COVID-19 will leave lasting economic scars around the world

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The coronavirus (COVID-19) pandemic has dealt a severe blow to an already fragile global economy.  Although the full scope of the human and economic impact of the pandemic will not be known for some time, the toll in both respects will be high. Pre-existing macroeconomic vulnerabilities make emerging market and developing economies (EMDEs) susceptible to economic and financial stress and this may limit the capacity and effectiveness of policy support at a time it is needed most. Even with policy support, the economic repercussions of the coronavirus pandemic are expected to be long-lasting , as we find in our latest analysis.

Widespread lockdowns

By early April, nearly 150 countries had closed all schools and mandated cancellation of events, and more than 80 had closed all workplaces in order to control the spread of the virus. Travel restrictions were widespread. The mandatory lockdowns, together with spontaneous social distancing by consumers and producers, have wreaked havoc on global activity and trade , and have been accompanied by gyrations in financial markets and sharp declines in oil and industrial metals prices.


Share of global GDP represented by countries with mandatory closures and cancellations

Share of global GDP represented by countries with mandatory closures and cancellations
Source: University of Oxford COVID-19 Government Response Tracker; World Bank.
Note: Travel restrictions are counted if they entail a ban on arrivals from all regions or a total border closure. Data is for April 1, 2020.

Multiple vulnerabilities

In the short term, EMDEs likely to be hardest hit economically are those that have weak health systems; rely heavily on trade, tourism, or remittances from abroad; depend on commodity exports; or have financial vulnerabilities. On average, EMDEs have higher debt than prior to the global financial crisis, making them more susceptible to financial stress.


Government and corporate debt

Government and corporate debt
Source: International Monetary Fund; World Bank.
Note: Bars show unweighted averages. Whiskers show interquartile range. Based on data for up to 152 EMDEs.

Long-term damage

Deep recessions inflict lasting scars on potential output through lower investment and innovation; erosion of the human capital of the unemployed; and a retreat from global trade and supply linkages.  The long-term damage of COVID-19 will be particularly severe in economies that suffer financial crises and, in energy exporters, because of the collapse in oil prices. In the average EMDE, over a five-year horizon, a recession combined with a financial crisis could lower potential output by almost 8 percent while, in the average EMDE energy exporter, a recession combined with an oil price plunge could lower potential output by 11 percent.


Cumulative EMDE potential output response after recessions and financial crises

Cumulative EMDE potential output response after recessions and financial crises
Source: Ha, Kose, and Ohnsorge (2019); World Bank.
Note: Vertical lines show 90 percent confidence bands. Sample includes 75 EMDEs during 1982-2018.

Hit to productivity

The pandemic can also be expected to stifle productivity growth, which has been anemic during the past decade.  Past epidemics were associated with 6 percent lower labor productivity and 11 percent lower investment five years later in affected countries.


Cumulative labor productivity response after epidemics

Cumulative labor productivity response after epidemics
Source: World Bank.
Note: Bars show the estimated impacts of SARS (2002-03), MERS (2012), Ebola (2014-15), and Zika (2015-16). Vertical lines show the range of the estimates with 90 percent significance. Sample includes 30 advanced economies and 86 EMDEs.

Groundwork for long-term growth

Policymakers must undertake comprehensive reform programs to improve institutions and frameworks that can ensure an eventual return to robust growth after the COVID-19 pandemic  while setting the stage for stronger long-term prospects. As the world emerges from the pandemic, it will also be critical to strengthen the mechanisms to prepare for, prevent, and respond to epidemics before the next one strikes. Less than 5 percent of countries around the world entered this pandemic scoring in the highest tier for their ability to respond to and mitigate the spread of an epidemic. Improving health sector capacity will require international policy cooperation and coordination, especially given the pandemic’s global reach. 


Health sector preparedness

Health sector preparedness
Source: Johns Hopkins University and Nuclear Threat Initiative, Global Health Security Index; World Bank.
Note: Data for 2019. Sample includes 31 LICs, 123 EMDEs, and 35 advanced economies. EMDEs exclude LICs.

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Report: Global Economic Prospects 

Authors

Dana Vorisek

Senior Economist, Development Economics Prospects Group

Join the Conversation

Frederik Bjørnsson
June 08, 2020

Hi Dana,
Do you have any predictions about the real estate effects in countries like Denmark and Sweden where I live?
Do you think we can see the same fall in houseprices as we did during the global finance crisis back in 2008?

KR
Fredrik

Julia walker
June 08, 2020

Hi Dana, Thanks for your post. Do you have any comments on the social fabric of society being tested and potentially corroding from this and the current protests over inequality?

R, Julia

Sat Goel
June 10, 2020

COVID-19 may have triggered this big change in the economic situation of the world. But it was coming. Our moral standards, ethical behavior and truthfulness have fallen so low that a natural calamity could only wake us up from our slumber. Population growth, people living under poverty line, lack of education and healthcare have all contributed to this havoc.

Take the case of the US only as an example. The US spends about 16-17% of GDP on healthcare, the highest in the world. The performance of the US in fighting the virus has been so far the worst. Where did all this spending go is a big question. Pharmaceutical companies are making huge profits. Hospitals must be responsible for high costs of health care. Medical profession should do some introspection. Why? Their profession is considered as a noble profession. How do they allow ignoble practices to flourish?

COVID-19 may be a good stick to beat this time. But the problem is much bigger and with deep roots.

SCOVIA DRIWARU
June 10, 2020

THE AFRICAN ECONOMY POST PANDEMIC;

The one great reason for economic optimism during this pandemic is that once public health concerns are addressed, the economy could quickly return to something like pre-crisis levels.

After all, if there were a safe way to return to normal behavior, restaurants could fill up, public transport would hit again, planes could begin flying, small businesses resume and millions of workers could return to their posts. But even if that happens in the coming months, the states will still be facing waves of second- and third-order economic effects that could last years.

Although every recession is different and much depends on the details of how the governments respond, African economies have primarily felt the impact of the global financial crisis indirectly. However there are some warnings from the last recession. In Africa, frontier and emerging markets were hit first, through their financial links with other regions in the world, South Africa, Nigeria, Ghana, and Kenya were hit first, suffering falling equity markets, capital flow reversals, and pressures on exchange rates.

In the 2008 downturn, caused inflation to accelerate, and dampened growth prospects. The global financial crisis greatly compounded the policy challenges confronting the region as it strove to consolidate its economic gains and meet the Millennium Development Goals (MDGs). Bank failures didn’t peak until 2010, causing a shortage of credit to businesses even once the economy was comfortably expanding.

In the 2020 pandemic downturn, there is the looming collapse of many small businesses; potential losses in the commercial real estate sectors. With revenue plunging precipitously at so many businesses — whether they ultimately close up entirely or not — the economic pain ripples throughout the economy. These factors could hold back the economy even if there’s a sharp rebound in employment as business life and public health return to normal.

According to the World Bank, Volatility in the global environment due to COVID-19 pandemic, which is taking a heavy toll on human life and placing excessive pressure on health systems, continues to negatively impact Sub-Saharan Africa. Economic and social impacts are immense, costing the region between $37 and $79 billion in estimated output losses in 2020, reducing agricultural productivity, weakening supply chains, increasing trade tensions, limiting job prospects, and exacerbating political and regulatory uncertainty. With such formidable challenges, economic growth is expected to contract from 2.4% in 2019 to between -2.1 and -5.1% in 2020, sparking the region’s first recession in 25 years.

It was always expected to be a difficult year for the African banking sector, ending 2019 by predicting weakening operating conditions at around 4% across the continent, compared to 6-7% historically and increased pressures on asset quality for 2020, with banks facing a high level of exposure. This was in part due to global economic difficulties, particularly against a backdrop of trade uncertainty, with high government debt and poor GDP growth of particular concern. Moody’s Banks Africa 2020 Outlook looked at the credit conditions of the banks and the operating and regulatory environments, and the banks’ funding and liquidity, finding that South Africa, Nigeria, Tunisia and Angola faced the year’s greatest banking challenges, while Egypt, Morocco, Mauritius and Kenya were expected to be more resilient. Now that the corona virus crisis begins to bite, the outlook is more negative than originally expected. And will exacerbate the slowdown in economic growth at a time when government debt levels have increased to over 50% of GDP on average across the continent.”

Several African countries stepped into the pandemic under a high note of debt burden which offers them a limited room for fiscal steer. For sub-Saharan Africa, government as a share of GDP has grown from 31.7% between 2010 to 2015 to 50% in 2020 with countries like Cape-verde, Mozambique and Angola recording debt levels as high as 119%, 107%, 90% of GDP respectively, however some countries like Kenya at 61%, Uganda 41% etc still have manageable debt to GDP according to IMF are below risky threshold of 50% though shrinking.

Hence reason why Africa needs debt alleviation, given most of the continent is mainly commodity dependent (9/10 African countries), 41% sub Saharan Africa, 17%, 16%, 13% and 12% spread across other continents. The reduction in revenue therefore will put pressure on the budgets across.

States and local governments are already starting to face cash shortfalls. more than one million jobs in March and April were slashed as a result of temporary shut down of the informal sector which contributes about 66% low wages, tourism sector, many other jobs in the education sector and other fragile sectors of the economy.

Their budgets were set in better times for the fiscal year now underway, and income tax collections this year are for their citizens’ earnings last year. But many revenue streams are under pressure, notably from sales taxes. And lower incomes in 2020 will depress income tax revenue in 2021.

Moreover, states often have tools they can use to delay the full impact of revenue shortfalls, like selling assets, using rainy-day funds, and shifting money around. Think of it as the equivalent of an unemployed family selling some furniture or tapping savings that had been meant for a vacation.

In other words, even in sectors far away from the restaurants and airlines that are temporarily shuttered, there could be lasting pain. In the earlier episode, overall business spending on equipment and structures started falling in the second quarter of 2015. But even though energy prices started rebounding only a year later, business investment didn’t return to previous levels until the first quarter of 2017.

There is much that is unsettled about the economy of 2020, and much that will depend on the evolution of public health and the government’s response. But as much as we might hope for an economy that surges out of this crisis and quickly returns to prosperity, there are some powerful forces that may stand in the way.