World Bank: COVID-19 will lead global economy into worst recession since WWII

(Patria) - The sudden and large shock of the coronavirus pandemic and lockdown measures to contain it have led to a serious decline in the global economy. According to World Bank forecasts, global growth will fall by 5.2% this year. This would represent the deepest recession since World War II, with the majority of economies experiencing the largest decline in per capita output since 1870, the World Bank announced in its latest Global Economic Prospects report.

Due to serious disruptions in domestic demand and supply, trade, and finance, economic activity in advanced economies is expected to decline by 7% in 2020. Emerging markets and developing economies (EMDEs) are expected to decline by 2.5% this year, the first contraction for this group in at least sixty years. Per capita income is expected to fall by 3.6%, which will push millions of people into extreme poverty this year. The hardest-hit countries are those where the pandemic has been most severe and which rely heavily on global trade, tourism, commodity exports, and external financing. Although the severity of the impact will vary by region, all emerging markets and developing economies have vulnerabilities, which are exacerbated by external shocks. In addition, disruptions to access to education and primary healthcare are likely to have long-term effects on human capital development.

"This is very concerning, as the crisis is likely to have long-lasting consequences and lead to major global challenges," said Ceyla Pazarbasioglu, World Bank Vice President for Equitable Growth, Finance and Institutions.

"The first item on the agenda is addressing urgent global health and economic issues. In addition, the global community must unite to find a way for a stronger recovery, to avoid even more people facing poverty and unemployment."

According to the baseline forecast, assuming the pandemic subsides enough to allow for the lifting of domestic easing measures by mid-year in advanced economies and slightly later in EMDEs, global spillovers diminish in the second half of the year, and financial market disruptions are not prolonged, global growth is projected to return to 4.2% in 2021, with advanced economies at 3.9% and EMDEs at 4.6%. However, the outlook is highly uncertain, with downside risks prevailing, including the possibility of a prolonged pandemic, a financial reversal, and a retreat from global trade links. The downside scenario could lead to a decline in the global economy by as much as 8% this year, followed by a slow recovery in 2021, of just over 1%, with a decline in EMDE output by nearly 5% this year.

The US economy is projected to decline by 6.1% this year, reflecting disruptions associated with pandemic control measures. Euro area output is expected to fall by 9.1% in 2020, as activity has been severely affected by the spread of the disease. Japan's economy is expected to decline by 6.1%, as containment measures have slowed economic activity.

"The COVID-19 recession is unique in several aspects and is likely to be the deepest recession in advanced economies since World War II and the first decline in output in emerging and developing economies in at least six decades," said Ayhan Kose, Director of the World Bank's Prospects Group.

"The current episode has already led to by far the fastest and largest global growth forecast declines on record. If past experience is any guide, there may be further downward revisions to growth, implying that policymakers may need to be prepared to implement additional measures to support activity."

The pandemic underscores the urgent need for action on health and economic policies, including global cooperation, to mitigate the impact, protect vulnerable populations, and strengthen countries' capacities to prevent and address similar events in the future. It is crucial for emerging markets and developing economies, which are particularly vulnerable, to strengthen public health systems, address challenges of informality and limited safety nets, and implement reforms to generate strong and sustainable growth after the crisis passes.

If the pandemic's effects persist, emerging markets and developing economies with fiscal space and favorable financing conditions could consider additional stimulus. This should be accompanied by measures that help credibly return to medium-term fiscal sustainability, including measures that strengthen the fiscal framework, improve domestic revenue mobilization and spending efficiency, and increase fiscal and debt transparency. Transparency of all state financial obligations, quasi-debt instruments, and investments is a key step in creating an attractive investment climate and could achieve significant progress this year.

Regional Outlook:

East Asia and Pacific: Regional growth is projected to fall to 0.5% in 2020, the lowest level since 1967, reflecting disruptions caused by the pandemic. For more information, see the regional overview. Europe and Central Asia: The regional economy is projected to contract by 4.7%, with recessions in almost all countries. For more information, see the regional overview.

Latin America and the Caribbean: Pandemic-induced shocks will lead to a 7.2% decline in economic activity in 2020. For more information, see the regional overview.

Middle East and North Africa: Economic activity in the Middle East and North Africa region is projected to decline by 4.2% due to the pandemic and developments in the oil market. For more information, see the regional overview.

South Asia: Economic activity in this region is projected to decline by 2.7% in 2020, as pandemic containment measures will limit consumption and services, and there is uncertainty about the impact of the pandemic on private investment. For more information, see the regional overview.

Sub-Saharan Africa: The region's economic activity in 2020 faces the largest recorded decline of 2.8%. For more information, see the regional overview.

World Bank Group's Response to COVID-19

The World Bank Group, one of the largest sources of funding and knowledge for developing countries, is taking broad and rapid measures to help developing countries strengthen their response to the pandemic. We are supporting public health interventions, working to ensure the flow of essential materials and equipment, and helping the private sector continue to operate and preserve jobs. We will be deploying up to $160 billion in financial support over 15 months to help 100 countries protect the poor and vulnerable, support businesses, and promote economic recovery. This includes $50 billion in new IDA resources through grants and concessional loans.