- The global economy will contract given the sudden stop to large swathes of activity.
- There is an income loss in the manufacturing and services sectors across most advanced countries.
- This combined with the adverse effects on financial markets, consumption, investment confidence, international trade, and commodity prices.
- Governments are scrambling to contain the economic impact of the COVID -19 pandemic.
- It is compounded by persistent fragilities surrounding highly speculative financial positions.
- Series of stimulus packages have been announced by countries to extenuate the mounting economic damage and respond to the health crisis.
Projections of the potential impact of the Covid-19 shock on economies around the world for the year 2020 vary widely, says a report published by UNCTAD on its website.
The global economy will contract due to COVID-19
However, there is broad agreement that the global economy will contract given the sudden stop to large swathes of activity and the resulting income loss in the manufacturing and services sectors across most advanced countries and China, combined with the adverse effects on financial markets, consumption (through both income and wealth effects), investment confidence, international trade, and commodity prices.
Governments scramble to save the economy
For advanced country governments, now scrambling to contain the economic impact of the COVID -19 pandemic, the challenge — as discussed in our first Trade and Development Report Update1 – – is compounded by persistent fragilities surrounding highly speculative financial positions, in particular, the already unsustainable debt burdens associated with highly leveraged corporate loans.
These have been built up over the last decade of easy money and against a backdrop of heavily underregulated ‘high-tech-cum-gig economies’ and deeply ingrained income inequalities. In addition, the avalanche of cheap credit since 2008 has also spilled over to developing countries, creating new financial vulnerabilities, and undermining their debt sustainability.
Stimulus package to avert a crisis
In the past days, a series of stimulus packages — unprecedented in both scale and scope — have been announced by the major developed economies and China to extenuate the mounting economic damage and respond to the health crisis.
Aside from financial injections to keep the banking and corporate balance sheets on relatively stable footing, the critical measures to avert contractions of economic activity include government spending (particularly on health care), extended unemployment benefits, and cash transfers.
The details still need to be carefully examined but some broad estimates can be made about how this will likely translate into additional demand and thus national income in each economy.
Global Policy Model
Employing our Global Policy Model, we estimate a boost to the national incomes of advanced economies and China of about $1.4 trillion in 2020, substantially smaller than the headline values of the packages.2 This no doubt will have a positive impact not only on their own economies but on the world economy as well.
Although this will, in all likelihood, not prevent a global contraction this year it should (hopefully) avert the recession turning in to a prolonged depression. It should also contribute to stemming the fall in the prices of both financial assets and commodities and will partially alleviate the negative growth impact from the crisis in developing countries.
Pressures and constraints
Developing countries, however, face distinct pressures and constraints which make it significantly harder for them to enact effective stimulus without facing binding foreign exchange constraints.
And as these countries do not issue international reserve currencies, they can only obtain them through exports or sales of their reserves. What is more, exports themselves require significant imports of equipment, intermediate goods, know-how, and financial business services.
Finally, the financial turmoil from this crisis has already triggered sharp currency devaluations in developing countries, which makes servicing their debts and paying for necessary imports for their industrial activity far more onerous.
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Source: UNCTAD
