in 2020 has pushed many individuals into unemployment and companies into bankruptcy, destroying valuable economic relationships that will take time to rebuild.
Lower spending and continued uncertainty will likely lead to persistent weakness in investment and the innovation embodied therein, with consequences for growth and productivity. Moreover, the financial turmoil and commodity price collapse engendered by the pandemic will likely have significant long-term effects on potential growth in many economies
Risks to the outlook
Given the unprecedented nature of the shock, forecasts are subject to a large degree of uncertainty. Downside risks could deepen the recession or delay the recovery. In the short run, the contraction would deepen if a protracted pandemic required an extension of control measures. Policy support might fail to soften the economic blow to households and firms to the degree assumed in the forecast. A prolonged disruption to economic activity could exacerbate financial stress, which could lead to widespread financial crises. Lower-for-longer commodity prices could trigger economic and financial distress among commodity producers. It is less likely but also possible that activity is stronger than expected if a combination of positive news on the flattening of the curve, new treatments and vaccine development, and aggressive and effective policy support set the stage for the beginning of a solid rebound in economic activity during the second half of 2020.
In all, depending on the ultimate outcome, global output in 2020 might decline by about 4 percent under an upside scenario, but by more than 7 percent under a worst-case scenario. Even in the best-case scenario, the 2020 global recession will be about twice as deep as the global financial crisis. There is also a possibility that activity will remain very weak beyond the near term, even after restrictions are lifted. The aftermath of the pandemic may cause lasting changes in consumer and business behavior, and high debt burdens could hold back investment. The crisis could catalyze a retreat from, and fragmentation of, global value chains. Social unrest could erupt. If these risks materialize, long-term growth prospects will be dampened, and goals for development and poverty reduction would be in severe jeopardy.
More protracted pandemic
Despite the best efforts of policymakers, a renewed surge in cases remains a real possibility, especially if there are delays in the development and rollout of test-and-trace measures and vaccines. A sharp rise in the number of patients requiring hospitalization amid a second wave of infections could overwhelm even the most robust health care systems in advanced economies, let alone those of EMDEs
In these circumstances, the necessary extension of policies to slow the spread of the outbreak and save lives would likely precipitate a renewed collapse in private consumption. The ability of households to procure the funds needed to maintain consumption at a basic level would be further strained, given previous income losses and already low levels of savings. The ability of welfare systems to cushion income losses varies considerably by country, and is considerably lower in LICs.
Meanwhile, domestic investment would grind to a halt amid extreme uncertainty, and development outcomes would worsen appreciably. Prolonged restrictions would severely limit the ability of fiscal or monetary policy to cushion the blow to activity. Firms would be hampered by a chronic lack of demand, by a growing shortage of inputs, and by the need to provide more space and virus safety precautions for employees. Fiscal stimulus may be less effective when some sectors are completely shut down.
In such a case, the result would be a deeper-than-expected global recession, with particularly pernicious effects in economies burdened with more elevated debt-to-GDP ratios.
Financial crises and debt burdens.
Thus far, an extraordinary policy response has prevented the slowdown in activity from becoming a financial crisis. In many countries, fiscal measures have replaced a proportion of lost incomes and mitigated default risk, loan guarantees have helped keep businesses afloat, and liquidity provision by central banks have kept the financial system functional. However, should the impact of the pandemic continue to grow, financial crises may follow, resulting in a collapse in lending, a longer global recession, and a slower recovery. Rising levels of debt have made the global financial system more vulnerable to financial market stress. Since the global financial crisis, global debt has risen to 230 percent of GDP, with EMDE debt reaching a historic high of 170 percent of GDP by 2019. In almost 40 percent of EMDEs, government debt is now at least 20 percentage points of GDP higher than it was in 2007. In addition, more than a quarter of corporate debt in the average EMDE is denominated in foreign currency. The need to service and roll over this sizable debt increases EMDEs’ vulnerability to spikes in borrowing costs and falls in domestic currency values, both of which have already taken place.
Large and prolonged flights to safety, or a series of ratings downgrades, could trigger cascading debt defaults and financial stress. Full-fledged financial crises would cause further declines in consumption and investment. Financial systems in advanced economies also contain pockets of vulnerability. Yields on lower quality corporate borrowing have surged, reflecting a higher perceived risk of default, particularly on the rapidly growing share of debt issuances in the form of leveraged loans. These are loans to firms that are highly indebted, have high debt service costs relative to earnings, and are typically below investment grade.
Even if the global financial system avoids a crisis, the debt accumulated in response to the pandemic may weigh on growth in the longer run. As global activity rebounds, interest rates are likely to rise. Higher debt service costs must be financed through higher taxes, additional borrowing, or by a reduction in other expenditures. In circumstances of scarce domestic savings, and limited access to foreign funds, additional borrowing may crowd out private investment. In addition, the loosening of macroprudential standards to support credit provision during the crisis may reduce balance sheet transparency and weaken market discipline in the longer term, potentially contributing to future financial instability.
Lasting effects on consumers and firms
The damage to economic activity from the pandemic could also extend well beyond the near term through a lasting negative effect on both consumers and producers. Precipitous losses of income brought on by lockdowns, firm closures, and travel restrictions could erode the confidence of both workers and firms about prospects for future labor income and profits. A protracted erosion in confidence could cause households to cut back on spending and firms to curtail investment, weighing heavily on both aggregate demand and supply. For workers, recessions can cause a substantial and permanent loss in lifetime earnings. Consumption would also be reduced if greater uncertainty and a higher perceived risk of unemployment permanently increase consumers’ savings rate. Chronically higher unemployment would dampen human capital accumulation, weighing appreciably on long-term growth.
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