The world has changed dramatically during Jan-Mar quarter of 2020. A rare disaster has resulted loss of a large number of human lives. As countries implement necessary quarantines and social distancing practices to contain the pandemic, the world has been put in a ‘Great Lockdown’. The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes.
This is a crisis like no other, and there is substantial uncertainty about its impact on people’s lives and livelihoods. A lot depends on the epidemiology of the virus, the effectiveness of containment measures, and adopting corrective measures. Many countries now face multiple crises—a health crisis, a financial crisis, and a collapse in commodity prices. Policymakers are providing unprecedented support to households, firms, and financial markets, but there remains considerable uncertainty about what the economic landscape will look like when countries emerge from this lockdown. It is expected countries will emerge victorious and life will become normal in second half, but the impacts will haunt for considerably long time. It may also be said, “This Great Lockdown has ushered 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, global growth in 2021 may remain dismal. Recovery, even in 2021 may remain partial. The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could touch US$ 10 trillion, greater than the economies of Japan and Germany, combined.
This is a truly global crisis as no country is spared. Countries reliant on tourism, travel, hospitality, and entertainment for their growth are experiencing particularly large disruptions. Emerging market and developing economies face additional challenges with unprecedented reversals in capital flows as global risk appetite decreases, and currency pressures, while coping with weaker health systems, and more limited fiscal space to provide support. Moreover, several economies entered this crisis in a vulnerable state with sluggish growth and high debt levels.
For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession. For this year, growth in advanced economies is projected at -6.1 percent. Emerging market and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates. Per capita come is projected to shrink for over 170 countries.
Alternative adverse scenariosÂ
The above stated is a likely scenario, but the situation could turn worse, keeping in view extreme uncertainty, which requires exploring 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 take a nosedive.
[ads1]
Exceptional policy actions
While the economy is shut down, policymakers will need to ensure that people are able to meet their needs and that businesses can pick up once the acute phases of the pandemic pass. The large, timely, and targeted, fiscal, monetary, and financial policies already taken by many policymakers—including credit guarantees, liquidity facilities, loan forbearance, expanded unemployment insurance, enhanced benefits, and tax relief—have been lifelines to households and businesses. This support should continue throughout the containment phase to minimize persistent scars that could emerge from subdued investment and job losses in this severe downturn.
Policymakers must also plan for the recovery. As containment measures come off, policies should shift swiftly to supporting demand, incentivizing firm hiring, and repairing balance sheets in the private and public sector to aid the recovery. Fiscal stimulus that is coordinated across countries with fiscal space will magnify the benefit for all economies. Moratoria on debt repayments and debt restructuring may need to be continued during the recovery phase.
Multilateral cooperation is vital to the health of the global recovery. To support needed spending in developing countries, bilateral creditors and international financial institutions should provide concessional financing, grants, and debt relief. The activation and establishment of swap lines between major central banks has helped ease shortages in international liquidity, and may need to be expanded to more economies. Collaborative effort is needed to ensure that the world does not de-globalize, so the recovery is not damaged by further losses to productivity.
International Monetary Fund is actively deploying US$ one trillion lending capacity to support vulnerable countries, including through rapid-disbursing emergency financing and debt service relief to our poorest member countries, and we are calling on official bilateral creditors to do the same.
There are some hopeful signs that the health crisis will end. Countries are succeeding in containing the virus using social distancing practices, testing, and contact tracing, at least for now, and treatments and vaccines may develop sooner than expected.
In the meantime, countries face tremendous uncertainty in the days to come. Commensurate with the scale and speed of the crisis, domestic and international policy responses need to be large, rapidly deployed, and speedily recalibrated as new data becomes available.