Sharpest economic contraction since 1930’s to slash $8.5 trillion off global economy

Globalization faces ‘existential crisis’ as 34 million people into extreme poverty in 2020 

by Felix von Geyer

The social and economic lockdown caused by the COVID19 pandemic could wipe nearly $8.5 trillion in output over the next two years, according to a new United Nations Report released Wednesday.

The writedown could reverse economic gains made over the previous four years making this the sharpest economic contraction since the Great Depression that could plunge an estimated thirty-four million people worldwide into extreme poverty this year alone.

The latest United Nations World Economic Situation and Prospects (WESP) mid-2020 report projects a global economic contraction of 3.2 per cent this year compared to initial forecasts of a 2.1 per cent global economic growth for 2020 before the pandemic, representing a 5.3 per cent swing in the original economic forecast.

The report estimates that GDP growth in developed economies is expected to plunge to -5.0% in 2020. A modest 3.4% growth – barely enough to make up for the lost output – is expected in 2021. World trade is forecast to contract by nearly 15 per cent in 2020 amid sharply reduced global demand and disruptions in global supply chains.

Approximately 90 per cent of the world economy has been in lockdown to a greater or lesser degree which has disrupted supply chains, depressed consumer demand and rendered millions out of work. 

According to the baseline scenario, developed country economies will likely contract by 5.0 per cent this year while developing country output will shrink by 0.7 per cent.

Increased economic poverty and inequality created by the pandemic’s socio-economic effects are estimated to push 34.3 million people below the extreme poverty line in 2020. African countries will suffer most with 56% of increased extreme poverty taking place within the African continent.  

Further extreme poverty could ensue during the coming decade swelling the extreme poverty ranks by an additional 130 million people by 2030, the target date to eradicate ‘poverty in all its forms and dimensions’ under goal one of the seventeen of the United Nations Sustainable Development Goals.

The report stresses that the pandemic will now further widen income inequality within and between countries.

Across the world governments have rolled out fiscal stimulus measures approximating 10 per cent of GDP, according to WESP. Developed countries have managed to increase fiscal spending including cash transfers and tax relief while the European Union has suspended its rules on limits to budget deficits.  In the US the Federal reserve has launched an unlimited bond buying programme already worth $2.3 trillion while the European Central Bank has leveraged €750 billion to buy bonds. Elsewhere Japan has expanded its asset management programme.

In contrast developing countries have managed to leverage programmes worth maybe 1 per cent of their GDP to alleviating the effects of the Coronavirus lockdown.

Therefore the aftermath of the Coronavirus,m developed countries will address domestic financing challenges through a lens of increased public debt and its ability to leverage higher taxes while developing countries will face higher inflation and a debt crisis as many developing countries area already heavily indebted both to private and multilateral institutions.

Indeed, the depth and severity of the crisis foreshadows a slow and painful recovery and places globalization in an existential crisis, according to the report. Efforts to recover from the aftermath of the Coronavirus will be a ‘litmus test for globalization and global solidarity,’ states the report. This crisis of legitimacy will further be exacerbated if global integration in the wake of the pandemic is seen to global health risks over resilience mechanisms to buffer against global shocks.

Consequently, the United Nations proposes a moratorium on debt finance, particularly for developing and least developed countries including the increased use of Special Drawing Rights under the IMF. Similarly, enhanced debt should be aligned to the UN Sustainable Development Goals established in 2012 at the Rio+20 conference. To this end the report embraces the World Bank rolling out $160 billion over the next 15 months. 

Elliott Harris, UN Chief Economist and Assistant Secretary-General for Economic Development stated that ‘The pace and strength of the recovery from the crisis not only hinges on the efficacy of public health measures in slowing the spread of the virus, but also on the ability of countries to protect jobs and incomes, particularly of the most vulnerable members of our societies.’

Where global liquidity per capita surged since the 2008 Global Financial Crisis, productive investment per capita stagnated, the report noted, aiding equity and bond prices over productive investment.

Hamid Rashid, Chief of the Global Economic Monitoring Branch and lead author of the report, said ‘The lesson we learnt from the last crisis is that fiscal and monetary stimulus measures do not necessarily boost productive investments. Governments must encourage businesses receiving its financial assistance to invest in productive capacities. This is a must for protecting decent jobs and preventing further rise in income inequality.’

The report proposed an increased availability and rapid deployment of international funds to address liquidity shortages and enable more manoeuvrability in fiscal policy options. Debt restructuring for developing countries particularly for commodity and tourism dependent economies is also highlighted to stimulate growth and accelerate recovery.  

A window of opportunity for ‘recovering better’ still exists. To this end the report advocates renewed global solidarity including enhanced public health systems and building resilience to withstand economic shocks while improving social protection systems worldwide, greening of economies and addressing climate change is the concluding theme of the UN report.

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