Coronavirus: World Bank June report confirms worst fears

Global economies have suffered devastating effects because of the dreaded coronavirus that has swept through many countries, the World Bank Group, has said.

As a response to the infections, many countries adopted restrictions in movement and lockdowns leading to reductions in economic activity by consumers and producers.

This, the group said, “constitute an unprecedented combination of adverse shocks that is causing deep recessions in many advanced economies and emerging market and developing economies (EMDEs)”.

In it’s Global Economic Prospects for June 2020, the group noted that the COVID-19 pandemic “has struck a devastating blow to an already fragile global economy”.

It said EMDEs that rely heavily on global trade, tourism, or remittances from abroad; and those that depend on commodity exports will be particularly hard-hit.

Beyond its short-term impact, deep recessions triggered by the pandemic are likely to leave lasting scars through multiple channels, including lower investment; erosion of the human capital of the unemployed; and a retreat from global trade and supply linkages.

Global activity and trade

Data released in the first half of 2020 point to a severe global recession. The global composite PMI—a gauge of worldwide manufacturing and services activity—sank deep into contractionary territory to a record low of 26.5 in April.

Commodity markets

As a result of the sharp decline of global commodity demand, the prices of most commodities have fallen steeply, particularly those used in the transport industry.

Benchmark oil prices have been most affected, with the European Brent spot price plunging by 85 percent between late January—when the first human-to-human transmissions of the virus were announced—and its trough in late-April and the WTI price briefly trading at negative levels, before a gradual recovery in May.

The decline in oil prices in March was the largest one-month price plunge on record

Global financial conditions

Global equity markets fell sharply as the pandemic spread across the world.
Within a week of reaching an all-time high in mid-February, the S&P 500 index in the United States experienced its fastest decline since October 1987, and stock markets in other major economies experienced declines of similar magnitude.
The VIX volatility index more than quadrupled in March before settling at about double its February value in mid-May.

Suggestions

In both energy exporters and importers, support measures could focus on boosting health infrastructure and capacity, in addition to protecting employment and social safety nets.

To alleviate the burden on fiscal balance sheets, energy exporters and importers with high debt levels may want to preemptively identify priority expenditures that need to be safe guarded if financing shrinks, as well as a lower priority, poorly targeted, or inefficient spending programs that can be delayed or suspended.

Additional liquidity could be injected in economies with low and stable inflation to enable banks to extend credit to firms and households and to prevent widespread insolvency.

The economic damage of the pandemic could be long-lasting, as it will take considerable time to repair the disruptions to labour markets, value chains, and balance sheets, and to restore consumers’ confidence in the safety of retail, leisure, and workspaces.