59. Post Corona Economic World - Predictions from IMF and WEF

Updated: Jun 5, 2020

What will be the Impact of Corona Pandemic on World Economy ?


I. Views and Predictions from IMF


The COVID-19 pandemic is inflicting high and rising human costs worldwide. Protecting lives and allowing health care systems to cope have required isolation, lockdowns, and widespread closures to slow the spread of the virus. The health crisis is therefore having a severe impact on economic activity. As a result of the pandemic, the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis (Table 1.1).

Table 1.1


In a baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound, the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support. There is extreme uncertainty around the global growth forecast. The economic fallout depends on factors that interact in ways that are hard to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, the extent of supply disruptions, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioral changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices.


Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices. Risks of a worse outcome predominate. Effective policies are essential to forestall worse outcomes. Necessary measures to reduce contagion and protect lives will take a short-term toll on economic activity but should also be seen as an important investment in long-term human and economic health. The immediate priority is to contain the fallout from the COVID-19 outbreak, especially by increasing health care expenditures to strengthen the capacity and resources of the health care sector while adopting measures that reduce contagion.


Economic policies will also need to cushion the impact of the decline in activity on people, firms, and the financial system; reduce persistent scarring effects fromthe unavoidable severe slowdown; and ensure that the economic recovery can begin quickly once the pandemic fades.


Because the economic fallout reflects particularly acute shocks in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to support affected households and businesses. Such actions will help maintain economic relationships throughout the shutdown and are essential to enable activity to gradually normalize once the pandemic abates and containment measures are lifted. The fiscal response in affected countries has been swift and sizable in many advanced economies (such as Australia, France, Germany, Italy, Japan, Spain, the United Kingdom, and the United States).


Many emerging market and developing economies (such as China, Indonesia, and South Africa) have also begun providing or announcing significant fiscal support to heavily impacted sectors and workers. Fiscal measures will need to be scaled up if the stoppages to economic activity are persistent, or the pickup in activity as restrictions are lifted is too weak. Economies facing financing constraints to combat the pandemic and its effects may require external support. Broad-based fiscal stimulus can preempt a steeper decline in confidence, lift aggregate demand, and avert an even deeper downturn. But it would most likely be more effective once the outbreak fades and people are able to move about freely.


The significant actions of large central banks in recent weeks include monetary stimulus and liquidity facilities to reduce systemic stress. These actions have supported confidence and contribute to limiting the amplification of the shock, thus ensuring that the economy is better placed to recover. The synchronized actions can magnify their impact on individual economies and will also help generate the space for emerging market and developing economies to use monetary policy to respond to domestic cyclical conditions. Supervisors should also encourage banks to renegotiate loans to distressed households and firms while maintaining a transparent assessment of credit risk.


Strong multilateral cooperation is essential to overcome the effects of the pandemic, including to help financially constrained countries facing twin health and funding shocks, and for channeling aid to countries with weak health care systems. Countries urgently need to work together to slow the spread of the virus and to develop a vaccine and therapies to counter the disease. Until such medical interventions become available, no country is safe from the pandemic (including a recurrence after the initial wave subsides) as long as transmission occurs elsewhere.


II. Views and Predictions from World Economic Forum ( WEF )


This article was updated on 7 May 2020.


Latest developments :


  • EU GDP is forecast to contract by 7.5% during 2020.

  • 3.2 million more Americans filed unemployment claims in the week ended 1 May, bringing the seven-week total to 33 million.

Confirmed cases of the COVID-19 coronavirus have surpassed 3.7 million globally. Businesses are coping with lost revenue and disrupted supply chains as factory shutdowns and quarantine measures spread across the globe, restricting movement and commerce.


Unemployment is skyrocketing, while policymakers across countries race to implement fiscal and monetary measures to alleviate the financial burden on citizens and shore up economies under severe strain.


The news comes after the US Commerce Department reported a rapid decline in gross domestic product (GDP) in the first three months of the year on 29 April.


GDP dropped by 4.8% in the first quarter of 2020 - the sharpest contraction since the global financial crisis of 2007-2009 - bringing to an end the longest economic expansion in US history.


The US Treasury Department has said it plans to borrow nearly $3 trillion in the second quarter of 2020 as it tries to mitigate the impacts of coronavirus. That it is five times as much as it has ever borrowed previously over a three-month period.


The International Monetary Fund (IMF) has said the coronavirus pandemic had instigated a global economic downturn the likes of which the world has not experienced since the Great Depression.


That view is supported by the latest figures from the European Commission, which has forecast that the GDP of EU countries will contract by 7.5% in 2020.


"Despite the swift and comprehensive policy response at both EU and national level, the EU economy will experience a recession of historic proportions this year," the Commission said in its spring economic forecast released on 6 May.


Here are some of the other ways the outbreak is sending economic ripples around the world.


III. Predicted slump for Asia


On 15 April, the IMF warned economies in Asia would see no growth this year, for the first time in 60 years, with the service sector particularly under pressure.

National lockdowns across the region have meant airlines, factories, shops and restaurants have suffered the greatest economic shocks.


Just a day after the IMF warning, official data showed the Chinese economy had contracted in the first quarter - the first time since quarterly records began in 1992.

Gross domestic product (GDP) in the world's second largest economy fell 6.8% in January-March year-on-year - more than the 6.5% forecast by analysts and the opposite of the 6% expansion in the fourth quarter of 2019.


The Chinese economy is likely to be hit further by reduced global demand for its products due to the effect of the outbreak on economies around the world.

Data released on 16 March showed China's factory production plunged at the sharpest pace in three decades in the first two months of the year.


For 2020, the country's economic growth is expected to fall to 2.5%, according to a Reuters poll - its slowest in almost 50 years.

IV. Monetary policy: central banks act but stocks, oil continue to come under steep pressure


To combat the economic fallout, the US Federal Reserve on 15 March cut its key interest rate to near zero.


But the move, coordinated with central banks in Japan, Australia and New Zealand in a joint-effort not seen since the 2008 financial crisis, has failed to shore up global investor sentiment. As of 9 April, the S&P 500 stock index is down more than 13% since the start of the year, while global oil prices have plummeted more than 47% year-to-date.


The Fed on 9 April unveiled a new batch of programs, saying it plans to provide $2.3 billion in loans to small and midsize businesses, as well as US cities and states. The US central bank also expanded its corporate lending program to include some classes of riskier debt.


Meanwhile, the European Central Bank (ECB) also took action, launching on 18 March a €750 billion Pandemic Emergency Purchase Programme that is expected to last until the end of this year.


V. A fiscal response


On 20 March, the UK announced radical fiscal spending measures to counter the economic impact of a worsening crisis. The government said it would pay up to 80% of the wages of employees across the country unable to work, as most businesses shut their doors to help fight the spread of coronavirus.


Earlier in the month, the Danish government announced it would help private companies struggling to manage the fallout from the pandemic by covering 75% of employees' salaries, if firms agreed not to cut staff.


Denmark has announced restrictions on companies that are registered in tax havens from accessing financial aid. Companies applying for state aid will also have to commit to not paying dividends or make share buy-backs this year and next.


Poland had already announced restrictions on access to state aid based on whether large firms pay taxes in the country.


The European Union more broadly has implemented fiscal measures to shore up the economy worth more than €3 trillion.


Meanwhile, the US government passed an unprecedented $2 trillion stimulus package at the end of March, including direct payouts to millions of Americans.


VI. The impact on employment


The number of Americans who have filed for unemployment in the seven weeks ending 1 May has soared above 33 million, according to data released from the US Labor Department on 7 May.


Meanwhile, India's lockdown resulted in 122 million job losses in April alone, according to data released on 5 May by the private research agency the Centre for Monitoring the Indian Economy released on 5 May.


Not surprisingly, India’s factory output, a key measure of economic activity, shrunk by 16.7 per cent, data from the Central Statistics Office showed on May 12, signalling that a widespread shutdown had bit the economy hard.


The lockdown imposed on March 24 has shuttered shops, factories and services, such as tourism, eateries and public transport, devastating jobs. Millions of displaced migrant labourers continue to flee major cities for their home states, as they fight a survival battle.


Of these, the vast majority (91 million) were small traders and labourers.


Pic : India's job losses during April were primarily among small traders and labourers

Source : Centre for Monitoring the Indian Economy


In the UK, the government's independent economics forecaster, the Office for Budget Responsibility (OBR), warned on 14 April that the country's economy could shrink by a record 35% by June 2020.


It also estimates UK unemployment could to rise by 2.1 million, to 3.4 million, by the end of June.


At the start of April, data from Spain showed nearly 900,000 people have lost their jobs since its lockdown started in mid-March. The official unemployment figure had also risen to 3.5 million - the highest level since April 2017.


Meanwhile, Bloomberg reports that around half of jobs in Africa are at risk as a result of the outbreak, according to the United Nations Economic Commission for Africa.


And the International Labour Organisation has warned that nearly half of the global workforce is at risk of losing their livelihoods.


VII. Impact on air travel


On 5 March - before the US travel ban was announced - the International Air Transport Association (IATA) predictied the COVID-19 outbreak could cost airlines $113 billion in lost revenue as fewer people take flights.


“The industry remains very fragile,” Brian Pearce, the IATA’s chief economist, told the Associated Press. “There are lots of airlines that have got relatively narrow profit margins and lots of debt and this could send some into a very difficult situation.”


On March 16, British Airways said it would cut flying capacity by at least 75% in April and May. Other UK airlines, including Virgin Atlantic and easyJet also announced drastic cuts.


The travel and tourism industries were hit early on by economic disruption from the outbreak.


Besides the impact on airlines, the UN’s International Civil Aviation Organization (ICAO) forecast that Japan could lose $1.29 billion of tourism revenue in the first quarter due to the drop in Chinese travellers, while Thailand could lose $1.15 billion.


VIII. Disruption to commerce


The initial shortage of products and parts from China affected companies around the world, as factories delayed opening after the Lunar New Year and workers stayed home to help reduce the spread of the virus.


Apple’s manufacturing partner in China, Foxconn, faced production delays. Some carmakers including Nissan and Hyundai temporarily closed factories outside China because they couldn’t get parts.


By March, countries such as Italy had closed all but the most essential factories.


The pharmaceutical industry, bracing for disruption to global production since February, reported fears of drug shortages as India faced lockdowns 24 March.


India supplies nearly half of the generic drugs for countries such as the U.S.


Most trade shows, cultural and sporting events across the world have been cancelled or postponed.


Conclusion


In Nutshell, We are entering into a New Economic World Order, wherein, people become very conservative in spending across all spheres of economic activity, will be on low confidence due to uncertainity in Job Markets, Unemployment will be on raise and Industries and Companies alike take a lot of time to recover due to low revenues.


Government Stimulus and Spending are very basic and mandatory to revive Economies and Particulary Central Banks must play a major role with proper Monetary Policies and Government with appropriate Fiscal Policies to the put the Economies on the Track post Corona Crisis.


MM Rao

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Sources :

https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020

https://www.weforum.org/agenda/2020/02/coronavirus-economic-effects-global-economy-trade-travel/

https://www.cnbc.com/2020/05/07/us-weekly-jobless-claims.html

https://www.hindustantimes.com/india-news/historic-high-122-million-people-lost-jobs-in-india

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