Coronavirus Changing Economic Growth Prospects

Coronavirus Changing Economic Growth Prospects

Coronavirus Changing Economic Growth Prospects

The COVID-19 pandemic and the economic shutdown in advanced economies and other parts of the globe have disrupted billions of lives and are jeopardizing decades of development progress. The World Bank published its latest Global Economic Prospects report on 8th June 2020, providing us with another glimpse of the expected economic fallout of the COVID-19 pandemic. According to its revised forecasts, the global economy will shrink by 5.2 percent this year, which would mark the deepest recession since World War II.

The COVID-19 pandemic has spread with astonishing speed to every part of the world and infected millions. The health and human toll is already large and continues to grow, with hundreds of thousands of deaths and many more suffering from diminished prospects and disrupted livelihoods. The pandemic represents the largest economic shock the world economy has witnessed in decades, causing a collapse in global activity. Various mitigation measures—such as lockdowns, closure of schools and non-essential business, and travel restrictions—have been imposed by most countries to limit the spread of COVID-19 and ease the strain on health care systems. 

The pandemic and associated mitigation measures have sharply curbed consumption and investment, as well as restricted labor supply and production. The cross-border spillovers have disrupted financial and commodity markets, global trade, supply chains, travel, and tourism. Financial markets have been extremely volatile, reflecting exceptionally high uncertainty and the worsening outlook. Flight to safety led to a sharp tightening of global and EMDE (Emerging Markets and Developing Economies) financial conditions.

 Equity markets around the world plunged, spreads on riskier categories of debt widened considerably, and EMDEs experienced large capital outflows in much of March and April that bottomed out only recently. Commodity prices have declined sharply as a result of falling global demand, with oil particularly affected. Many countries have provided large-scale macroeconomic support to alleviate the economic blow, which has contributed to a recent stabilization in financial markets. Central banks in advanced economies have cut policy rates and taken other far-reaching steps to provide liquidity and to maintain investor confidence. In many EMDEs, central banks have also eased monetary policy. 

The fiscal policy support that has been announced already far exceeds that enacted during the 2008-09 global financial crisis. In all, the pandemic has plunged a majority of countries into recession this year, with per capita output contracting in the largest fraction of countries since 1870. Advanced economies are projected to shrink by 7 percent in 2020, as widespread social-distancing measures, a sharp tightening of financial conditions, and a collapse in external demand depress activity. Assuming that the outbreak remains under control and activity recovers later this year, China is projected to slow to 1 percent in 2020—by far the lowest growth it has registered in more than four decades. 

Due to the negative spillovers from weakness in major economies, alongside the disruptions associated with their own domestic outbreaks, EMDE GDP is forecast to contract by 2.5 percent in 2020. This would be well below the previous trough in EMDE growth of 0.9 percent in 1982, and the lowest rate since at least 1960, the earliest year with available aggregate data. EMDEs with large domestic COVID-19 outbreaks and limited health care capacity; that are deeply integrated in global value chains; that are heavily dependent on foreign financing; and that rely extensively on international trade, commodity exports, and tourism will suffer disproportionately. 

Commodity-exporting EMDEs are hard hit by adverse spillovers from sharply weaker growth in China, and by the collapse in global commodity demand, especially for oil. With more than 90 percent of EMDEs expected to experience contractions in per capita incomes this year, many millions are likely to fall back into poverty. 

 Real Gross Domestic Product

            Percentage point differences from January 2020 Projections

(Percent change from previous year)  Source: World Bank

Low-Income Country forecasts

Percentage point differences from January 2020 Projections

(Real GDP growth at market prices in percent, unless indicated otherwise)   Source: World Bank

Coronavirus Wreaks Havoc on Economic Growth Prospects

(Percentage point change in real GDP growth projects for 2020 due to the COVID-19 pandemic)   Source: Statista.com

While countries with high case and death counts and those relying heavily on tourism, global trade and commodity exports are expected to be hit hardest by the pandemic, this is a truly global crisis affecting more countries than any other economic downturn since 1870, according to the World Bank. The economic impact of the coronavirus outbreak is expected to be severe across the globe, with no regions spared. Compared to its January 2020 projection, the World Bank revised its global growth estimate by 7.7 percentage points, with the Euro Area and Brazil suffering the biggest hit to their economic growth prospects.

 Growth of GDP and per capita GDP in global recessions 

Policymakers face formidable challenges as they seek to contain the devastating health, macroeconomic, and social effects of the pandemic. During the last global recession, in 2009, many EMDEs were able to implement large -scale fiscal and monetary responses. Today, however, many EMDEs are less prepared to weather a global downturn and must simultaneously grapple with a severe public health crisis with heavy human costs. 

Particularly vulnerable EMDEs include those that have weak health systems; those that rely heavily on global trade, tourism, and remittances; those that are prone to financial market disruptions; and those that depend on oil and other commodity exports. EMDEs where poverty and informality are widespread, including many low-income countries, are also vulnerable, since their poor have limited access to proper sanitation and adequate social safety nets, and often suffer greater food insecurity. 

South Asia country forecasts 

Percentage point differences from Jaunary 2020 projections 

(Real GDP growth at market prices in percent, unless indicated otherwise) Source: World Bank

Private consumption has been severely hindered as large-scale lockdowns were instituted in several economies, including Bangladesh, India, Nepal, and Pakistan. Some recent relaxations to these measures have been cautious, given continued rise in COVID-19 cases. Non-essential business closures stalled retail sales. In rural areas, food and other essential activity deliveries also faced major impediments. Closure of small and medium sized enterprises, a key engine of regional private sector activity, induced substantial loss in employment and private investment. 

Tourism activity was on the rise in Nepal and 2020 was declared as Visit Nepal and significant investments were made but became severely damaged by the pandemic. This includes sharp declines in tourist arrivals in the pre pandemic and will further deteriorate in the post pandemic environment.  This includes a decline in arrivals from China, a key market, since early in the year. International travel bans and other restrictions adopted by regional economies have further contributed to the weakness in tourism and it will be assumed to be continued for some time in future unless significant reduction in the spread and confidence of people move toward normality. 

Nepal is projected to experience substantial decelerations in FY 2019/20. In Nepal, growth is expected to slow to 1.8 percent in current year and estimated to be 2.1% in 2021, as the recovery in industrial production is reversed by COVID-19-related disruptions such as mitigation measures and global exports plunge, and as remittances fall, in addition to a drop in tourism (more than one-third of which are from China and India). Nepalese economy is also vulnerable to supply chain disruptions, both domestic and those stemming from imports of intermediate goods, as well as travel-related disruptions to international investors/traders in many sectors of the economy.

Expected Economic Growth Rate of Nepal

Source: Ministry of Finance Nepal

Nepal government’s expected economic growth rate of Nepal in the current year is 2.3% and for the next year 7% which the government believes  can be achieved with correct financial and monetary stimulus in the economy. The recovery from this year’s coronavirus pandemic can be aided by increased private sector investment due to continued reforms to improve business environments for Nepal.

Nepal Budget for Fiscal Year 2077/78

Source: Ministry of Finance Nepal

The government has given priority to the healthcare sector in the new budget to improve the healthcare system and address Covid-19 and similar crises in the future. The budget is expected to stabilize the nation’s economy and its shaky job market and support small and medium-sized businesses that have taken a hit from the coronavirus pandemic.

Conclusions

Thus, policy makers face unprecedented challenges from the health, macroeconomic and social effects of the pandemic. To limit the harm, it is important to secure core public services, maintain a private sector and get money directly to people. This will allow a quicker return to business creation and sustainable development after the pandemic has passed. During this mitigation period, countries should focus on targeted support to households and essential public and private sector services; and remain vigilant to counter potential financial disruptions. During the recovery period, countries will need to calibrate the withdrawal of public support and should be attentive to broader development challenges. 

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