The pandemic will accelerate a change that had already begun: a move away from US-centric globalization to the one centered around China
Aaniqa Qayoom
Covid-19 is a crisis like no other, and there is substantial ambiguity about its impact on people’s lives and livelihoods. A lot depends on the epidemiology of the virus, the effectiveness of containment measures, and the development of therapeutics and vaccines, all of which are hard to predict at this point of time. In addition, many countries now face multiple crises—a health crisis, a financial crisis, and a collapse in commodity prices, which interact in complex ways. Policymakers are providing unprecedented support to households, firms, and financial markets, and, while this is crucial for a strong recovery, there is considerable uncertainty about what the economic landscape will look like when we emerge from this lockdown.
Under the assumption that the pandemic and required containment peaks in the second quarter for most countries in the world, and recedes in the second half of this year, in the April World Economic Outlook global growth in 2020 is projected to fall to -3 percent. This is a downgrade of 6.3 percentage points from January 2020, a major revision over a very short period. This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis.
Assuming the pandemic fades in the second half of 2020 and that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains, we project global growth in 2021 to rebound to 5.8 percent.
This recovery in 2021 is only partial as the level of economic activity is projected to remain below the level it had been projected for 2021, before the virus hit. The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars, greater than the economies of Japan and Germany, combined.
The extreme uncertainty around the duration and intensity of the health crisis, we also explore alternative, more adverse scenarios. The pandemic may not recede in the second half of this year, leading to longer durations of containment, worsening financial conditions, and further breakdowns of global supply chains. In such cases, global GDP would fall even further: an additional 3 percent in 2020 if the pandemic is more protracted this year, while, if the pandemic continues into 2021, it may fall next year by an additional 8 percent compared to our baseline scenario.
The pandemic has led to more than a third of the world’s population being placed on lockdown to stop the spread of COVID-19. It has caused severe repercussions for economies across the world, following soon after a global economic slowdown during 2019 that saw stagnation of stock markets and consumer activity worldwide.
The recession has seen unusually high and rapid increases in unemployment in many countries, and the inability in the United States for state-funded unemployment insurance computer systems and processes to keep up with applications. The United Nations (UN) predicted in April 2020 that global unemployment will wipe out 6.7 per cent of working hours globally in the second quarter of 2020—equivalent to 195 million full-time workers. In western nations, unemployment is expected to be at around 10%, with more severely affected nations from the COVID-19 pandemic having higher unemployment rates. The developing world is also being affected by a drop in remittances. The UN warned in April of a famine “of biblical proportions”, which could affect over 30 developing nations.
The recession also saw the collapse of the price of oil triggered by the 2020 Russia–Saudi Arabia oil price war, the collapse of tourism, the hospitality industry, the energy industry and a significant downturn in consumer activity in comparison to the previous decade. Global stock markets crashed around 20 to 30% during late February and March 2020, respectively. During the crash, global stock markets made unprecedented and volatile swings, mainly due to extreme uncertainty in the markets.
Approaching and understanding the economic impact of Post-COVID-19 in any given context usually begins with the measure of the final impact of epidemics on the economic performance such as the case of COVID-19 crisis, which provides the most basic explanation about the economic cost of COVID-19.
The economic system we construct after this pandemic will have to be less shortsighted, more resilient, and more sensitive to the fact that economic globalization has far outpaced political globalization. So long as this is the case, countries will have to strive for a better balance between taking advantage of globalization and a necessary degree of self-reliance.
The corona virus pandemic is the first crisis since the 1930s to engulf both advanced and developing economies. Their recessions may be deep and long. As in the 1930s, sovereign defaults will likely spike. Calls to restrict trade and capital flows find fertile soil in bad times.
Doubts about pre-corona virus global supply chains, the safety of international travel, and, at the national level, concerns about self-sufficiency in necessities and resilience are all likely to persist—even after the pandemic is brought under control (which may itself prove a lengthy process). The post-corona virus financial architecture may not take us all the way back to the pre globalization era of Bretton Woods, but the damage to international trade and finance is likely to be extensive and lasting.
The pandemic will worsen four pre-existing conditions of the world economy. They will remain reversible through major surgery but turn chronic and damaging absent such interventions. The first of these conditions is secular stagnation—the combination of low productivity growth, a lack of private investment returns, and near-deflation. This will deepen as people stay risk-averse and save more following the pandemic, which will persistently weaken demand and innovation.
Second, the gap between rich countries (along with a few emerging markets) and the rest of the world in their resilience to crises is going to broaden further.
Finally, economic nationalism will increasingly lead governments to shut off their own economies from the rest of the world. This will never produce complete autarky, or anything close to it, but it will reinforce the first two trends and increase resentment of the third.
The COVID-19 pandemic will accelerate a change that had already begun: a move away from U.S.-centric globalization to a more China-centric globalization .In an evolving crisis, when no one is able to say for sure when it will be contained and what its long-term impact could be, the stress will be placed unequally on the individual and society, and on the government. And the structural risk, which affects everyone, is as economic as it is biological.
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