Rashid A Mughal
ACCORDING to Oxfam, Coronavirus is hitting the poor segment of society, every where and will result in increased poverty level and denial of food and health facilities to more families, particularly in Asia and Africa. Due to this pandemic, the global poverty is estimated to increase by 4% and will exclude 8% of the people from access to food and health facilities. As the Coronavirus continues its march around the world, governments have turned to proven public health measures, such as social distancing, to physically disrupt the contagion. Yet, doing so has severed the flow of goods and people, stalled economies, and is in the process of delivering a global recession. Economic contagion is now spreading as fast as the disease itself. This didn’t look plausible even a few weeks ago. As the virus began to spread, politicians, policy makers and markets, informed by the pattern of historical outbreaks, looked on while the early (and thus more effective and less costly) window for social distancing closed. Now, much further along the disease trajectory, the economic cost is much higher and predicting the path ahead has become nearly impossible, as multiple dimensions of the crisis are unprecedented and unknowable.
In this uncharted territory, naming a global recession adds little clarity beyond setting the expectation of negative growth. Pressing questions include the path of the shock and recovery, whether economies will be able to return to their pre-shock output levels and growth rates, and whether there will be any structural legacy from the Coronavirus crisis. In these trying circumstances it is heartening to notice that both, the IMF and the World Bank Group have committed to standby and is ready to help member countries address the human tragedy and economic challenge posed by the COVID-19 virus.
“We are engaged actively with international institutions and country authorities, with special attention to poor countries where health systems are the weakest and people are most vulnerable,” said Kristalina Georgieva, the Managing Director of the IMF and David Malpass, the President of the World Bank Group. “We will use our available instruments to the fullest extent possible, including emergency financing, policy advice and technical assistance.” “In particular, we have rapid financing facilities that, collectively, can help countries respond to a wide range of needs. The strengthening of country health surveillance and response systems is crucial to contain the spread of this and any future outbreaks”, they said. The organisations added that international cooperation is essential to deal with the impact of the COVID-19 virus.
The global GDP growth is projected to slow from 2.9% in 2019 to 1.4% this year, before picking up to around 2¼ per cent in 2021 as the effects of the Coronavirus fade and output gradually recovers. Announced and implemented policy actions incorporated in the projections will help support incomes in the near term, particularly those well-targeted on affected firms and households. Macroeconomic policy stimulus in the most exposed economies will help restore confidence as the effects of the virus outbreak and supply-side disruptions fade. Low interest rates should help cushion demand, although the impact of recent and projected changes in policy interest rates on activity is likely to be modest in the advanced economies.
Fiscal policy easing will also help Asian economies, but it appears likely to be more restrictive than desirable in many others, particularly in Europe, given soft growth prospects and low borrowing rates. Household spending continues to be underpinned by improving labour market conditions, but slowing job creation is likely to weigh on income growth, and persistent weak productivity growth and investment will check the strength of real wage gains. Uncertainty is likely to remain elevated, with trade and investment remaining very weak. The downturn in financial market risk sentiment, and reductions in business travel and tourism are also likely to constrain demand growth for some time.
Growth could be weaker still if downside risks materialise. In the near-term, the major downside risk is that the impact of the Coronavirus proves longer lasting and more intensive than assumed in the projections. In the event that outbreaks spread more widely in the Asia-Pacific region or the major advanced economies in the northern hemisphere, the adverse effects on global growth and trade will be much worse and more widespread. Illustrative simulations of this downside risk scenario suggest that global GDP could possibly be reduced by 1½ per cent in 2020, rather than by ½ per cent as in the base-case scenario. A larger decline in growth prospects of this magnitude would lower global GDP growth to around 1½ per cent in 2020 and could push several economies into recession, including Japan and the Euro area. The overall impact on China would also intensify, reflecting the decline in key export markets and supplying economies.
The additional headwinds and uncertainty related to the Coronavirus outbreak make it essential for monetary policies to remain supportive in all economies to ensure that long-term interest rates remain low. Policy has already become more accommodative over the past year in many countries, with widespread cuts in interest rates and enhanced forward guidance that policy easing will be forthcoming in both advanced and emerging-market economies, and the restarted net asset purchase programme by the ECB. Moves to enhance monetary policy accommodation are likely to be reflected quickly in asset prices and private sector sentiment. However, after a prolonged period of low or negative policy interest rates the impact of additional monetary policy measures on demand and inflation may be only modest, particularly in the absence of other fiscal and structural policy support. Conditional on the current growth projections, there is limited need for further reductions in policy interest rates in the United States unless the risks of a sharper growth slowdown rise.
The Euro area and Japan may face a renewed need to implement additional unconventional measures, with sub-par growth projected to persist and inflation well below target, but have less scope to ease monetary policy substantially. A number of emerging-market economies with flexible exchange rate frameworks and manageable exposures to foreign currency denominated debt, including Brazil, India and Mexico, have scope to further ease monetary policy provided inflation declines, while taking the opportunity to undertake fiscal and structural measures that enhance investor confidence.
— The writer is former DG (Emigration) and consultant ILO, IOM.
