‘Covid to cause $12tr global income loss’

Updated 23 Sep 2020

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Growth recovery in 2021 will coincide with rising unemployment, which is likely to reach double digits in some advanced economies, says report. — AFP/File
Growth recovery in 2021 will coincide with rising unemployment, which is likely to reach double digits in some advanced economies, says report. — AFP/File

ISLAMABAD: The Trade and Development Report 2020 (TDR2020) on Tuesday warned that the Covid-19 recesion — measured in terms of world gross product — will likely amount to a $12 trillion loss in global income by end of 2021.

Moreover, the growth recovery in 2021 will coincide with rising unemployment, which is likely to reach double digits in some advanced economies, says the report released by United Nations Conference on Trade and Development (UNCTAD).

A global recovery plan must be both bold and comprehensive, built around a coordinated macroeconomic expansion focused on job creation and higher wages and supported by a big public investment push into cleaner energy, environmental protection, sustainable transport systems and the care economy.

But, if fiscal policy is to be a useful instrument for transformative development as well as macroeconomic stabilisation, complementary industrial policies will also be needed, it says.

TDR2020 says: “All eyes are now on 2021. Even if economic activity continues to bounce back and advanced country governments continue with the current mix of fiscal and monetary measures, employment will not fully recover, many countries will remain in debt distress and income gaps will widen.”

UNCTAD’s flagship report notes that central banks reacted quickly to the Covid-19 and seem to have averted a global financial meltdown. But the evidence from the global financial crisis (GFC) shows that monetary policy alone cannot bring the economy quickly back to its pre-shock situation. Fiscal stimulus is needed; the scale and composition of that stimulus will have a significant bearing on the trajectory of recovery, it says.

Based on what happened after the GFC, the necessary increase in government deficits and debt to fight the crisis may be prematurely aborted by fiscal consolidation; this could happen as soon as mid-2021 in many countries, which in its turn would slow down the return to full economic recovery or even reverse it, TDR2020 says.

The report warned that the fragile state of the world economy going into 2021 should be a wake-up call for policymakers everywhere. There is a high likelihood that if it is not, world output will not follow the V-shaped pattern that many are hoping for or even the stunted V that we see as the more likely outcome. A prolonged recession or U-shaped recovery, a double-dip recession (W-shaped) or a permanent loss of potential output (L-shaped) are all possible trajectories.

As of mid-2020, the expectation of most private sector, government and multilateral institutions is a sharp contraction of the world economy this year, concentrated in the first half of 2020, followed by an incomplete recovery, starting in the second half of 2020. As measured by annual growth rates, the recession in 2020 will be much deeper than after the GFC, the report says.

The UNCTAD report suggests that a global sovereign debt authority, independent of either (institutional or private) creditor or debtor interests, should be established to address the manifold flaws in the current handling of sovereign debt restructurings.

Lockdown has parachuted economists into unfamiliar territory. The current situation is not like a war economy where a switch to military spending sees output expand. Nor is it a traditional global supply-side shock where inflationary pressure is the big challenge for policy makers. In a global health crisis, putting lives before profits has triggered a series of simultaneous and mutually reinforcing supply, demand and financial shocks.

In the wake of these shocks the global economy will contract by an estimated 4.3 per cent this year, leaving global output by year’s end over $6tr short of what economists had expected it to be before the Covid-19 pathogen began to spread. In short, the world is grappling with the equivalent of a complete wipeout of the Brazilian, Indian and Mexican economies. And as domestic activity contracts, so goes the international economy; trade will shrink by around one fifth this year, foreign direct investment flows by up to 40pc and remittances will drop by over $100 billion.

The biggest falls in output will be in the developed world, with some likely to register a double-digit decline. But the greatest economic and social damage will be in the developing world where levels of informality are high, there is continued reliance on a few commodities or tourism as a source of foreign exchange, and fiscal and policy space is limited, says the report.

Published in Dawn, September 23rd, 2020