The June 2020 Global Economic Prospects describes both the immediate and near-term outlook for the impact of the pandemic and the long-term damage it has dealt with prospects for growth. The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020, using market exchange rate weights — the deepest global recession in decades, despite the extraordinary efforts of governments to counter the downturn with fiscal and monetary policy support, worldbank.org reported.

Over the longer horizon, the deep recessions triggered by the pandemic are expected to leave lasting scars through lower investment, an erosion of human capital through lost work and schooling, and fragmentation of global trade and supply linkages.

For emerging market and developing countries, many of which face daunting vulnerabilities, it is critical to strengthen public health systems, address the challenges posed by informality, and implement reforms that will support strong and sustainable growth once the health crisis abates.

Advanced economies are projected to shrink seven percent. That weakness will spill over to the outlook for emerging market and developing economies, who are forecast to contract by 2.5 percent as they cope with their own domestic outbreaks of the virus. This would represent the weakest showing by this group of economies in at least 60 years.

“The crisis highlights the need for urgent action to cushion the pandemic’s health and economic consequences, protect vulnerable populations, and set the stage for a lasting recovery.”

Every region is subject to substantial growth downgrades. East Asia and the Pacific will grow by a scant 0.5 percent. South Asia will contract by 2.7 percent, Sub-Saharan Africa by 2.8 percent, Middle East and North Africa by 4.2 percent, Europe and Central Asia by 4.7 percent, and Latin America by 7.2 percent.  These downturns are expected to reverse years of progress toward development goals and tip tens of millions of people back into extreme poverty.

Emerging market and developing economies will be buffeted by economic headwinds from multiple quarters: Pressure on weak health care systems, loss of trade and tourism, dwindling remittances, subdued capital flows, and tight financial conditions amid mounting debt. Exporters of energy or industrial commodities will be particularly hard hit. Demand for metals and transport-related commodities such as rubber and platinum used for vehicle parts has also tumbled. While agriculture markets are well supplied globally, trade restrictions and supply chain disruptions could yet raise food security issues in some places.

A possibility of even worse outcomes

Even this bleak outlook is subject to great uncertainty and significant downside risks. The forecast assumes that the pandemic recedes in such a way that domestic mitigation measures can be lifted by mid-year in advanced economies and later in developing countries, that adverse global spillovers ease during the second half of 2020, and that widespread financial crises are avoided. This scenario would envision global growth reviving, albeit modestly, to 4.2 percent in 2021.

However, this view may be optimistic. Businesses might find it hard to service debt, heightened risk aversion could lead to climbing borrowing costs, and bankruptcies and defaults could result in financial crises in many countries. Under this downside scenario, global growth could shrink by almost eight percent in 2020.

Looking at the speed with which the crisis has overtaken the global economy may provide a clue to how deep the recession will be. The sharp pace of global growth forecast downgrades points to the possibility of yet further downward revisions and the need for additional action by policymakers in coming months to support economic activity.

A particularly concerning aspect of the outlook is the humanitarian and economic toll the global recession will take on economies with extensive informal sectors that make up an estimated one-third of the GDP and about 70 percent of total employment in emerging market and developing economies. Policymakers must consider innovative measures to deliver income support to these workers and credit support to these businesses.

The June 2020 Global Economic Prospects looks beyond the near-term outlook to what may be lingering repercussions of the deep global recession: Setbacks to potential output — the level of output an economy can achieve at full capacity and full employment — and labor productivity.  Efforts to contain COVID-19 in emerging and developing economies, including low-income economies with limited health care capacity, could precipitate deeper and longer recession — exacerbating a multi-decade trend of slowing potential growth and productivity growth.

Another important feature of the current landscape is the historic collapse in oil demand and oil prices. Low oil prices are likely to provide, at best, temporary initial support to growth once restrictions to economic activity are lifted. However, even after demand recovers, adverse impacts on energy exporters may outweigh any benefits to activity in energy importers. In addition, the recent oil price plunge may provide further momentum to undertake energy subsidy reforms and deepen them once the immediate health crisis subsides.

In the face of this disquieting outlook, the immediate priority for policymakers is to address the health crisis and contain short-term economic damage. Over the longer term, authorities need to undertake comprehensive reform programs to improve the fundamental drivers of economic growth once the crisis lifts.

Global coordination and cooperation — of the measures needed to slow the spread of the pandemic, and of the economic actions needed to alleviate the economic damage, including international support — provide the greatest chance of achieving public health goals and enabling a robust global recovery.