Global economy could shrink by 1%

UNITED NATIONS — The global economy could shrink almost 1 percent this year due to the novel coronavirus, a sharp reversal from the pre-pandemic forecast of 2.5 percent growth, the United Nations said on Wednesday.

The UN Department of Economic and Social Affairs warned in a report that the decline could be even deeper if restrictions on economic activities extend into the third quarter of the year, and if fiscal stimulus efforts don’t support income and consumer spending.

By comparison, the world economy contracted 1.7 percent during the global financial crisis in 2009.

“Fears of the exponential spread of the virus — and growing uncertainties about the efficacy of various containment measures — have rocked financial markets worldwide, with market volatility surpassing its peak during the global financial crisis and equity markets and oil prices plunging to multiyear lows,” the report said.

In the best-case scenario, the report said, moderate declines in private consumption, investment and exports will be offset by increases in government spending in the seven major industrialized nations and China, leading to global growth of 1.2 percent in 2020.

In the worst-case scenario, it said, global output would contract 0.9 percent, “based on demandside shocks of different magnitudes” to China, Japan, South Korea, the United States and the European Union as well as a 50 percent decline in oil prices.

This scenario “assumes that wide-ranging restrictions on economic activities in the EU and the US would extend until the middle of the second quarter”, the report said.

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.

Unemployment spike

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.

“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, the UN undersecretary-general for economic and social affairs.

The report said fiscal stimulus packages should prioritize health spending to contain the spread of the virus, and should provide income support to households most affected by the pandemic. But the outlook remains gloomy. “A sharp decline in consumer spending in the EU and the US will reduce imports of consumer goods from developing countries,” the report said. “In addition, global manufacturing production could contract significantly, amid the possibility of extended disruptions to global supply chains.”

Elliot Harris, the UN chief economist and assistant secretary-general for economic development, said the collective goal must be a resilient recovery which puts the planet back on a sustainable track. “We must not lose sight how it is affecting the most vulnerable population and what that means for sustainable development,” he added.