Global economy could shrink by almost 1 per cent in this year due to the COVID-19 pandemic, a sharp reversal from the pre-pandemic forecast of 2.5 per cent growth, the UN has said. A report issued by the UN Department of Economic and Social Affairs (UN-DESA) has warned that the decline could go further down if the restrictions on the economic activities continue and if the stimulus packages fail to support income and consumer spendings.
The report issued on Wednesday said that that the pandemic caused by the COVID-19 virus has disrupted global supply chains and international trade. With nearly 100 countries closing national borders during the past month, the movement of people and tourism flows have come to a screeching halt. The numbers could translate to a global economic contraction of 0.9 per cent by the end of the year, or even higher if governments fail to boost consumer spending.
“Millions of workers in these countries are facing the bleak prospect of losing their jobs. Governments are considering and rolling out large stimulus packages to avert a sharp downturn of their economies which could potentially plunge the global economy into a deep recession. In the worst-case scenario, the world economy could contract by 0.9 per cent in 2020,” the DESA said, adding that the world economy had contracted by 1.7 per cent during the global financial crisis in 2009.
As per the report, in the best-case scenario – with moderate declines in private consumption, investment and exports and offsetting increases in government spending in the G-7 countries and China – global growth would fall to 1.2 per cent in the current year.
“In the worst-case scenario, the global output would contract by 0.9 per cent – instead of growing by 2.5 per cent – in 2020,” it said, adding that the scenario is based on demand-side shocks of different magnitudes to China, Japan, South Korea, the US and the EU, as well as an oil price decline of 50 per cent against our baseline of USD 61 per barrel.
According to the forecast, lockdowns in Europe and North America are hitting the service sector hard, particularly industries that involve physical interactions such as retail trade, leisure and hospitality, recreation and transportation services. Collectively, such industries account for more than a quarter of all jobs in these economies.
As businesses lose revenue, unemployment is likely to increase sharply, transforming a supply-side shock to a wider demand-side shock for the economy. The severity of the impact will largely depend on the duration of restrictions on the movement of people and economic activities and on the scale and efficacy of responses by national treasuries.
Against that backdrop, the UN-DESA has joined a chorus of voices across the UN system calling for well-designed fiscal stimulus packages which prioritize health spending and support households most affected by the pandemic.
“Urgent and bold policy measures are needed, not only to contain the pandemic and save lives, but also to protect the most vulnerable in our societies from economic ruin and to sustain economic growth and financial stability,” said Liu Zhenmin, UN undersecretary-general for economic and social affairs.
The analysis also warned that the adverse effects of prolonged economic restrictions in developed economies will soon spill over to developing countries via trade and investment channels.
“Developing countries, particularly those dependent on tourism and commodity exports, face heightened economic risks. Global manufacturing production could contract significantly, and the plummeting number of travellers is likely to hurt the tourism sector in small island developing States, which employs millions of low-skilled workers,” it said.