The coronavirus pandemic and shutdown measures to contain it have caused “swift and massive shock” that has plunged the world economy into a severe contraction, despite unprecedented government support, the World Bank said Monday.
The Bank expects the global economy to shrink by 5.2 percent this year, the worst recession in 80 years and the deepest since the Second World War, it said in its June 2020 edition of the Global Economic Prospects.
Economic activity in advanced economies is anticipated to shrink 7 percent in 2020 with the severe disruptions to domestic demand and supply, trade, and finance. Meanwhile, emerging market and developing economies are expected to decline by 2.5 percent, their first contraction as a group in at least 60 years.
Particularly in sub-Saharan Africa, economic activity is on course to contract by 2.8 percent this year, the deepest on record. The region’s biggest economy Nigeria is expected to shrink by 3.2 percent, given the collapse in oil prices while South Africa’s output is forecast to contract 7.1 percent, the deepest contraction in a century, as “stringent but necessary” containment measures curtail economic activity, the bank said.
With the largest fraction of economies experiencing declines in per capita output, the scale of the downturn is worse than any recession since 1870. “This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges,” said Ceyla Pazarbasioglu, World Bank Group VP for Equitable Growth, Finance and Institutions.
Per capita incomes are expected to decline by 3.6 percent, which will tip millions of people into extreme poverty this year. According to the World Bank, the depth of the crisis will drive 70 to 100 million people into extreme poverty – worse than the prior estimate of 60 million. Elevated extreme poverty will most likely persist through 2021, the bank said Tuesday.
Though dramatic, the current forecast falls short of the Great Depression, which saw a global contraction of 14.5 percent from 1930 to 1932, while the post-war downturn in 1945-1946 was 13.8 percent, according to the World Bank. But things could get worse, however, meaning forecasts may be revised even lower.
With the World Health Organization saying the pandemic is “far from over” as daily cases hit record high, there remain some “exceptionally high” risks to the outlook, the bank warned. Under the worst-case scenario, the global recession could mean a contraction of 8 percent, the report said, that is if the disease lingers and authorities have to reimpose restrictions.
Given this uncertainty, further downgrades to the outlook are very likely, Pazarbasioglu cautioned. And while the bank projects a 4.2 percent economic rebound for 2021, there is a risk a second wave of outbreaks could undermine the recovery and turn the economic crisis into a financial one that will see a “wave of defaults.”
“Disruptions to activity would weaken businesses’ ability to remain in operation and service their debt,” the report cautioned. That, in turn, could raise interest rates for higher-risk borrowers. “With debt levels already at historic highs, this could lead to cascading defaults and financial crises across many economies,” it said. More so, deep recessions triggered by COVID-19 will likely weigh on potential output in many countries for years to come.