UN Warns Global Economy Could Shrink by 1% Due To COVID-19

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  • The global economy could shrink by up to 1 percent in 2020 due to COVID-19.
  • UN-DESA said the pandemic is disrupting global supply chains and international trade.
  • Governments are rolling out large stimulus packages to avert a sharp downturn of their economies.
  • The oil price can decline by 50 percent against the baseline of USD 61 per barrel.
  • A well-designed fiscal stimulus package, prioritizing health is in need of the hour.
  • Unemployment is likely to increase sharply.

According to an article published in the Economic Times, the global economy could shrink by up to 1 percent in 2020 due to the coronavirus pandemic, a reversal from the previous forecast of 2.5 percent growth.

Restrictions on economic activities

The UN warned that it may contract even further if restrictions on the economic activities are extended without adequate fiscal responses.

The analysis by the UN Department of Economic and Social Affairs (DESA) said the COVID-19 pandemic is disrupting global supply chains and international trade.

The analysis noted that before the outbreak of the COVID-19, world output was expected to expand at a modest pace of 2.5 percent in 2020, as reported in the World Economic Situation and Prospects 2020.

Stimulus packages 

Governments are considering and rolling out large stimulus packages to avert a sharp downturn of their economies which could potentially plunge the global economy into a deep recession. 

In the worst-case scenario, the world economy could contract by 0.9 percent in 2020, the DESA said, adding that the world economy had contracted by 1.7 percent during the global financial crisis in 2009.

Steps to be taken

It added that to avoid further contraction, governments should provide income support and help boost consumer spending.

Best and worst-case scenarios

The UN DESA’s World Economic Forecasting Model, with the rapidly changing economic conditions, has estimated best and worst-case scenarios for global growth in 2020.

Best-case scenario

In the best-case scenario – with moderate declines in private consumption, investment and exports and offsetting increases in government spending in the G-7 countries and China – global growth would fall to 1.2 percent in 2020.

Worst-case scenario

In the worst-case scenario, the global output would contract by 0.9 percent – instead of growing by 2.5 percent – in 2020.

Demand-side shocks 

Adding that the scenario is based on demand-side shocks of different magnitudes to China, Japan, South Korea, the US, and the EU, as well as an oil price decline of 50 percent against our baseline of USD 61 per barrel.

Factors that affect the economy

The severity of the economic impact will largely depend on two factors: 

  • the duration of restrictions on the movement of people and economic activities in major economies; and 
  • the actual size and efficacy of fiscal responses to the crisis.

A well-designed fiscal stimulus package, prioritizing health spending to contain the spread of the virus and providing income support to households most affected by the pandemic would help to minimize the likelihood of a deep economic recession, it said.

Service sectors take the blow

According to the forecast, lockdowns in Europe and North America are hitting the service sector hard, particularly industries that involve physical interactions such as retail trade, leisure, and hospitality, recreation and transportation services. Collectively, such industries account for more than a quarter of all jobs in these economies.

The DESA said as businesses lose revenue, unemployment is likely to increase sharply, transforming a supply-side shock to a wider demand-side shock for the economy.

Against this backdrop, the UN-DESA is joining a chorus of voices across the UN system calling for well-designed fiscal stimulus packages that prioritize health spending and support households most affected by the pandemic.

Need for strong policy measures

Urgent and bold policy measures are needed, not only to contain the pandemic and save lives but also to protect the most vulnerable in our societies from economic ruin and to sustain economic growth and financial stability, Under-Secretary-General for Economic and Social Affairs Liu Zhenmin said.

The analysis also warns that the adverse effects of prolonged economic restrictions in developed economies will soon spill over to developing countries via trade and investment channels.

A sharp decline in consumer spending in the European Union and the United States will reduce imports of consumer goods from developing countries.

Developing countries, particularly those dependent on tourism and commodity exports, face heightened economic risks. Global manufacturing production could contract significantly, and the plummeting number of travelers is likely to hurt the tourism sector in small island developing States, which employs millions of low-skilled workers, it said.

Increasing the likelihood of debt distress

Meanwhile, the decline in commodity-related revenues and a reversal of capital flows are increasing the likelihood of debt distress for many nations. Governments may be forced to curtail public expenditure at a time when they need to ramp up spending to contain the pandemic and support consumption and investment.

UN Chief Economist and Assistant Secretary-General for Economic Development Elliot Harris said the collective goal must be a resilient recovery that puts the planet back on a sustainable track. We must not lose sight of how it is affecting the most vulnerable population and what that means for sustainable development, he said.

The alarms raised by UN-DESA echo another report, released on March 31, in which UN experts issued a broad appeal for a large-scale, coordinated, comprehensive multilateral response amounting to at least 10 percent of global gross domestic product (GDP). 

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Source: EconomicTimes

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