A World Bank Group Flagship Report JUNE 2020 Global Economic Prospects JUNE 2020 Global Economic Prospects © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. 1 2 3 4 23 22 21 20 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. ISSN: 1014-8906 ISBN (paper): 978-1-4648-1553-9 ISBN (electronic): 978-1-4648-1580-5 DOI: 10.1596/978-1-4648-1553-9 Cover design: Bill Pragluski (Critical Stages). The cutoff date for the data used in this report was May 29, 2020 for chapters 1 and 2 and May 22, 2020 for chapters 3 and 4. Summary of Contents Acknowledgments ............................................................................................................................xi Foreword....................................................................................................................................... xiii Executive Summary ......................................................................................................................... xv Abbreviations................................................................................................................................ xvii Chapter 1 Pandemic, Recession: The Global Economy in Crisis .............................................. 1 Box 1.1 How deep will the COVID-19 recession be? ...............................................13 Box 1.2 Recent developments and outlook for low-income countries (LICs)...............24 Box 1.3 Scenarios of possible global growth outcomes..............................................30 Box 1.4 How does informality aggravate the impact of COVID-19? ..........................36 Chapter 2 Regional Outlooks...............................................................................................67 Special Focus Regional Macroeconomic Implications of COVID-19 ......................109 Box SF.1 The impact of COVID-19 on global value chains.................................... 117 Chapter 3 Lasting Scars of the COVID-19 Pandemic...........................................................131 Box 3.1 How do deep recessions affect potential output in EMDEs?........................ 146 Box 3.2 How do disasters affect productivity?. ...................................................... 151 Chapter 4 Adding Fuel to the Fire: Cheap Oil During the Pandemic .....................................181 Box 4.1 Reforms after the 2014-16 oil price plunge ............................................... 193 Statistical Appendix .......................................................................................................................205 Selected Topics .............................................................................................................................212 iii Table of Contents Acknowledgments ............................................................................................................................xi Foreword....................................................................................................................................... xiii Executive Summary ......................................................................................................................... xv Abbreviations................................................................................................................................ xvii Chapter 1 Pandemic, Recession: The Global Economy in Crisis .............................................. 1 Summary ............................................................................................................. 3 Major economies: Recent developments and outlook................................................ 7 United States ................................................................................................. 8 Euro Area ...................................................................................................... 8 Japan............................................................................................................. 9 China .......................................................................................................... 10 Global trends ..................................................................................................... 10 Global trade ................................................................................................. 10 Financial markets.......................................................................................... 12 Commodity markets ..................................................................................... 20 Emerging market and developing economies ......................................................... 21 Recent developments .................................................................................... 22 Outlook ...................................................................................................... 29 Global outlook and risks ..................................................................................... 34 Global outlook ............................................................................................. 35 Risks to the outlook ...................................................................................... 42 Policy challenges ................................................................................................ 47 Challenges in advanced economies.................................................................. 47 Challenges in emerging market and developing economies ................................ 50 Global coordination and cooperation .............................................................. 56 Box 1.1 How deep will the COVID-19 recession be?.............................................. 13 Box 1.2 Recent developments and outlook for low-income countries (LICs) ............. 24 Box 1.3 Scenarios of possible global growth outcomes ............................................ 30 Box 1.4 How does informality aggravate the impact of COVID-19? ........................ 36 References ......................................................................................................... 58 v Chapter 2 Regional Outlooks ............................................................................................. 67 East Asia and Pacific .......................................................................................... 69 Recent developments........................................................................................ 69 Outlook.......................................................................................................... 70 Risks .............................................................................................................. 73 Europe and Central Asia ..................................................................................... 75 Recent developments ...................................................................................... 75 Outlook ........................................................................................................ 76 Risks............................................................................................................. 78 Latin America and the Caribbean ........................................................................ 81 Recent developments ...................................................................................... 81 Outlook ........................................................................................................ 82 Risks............................................................................................................. 84 Middle East and North Africa ............................................................................. 87 Recent developments ...................................................................................... 87 Outlook ........................................................................................................ 88 Risks............................................................................................................. 90 South Asia ......................................................................................................... 93 Recent developments ...................................................................................... 93 Outlook ........................................................................................................ 94 Risks............................................................................................................. 96 Sub-Saharan Africa ............................................................................................ 99 Recent developments ...................................................................................... 99 Outlook ...................................................................................................... 100 Risks........................................................................................................... 102 References........................................................................................................ 106 Special Focus Regional Macroeconomic Implications of COVID-19 ......................................... 109 Introduction .................................................................................................... 111 The pandemic and health policy responses........................................................... 112 Regional vulnerabilities to health and economic stress ........................................... 115 Macroeconomic policy responses ........................................................................ 120 Prospects for per capita growth and poverty ......................................................... 126 Risks ............................................................................................................... 128 Box SF.1 The impact of COVID-19 on global value chains................................... 117 References........................................................................................................ 129 vi Chapter 3 Lasting Scars of the COVID-19 Pandemic .........................................................131 Introduction .................................................................................................... 133 Spread of the pandemic ..................................................................................... 134 The economics of the pandemic: Shocks and spillovers ......................................... 136 Initial impact: Economic activity, financial and commodity markets....................... 137 Global activity and trade ............................................................................ 137 Global financial conditions ......................................................................... 138 Commodity markets .................................................................................. 138 Short-term growth impact ................................................................................. 139 Spillovers.................................................................................................. 140 Vulnerabilities: Magnifying the short-term impact ........................................ 141 Long-term growth effects ................................................................................... 144 Implications for potential output ................................................................ 145 Implications for productivity ...................................................................... 150 Unique nature of the pandemic: Magnifying the long-term impact ................. 150 Conclusion ...................................................................................................... 158 Box 3.1 How do deep recessions affect potential output in EMDEs? ................... 146 Box 3.2 How do disasters affect productivity?................................................... 151 Annex 3.1 The macroeconomic effects of pandemics and epidemics: A literature review............................................................................................. 160 Annex 3.2 Bayesian vector autoregression model .................................................. 170 Annex 3.3 EMDE vulnerability index ................................................................. 170 Annex 3.4 Long-term implications of recessions: Data and methodology................. 171 References........................................................................................................ 172 Chapter 4 Adding Fuel to the Fire: Cheap Oil during the Pandemic .................................... 181 Introduction.....................................................................................................183 Drivers of the oil price plunge ............................................................................185 Comparison with previous periods of disruptions .................................................187 Implications of oil price plunges for the global economy........................................188 Past oil price plunges..................................................................................188 The 2014-16 oil price plunge......................................................................190 The 2020 oil price plunge...........................................................................192 Box 4.1. Reforms after the 2014-16 oil price plunge .............................................193 Conclusions .....................................................................................................198 Annex 4.1. Methodology: Decomposition of oil price movements ..........................199 Annex 4.2. Oil price plunges since 1970 ..............................................................199 Annex 4.3. Methodology: Impact of oil price plunges on output ............................200 References ........................................................................................................201 vii Statistical Appendix ....................................................................................................................... 205 Data and Forecast Conventions....................................................................................................... 211 Selected Topics .............................................................................................................................. 212 Figures 1.1 Global growth prospects ....................................................................... 5 1.2 Global risks and policy challenges .......................................................... 6 1.3 Advanced economies ............................................................................ 8 1.4 United States ...................................................................................... 9 1.5 Euro Area ......................................................................................... 10 1.6 China ............................................................................................... 11 1.7 Global trade ...................................................................................... 12 1.1.1 Global recessions: 1870-2021.............................................................. 14 1.1.2 Global activity during global recessions: 1960-2021............................... 16 1.1.3 Evolution of forecasts during global recessions ...................................... 19 1.8 Global finance................................................................................... 21 1.9 Commodity markets .......................................................................... 22 1.10 EMDE recent developments ............................................................... 23 1.2.1 Recent developments in low-income countries ...................................... 25 1.2.2 Outlook and risks .............................................................................. 26 1.11 EMDE outlook ................................................................................. 29 1.3.1 Possible global growth outcomes ......................................................... 31 1.12 EMDE per capita income growth and poverty ...................................... 34 1.13 Risks to the outlook ........................................................................... 35 1.4.1 Informality in EMDEs ....................................................................... 37 1.4.2 Features of the informal sector ............................................................ 38 1.4.3 Development challenges ..................................................................... 39 1.14 More protracted pandemic ................................................................. 43 1.15 Financial crises and debt burdens......................................................... 44 1.16 Retreat from global value chains .......................................................... 45 1.17 Monetary and financial policies in advanced economies ......................... 46 1.18 Fiscal policies in advanced economies................................................... 47 1.19 Structural policies in advanced economies ............................................ 48 1.20 EMDE monetary and financial policy .................................................. 49 1.21 EMDE fiscal policy............................................................................ 52 1.22 EMDE structural policies ................................................................... 53 2.1.1 EAP: Recent developments ................................................................ 70 2.1.2 Recent developments, China............................................................... 71 viii Figures 2.1.3 EAP: Outlook and risks...................................................................... 72 2.2.1 ECA: Recent developments................................................................. 76 2.2.2 ECA: Outlook and risks ..................................................................... 77 2.3.1 LAC: Recent developments................................................................. 82 2.3.2 LAC: Outlook and risks ..................................................................... 83 2.4.1 MENA: Recent developments ............................................................. 88 2.4.2 MENA: Outlook and risks.................................................................. 89 2.5.1 SAR: Recent developments ................................................................. 94 2.5.2 SAR: Outlook and risks...................................................................... 95 2.6.1 SSA: Recent developments.................................................................100 2.6.2 SSA: Outlook and risks .....................................................................101 SF.1 COVID-19 outbreaks .......................................................................113 SF.2 Regional vulnerabilities and economic impacts.....................................115 SF.1.1 The impact of COVID-19 on GVCs ..................................................118 SF.1.2 Simulation results .............................................................................120 SF.3 Policy measures ................................................................................122 SF.4 Prospects for growth, per capita incomes and poverty ...........................127 3.1 The COVID-19 pandemic and mitigation measures.............................135 3.2 Health vulnerabilities in EMDEs .......................................................136 3.3 Indicators of economic activity and international trade .........................137 3.4 Financial and commodity market conditions .......................................139 3.5 EMDE growth response to growth slowdown in major economies .........140 3.6 EMDE vulnerabilities .......................................................................142 3.7 Fiscal and external positions of EMDEs .............................................143 3.8 Informality, poverty, and food insecurity.............................................144 3.1.1 EMDE vulnerabilities to financial stress and oil price plunges ...............146 3.1.2 Growth: Recessions, crises, and oil price plunges ..................................147 3.1.3 Potential output in EMDEs: Recessions, crises, and oil price plunges ...........................................................................................148 3.9 EMDE potential output and recessions ...............................................150 3.2.1 Severity, frequency, and duration of pandemics, epidemics, and climate disasters ...........................................................................................152 3.2.2 Disasters and productivity .................................................................154 3.2.3 Impact of disasters ............................................................................155 3.2.4 Impact of wars and financial crises on productivity ...............................156 3.10 Productivity and epidemics ................................................................158 3.11 Factors aggravating long-term costs.....................................................158 3.12 Fiscal and monetary policy responses ..................................................159 ix Figures A.3.1.1 Economic impact of pandemics..........................................................161 4.1 Oil price decline ...............................................................................184 4.2 Drivers of the 2020 oil price plunge....................................................186 4.3 Oil markets during past recessions and travel disruptions ......................187 4.4 Oil market developments during past oil price plunges .........................189 4.5 Macroeconomic developments in EMDEs during past oil price plunges.. 190 4.6 Impact of 2014-16 oil price plunge on energy exporters ........................191 4.7 Impact of 2014-16 oil price plunge on the largest energy importers ........192 4.1.1 Reforms since 2014 ..........................................................................195 4.8 Pandemic and mitigation measures in EMDE energy exporters ..............197 4.9 EMDE energy exporters’ vulnerabilities: 2014-16 and 2019 ..................198 Tables 1.1 Real GDP ........................................................................................... 4 1.1.1 Growth of GDP and per capita GDP in global recessions....................... 17 1.1.2 Growth of GDP and per capita GDP in global recessions, by region........ 17 1.2.1 Low-income country forecasts ............................................................. 27 1.2 Emerging market and developing economies......................................... 57 2.1.1 East Asia and Pacific forecast summary................................................. 74 2.1.2 East Asia and Pacific country forecasts.................................................. 74 2.2.1 Europe and Central Asia forecast summary ........................................... 79 2.2.2 Europe and Central Asia country forecasts ............................................ 80 2.3.1 Latin America and the Caribbean forecast summary .............................. 85 2.3.2 Latin America and the Caribbean country forecasts ............................... 86 2.4.1 Middle East and North Africa forecast summary ................................... 91 2.4.2 Middle East and North Africa economy forecasts .................................. 92 2.5.1 South Asia forecast summary............................................................... 97 2.5.2 South Asia country forecasts................................................................ 98 2.6.1 Sub-Saharan Africa forecast summary..................................................104 2.6.2 Sub-Saharan Africa country forecasts ..................................................105 A.3.1.1 Estimated mortality and infection rates of pandemics during the past century .....................................................................................162 A.3.1.2 Economic impacts of simulated influenza pandemics ............................166 A.3.1.3 Estimates of economic impacts of historical pandemics and epidemics ....167 A.3.1.4 Preliminary estimates of economic impacts of COVID-19 ....................168 x Acknowledgments This World Bank Group Flagship Report is a product of the Prospects Group in the Equitable Growth, Finance and Institutions (EFI) Vice Presidency. The project was managed by M. Ayhan Kose and Franziska Ohnsorge, under the general guidance of Ceyla Pazarbasioglu. Global and regional surveillance work was dissemination. Graeme Littler provided editorial coordinated by Carlos Arteta. The report was support, with contributions from Adriana prepared by John Baffes, Alistair Dieppe, Justin- Maximiliano. Damien Guénette, Alain Kabundi, Sergiy Kasyanenko, Sinem Kilic Celik, Gene Kindberg- Regional projections and write-ups were Hanlon, Patrick Kirby, Maryla Maliszewska, produced in coordination with country teams, Hideaki Matsuoka, Peter Nagle, Yoki Okawa, country directors, and the offices of the regional Cedric Okou, Franz Ulrich Ruch, Rudi chief economists. Steinbach, Naotaka Sugawara, Ekaterine Vashakmadze, Dana Vorisek, Collette Mari The print publication was produced by Maria Wheeler, Lei Sandy Ye, and Shu Yu. Hazel Macadangdang and Adriana Maximiliano, in collaboration with Luiz H. Almeida, Andrew Research assistance was provided by Yushu Charles Berghauser, Cindy A. Fisher, Michael Chen, Zhuo Chen, Hrisyana Doytchinova, Fuda Harrup, and Jewel McFadden. Jiang, Yi Li, Maria Hazel Macadangdang, Julia Renee Roseman Norfleet, Ipek Ceylan Oymak, Many reviewers provided extensive advice and Vasiliki Papagianni, Maria Filipa Seara E. comments. The analysis also benefited from Pereira, Shijie Shi, Kaltrina Temaj, Xinyue comments and suggestions by staff members Wang, Jinxin Wu, Heqing Zhao, and Juncheng from World Bank Group country teams and Zhou. Modeling and data work were provided other World Bank Group Vice Presidencies as by Rajesh Kumar Danda, Julia Renee Roseman well as Executive Directors in their discussion of Norfleet, and Shijie Shi. the report on May 26, 2020. However, both forecasts and analysis are those of the World Online products were produced by Graeme Bank Group staff and should not be attributed Littler. Indira Chand, Mark Felsenthal, and to Executive Directors or their national Alejandra Viveros managed media relations and authorities. xi Foreword The COVID-19 pandemic and the economic The World Bank Group is committed to helping shutdown in advanced economies and other parts alleviate financing breakdowns from the COVID- of the globe have disrupted billions of lives and 19 crisis in ways that work toward a more are jeopardizing decades of development progress. resilient recovery. Some examples include expanding and increasing the coverage of safety This edition of the Global Economic Prospects net programs, providing trade finance, and assesses the impacts of the pandemic and analyzes supporting the working capital needs of small and possible courses and outcomes. It presents clear medium-sized enterprises. In the broad COVID- actions needed by the global community and 19 response for the poorest nations, World Bank national policymakers—to limit the harm, Group resources are being scaled up dramatically recover, and rebuild better and stronger than and debt service payments by official bilateral before. creditors were suspended on May 1, with comparable treatment expected by commercial The report describes a global economy suffering a creditors. devastating blow. Our baseline forecast envisions the deepest global recession since World War II. Yet these steps toward financing and liquidity will The report also includes an exhaustive analysis of not be enough. Even before the pandemic, the outlook for emerging market and developing development for people in the world’s poorest economies, many of which are now fighting on countries was slow to raise their incomes, enhance two fronts—containing the domestic outbreak living standards, or narrow inequality. The and its consequences while coping with the pandemic and economic shutdown in advanced economic spillovers from the deep recessions in economies and elsewhere are hitting the poor and advanced economies. vulnerable the hardest – through illnesses, job and income losses, food supply disruptions, Looking a layer deeper, the report investigates the school closures and lower remittance flows. depth and breadth of the economic and humanitarian storm. The COVID-19 recession is Thus, policy makers face unprecedented the first since 1870 to be triggered solely by a challenges from the health, macroeconomic and pandemic. The speed and depth with which it has social effects of the pandemic. To limit the harm, struck suggests the possibility of a sluggish it is important to secure core public services, recovery that may require policymakers to maintain a private sector and get money directly consider additional interventions. For many to people. This will allow a quicker return to emerging market and developing countries, business creation and sustainable development however, effective financial support and after the pandemic has passed. During this mitigation measures are particularly hard to mitigation period, countries should focus on achieve because a substantial share of targeted support to households and essential employment is in informal sectors. public and private sector services; and remain vigilant to counter potential financial disruptions. Beyond the staggering economic impacts, the pandemic will also have severe and long-lasting During the recovery period, countries will need socio-economic impacts that may well weaken to calibrate the withdrawal of public support and long-term growth prospects—the plunge in should be attentive to broader development investment because of elevated uncertainty, the challenges. The Global Economic Prospects report erosion of human capital from the legions of discusses the importance of allowing an orderly unemployed, and the potential for ruptures of allocation of new capital toward sectors that are trade and supply linkages. productive in the new post-pandemic structures xiii that emerge. To succeed in this, countries will ments is a key step in creating an attractive need reforms that allow capital and labor to adjust investment climate and could make substantial relatively fast—by speeding the resolution of progress this year. Faster advances in digital disputes, reducing regulatory barriers, and connectivity are also necessary and should get a reforming the costly subsidies, monopolies and vital boost from the pandemic, which heightened protected state-owned enterprises that have the value of teleworking capabilities, digital slowed development. information, and broad connectivity. Digital financial services are playing a transformative role To make future economies more resilient, many in allowing new entrants into the economy and countries will need systems that can build and making it easier for governments to provide retain more human and physical capital during rapidly expandable, needs-based cash transfers. the recovery—using policies that reflect and encourage the post-pandemic need for new types This edition of the Global Economic Prospects of jobs, businesses and governance systems. describes a grave near-term outlook. The speed Emerging market and developing economies are and strength of the recovery will depend on the devoting more public resources to critical health effectiveness of the support programs care and support for livelihoods during the governments and the international community shutdown, adding to the urgency of their allowing put in place now; and, critically, on what and attracting more private sector investment. policymakers do to respond to the new This makes the financing and building of environment. The World Bank Group is productive infrastructure one of the hardest-to- committed to seeking much better outcomes for solve development challenges in the post- people in emerging market and developing pandemic recovery. countries, especially the poor. During the crisis, we call on policymakers to act fast and forcefully: The transparency of all government financial our interventions should be no less powerful than commitments, debt-like instruments and invest- the crisis itself. David Malpass President World Bank Group xiv Executive Summary COVID-19 has triggered a global crisis like no other—a global health crisis that, in addition to an enormous human toll, is leading to the deepest global recession since the second world war. While the ultimate growth outcome is still uncertain, and an even worse scenario is possible if it takes longer to bring the health crisis under control, the pandemic will result in output contractions across the vast majority of emerging market and developing economies (EMDEs). Moreover, the pandemic is likely to exert lasting damage to fundamental determinants of long-term growth prospects, further eroding living standards for years to come. The immediate policy priorities are to alleviate the ongoing health and human costs and attenuate the near-term economic losses, while addressing challenges such as informality and weak social safety nets that have heightened the impact on vulnerable populations. Once the crisis abates, it will be necessary to reaffirm credible commitment to sustainable policies—including medium-term fiscal frameworks in energy-exporting EMDEs suffering from the large plunge in oil prices—and undertake the necessary reforms to buttress long-term growth prospects. For these actions, global coordination and cooperation will be critical. Global Outlook: Pandemic, Recession: The Economic disruptions are likely to be more severe Global Economy in Crisis. The COVID-19 and protracted in those countries with larger pandemic has, with alarming speed, delivered a domestic outbreaks, greater exposure to global economic shock of enormous magnitude, international spillovers (particularly through leading to steep recessions in many countries. exposure to global commodity and financial The baseline forecast envisions a 5.2 percent markets, global value chains, and tourism), and contraction in global GDP in 2020—the deepest larger pre-existing challenges such as informality. global recession in eight decades, despite Growth forecasts for all regions have been unprecedented policy support. Per capita incomes severely downgraded; Latin America and the in the vast majority of EMDEs are expected to Caribbean (LAC) and Europe and Central Asia shrink this year. The global recession would be (ECA) in particular have large downgrades partly deeper if bringing the pandemic under control because of the size of their domestic outbreaks took longer than expected, or if financial stress and exposure to global spillovers, while South triggered cascading defaults. The pandemic Asia’s substantial downgrade is primarily the highlights the urgent need for health and result of stringent lockdown measures. Many economic policy action—including global countries have avoided more adverse outcomes cooperation—to cushion its consequences, through sizable fiscal and monetary policy protect vulnerable populations, and improve support measures. Despite these measures, per countries’ capacity to prevent and cope with capita incomes in all EMDE regions are expected similar events in the future. Since EMDEs are to contract in 2020, likely causing many millions particularly vulnerable, it is critical to strengthen to fall back into poverty. their public health care systems, to address the challenges posed by informality and limited safety This edition of Global Economic Prospects also nets, and, once the health crisis abates, to includes analytical chapters on the short- and undertake reforms that enable strong and long-term growth impact of the pandemic, as well sustainable growth. as on global implications of the recent plunge in oil prices. Regional Macroeconomic Implications of COVID-19. The rapid rise of COVID-19 cases, Lasting Scars of the COVID-19 Pandemic. The together with the wide range of measures to slow COVID-19 pandemic has struck a devastating the spread of the virus, has slowed economic blow to an already-fragile global economy. activity precipitously in many EMDEs. Lockdowns and other restrictions needed to xv address the public health crisis, together with Adding Fuel to the Fire: Cheap Oil during the spontaneous reductions in economic activity by Pandemic. The outbreak of COVID-19 and the many consumers and producers, constitute an wide-ranging measures needed to slow its advance unprecedented combination of adverse shocks have precipitated an unprecedented collapse in oil that is causing deep recessions in many advanced demand, a surge in oil inventories, and, in March, economies and EMDEs. Those EMDEs that have the steepest one-month decline in oil prices on weak health systems; those that rely heavily on record. In the context of the current restrictions global trade, tourism, or remittances from abroad; on a broad swath of economic activity, low oil and those that depend on commodity exports will prices are unlikely to do much to buffer the effects be particularly hard-hit. Beyond its short-term of the pandemic, but they may provide some impact, deep recessions triggered by the pandemic initial support for a recovery once these are likely to leave lasting scars through multiple restrictions begin to be lifted. Like other channels, including lower investment; erosion of countries, energy-exporting EMDEs face an the human capital of the unemployed; and a unprecedented public health crisis, but their fiscal retreat from global trade and supply linkages. positions were already strained even before the These effects may well lower potential growth and recent collapse in oil revenues. To help retain labor productivity in the longer term. Immediate access to market-based financing for fiscal support policy measures should support health care programs, these EMDEs will need to make systems and moderate the short-term impact of credible commitments to a sustainable medium- the pandemic on activity and employment. In term fiscal position. For some of them, current addition, a comprehensive reform drive is needed low oil prices provide an opportunity to to reduce the adverse impact of the pandemic on implement energy-pricing policies that yield long-term growth prospects by improving efficiency and fiscal gains over the medium term. governance and business environments, and expanding investment in education and public health. xvi Abbreviations ADB Asian Development Bank AE advanced economy BIS Bank for International Settlements BVAR Bayesian vector autoregression model CA Central Asia CDC Centers for Disease Control and Prevention CE Central Europe CEPR Center for Economic and Policy Research CGE computable general equilibrium CFRTV COVID-19 Financial Response Tracker Visualization DALY disability-adjusted life year DGE/DSGE dynamic stochastic general equilibrium EAP East Asia and Pacific ECA Europe and Central Asia ECB European Central Bank EDB Eurasian Development Bank EE Eastern Europe EIA U.S. Energy Information Administration EMBI Emerging Market Bond Index EMDE emerging market and developing economy EM-DAT Emergency Events Database EU European Union FAO Food and Agriculture Organization of the United Nations FCV fragility, conflict, and violence FDI foreign direct investment FSIN Food Security Information Network GCC Gulf Cooperation Council GDP gross domestic product GEP Global Economic Prospects GFC global financial crisis GNFS goods and nonfactor services GNI gross national income GVCs global value chains HIPC heavily indebted poor countries HIV human immunodeficiency viruses ICTD The International Centre for Tax and Development IDB Inter-American Development Bank IEA International Energy Agency ILO International Labour Organization IMF International Monetary Fund IP industrial production IRF impulse response function JMP Joint Monitoring Programme LAC Latin America and the Caribbean LIC low-income country LMIC low- and middle-income countries xvii LNY lunar new year LPM local projections model MNA/MENA Middle East and North Africa MERS Middle East respiratory syndrome MIC middle-income country NBER National Bureau of Economic Research NO2 nitrogen dioxide NPL nonperforming loan NTI Nuclear Threat Initiative ODA official development assistance OECD Organisation for Economic Co-operation and Development OPEC Organization of the Petroleum Exporting Countries OPEC+ OPEC and Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan, and South Sudan PGSSC Program in Global Surgery and Social Change at Harvard Medical School PM2.5 particulate matter with diameter less than 2.5 micrometers PMI Purchasing Managers’ Index PPP purchasing power parity PRIO Peace Research Institute Oslo RHS right-hand side (in figures) SAR South Asia Region SARS severe acute respiratory syndrome SCC South Caucasus SDG Sustainable Development Goal SME small and medium enterprise SSA Sub-Saharan Africa SVAR structural vector autoregression TB tuberculosis TFP total factor productivity TiVA trade in value added TSA Transportation Security Administration UN United Nations UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UNESCO United Nations Educational, Scientific and Cultural Organization UNICEF United Nations Children's Fund UNU-WIDER United Nations University World Institute for Development Economics Research UNWTO United Nations World Tourism Organization VAR vector autoregression VAT value-added tax VIX Chicago Board Options Exchange Volatility Index WAEMU West African Economic and Monetary Union WBK Western Balkans WFP World Food Program WGI World Governance Indicators WHO World Health Organization WTO World Trade Organization xviii CHAPTER 1 GLOBAL OUTLOOK Pandemic, Recession: The Global Economy in Crisis G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 3 The COVID-19 pandemic has, with alarming speed, delivered a global economic shock of enormous magnitude, leading to steep recessions in many countries. The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020—the deepest global recession in eight decades, despite unprecedented policy support. Per capita incomes in the vast majority of emerging market and developing economies (EMDEs) are expected to shrink this year, tipping many millions back into poverty. The global recession would be deeper if bringing the pandemic under control took longer than expected, or if financial stress triggered cascading defaults. The pandemic highlights the urgent need for health and economic policy action—including global cooperation—to cushion its consequences, protect vulnerable populations, and improve countries’ capacity to prevent and cope with similar events in the future. Since EMDEs are particularly vulnerable, it is critical to strengthen their public health care systems, to address the challenges posed by informality and limited safety nets, and, once the health crisis abates, to undertake reforms that enable strong and sustainable growth. Summary conditions. Equity markets around the world plunged, spreads on riskier categories of debt The COVID-19 pandemic has spread with widened considerably, and EMDEs experienced astonishing speed to every part of the world and large capital outflows in much of March and April infected millions (Figure 1.1.A). The health and that bottomed out only recently. Commodity human toll is already large and continues to grow, prices have declined sharply as a result of falling with hundreds of thousands of deaths and many global demand, with oil particularly affected more suffering from diminished prospects and (Figure 1.1.D). disrupted livelihoods. The pandemic represents Many countries have provided large-scale the largest economic shock the world economy has macroeconomic support to alleviate the economic witnessed in decades, causing a collapse in global blow, which has contributed to a recent activity (Figures 1.1.B and 1.1.C). Various stabilization in financial markets. Central banks in mitigation measures—such as lockdowns, closure advanced economies have cut policy rates and of schools and non-essential business, and travel taken other far-reaching steps to provide liquidity restrictions—have been imposed by most and to maintain investor confidence. In many countries to limit the spread of COVID-19 and EMDEs, central banks have also eased monetary ease the strain on health care systems. The policy (Figure 1.1.E). The fiscal policy support pandemic and associated mitigation measures have that has been announced already far exceeds that sharply curbed consumption and investment, as enacted during the 2008-09 global financial crisis. well as restricted labor supply and production. The cross-border spillovers have disrupted In all, the pandemic is expected to plunge a financial and commodity markets, global trade, majority of countries into recession this year, with supply chains, travel, and tourism. per capita output contracting in the largest fraction of countries since 1870 (Figure 1.1.F). Financial markets have been extremely volatile, Advanced economies are projected to shrink by 7 reflecting exceptionally high uncertainty and the percent in 2020, as widespread social-distancing worsening outlook. Flight to safety led to a sharp measures, a sharp tightening of financial tightening of global and EMDE financial conditions, and a collapse in external demand depress activity. Assuming that the outbreak remains under control and activity recovers later Note: This chapter was prepared by Carlos Arteta, Justin- this year, China is projected to slow to 1 percent Damien Guénette, Patrick Kirby, and Collette Mari Wheeler, with contributions from Rudi Steinbach and additional inputs from John in 2020—by far the lowest growth it has Baffes, Sergiy Kasyanenko, Peter Nagle, Franz Ulrich Ruch, and registered in more than four decades. Ekaterine Vashakmadze. Research assistance was provided by Yushu Chen, Hrisyana Doytchinova, Fuda Jiang, Maria Hazel Macadangdang, Julia Renee Roseman Norfleet, Ipek Ceylan Oymak, Due to the negative spillovers from weakness in Vasiliki Papagianni, Shijie Shi, Kaltrina Temaj, Jinxin Wu, and major economies, alongside the disruptions Juncheng Zhou. 4 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 TABLE 1.1 Real GDP1 Percentage point (Percent change from previous year) differences from January 2020 projections 2017 2018 2019e 2020f 2021f 2020f 2021f World 3.3 3.0 2.4 -5.2 4.2 -7.7 1.6 Advanced economies 2.5 2.1 1.6 -7.0 3.9 -8.4 2.4 United States 2.4 2.9 2.3 -6.1 4.0 -7.9 2.3 Euro Area 2.5 1.9 1.2 -9.1 4.5 -10.1 3.2 Japan 2.2 0.3 0.7 -6.1 2.5 -6.8 1.9 Emerging market and developing economies 4.5 4.3 3.5 -2.5 4.6 -6.6 0.3 Commodity-exporting EMDEs 2.2 2.1 1.5 -4.8 3.1 -7.4 0.2 Other EMDEs 6.1 5.7 4.8 -1.1 5.5 -6.2 0.3 Other EMDEs excluding China 5.4 4.8 3.2 -3.6 3.6 -7.6 -0.8 East Asia and Pacific 6.5 6.3 5.9 0.5 6.6 -5.2 1.0 China 6.8 6.6 6.1 1.0 6.9 -4.9 1.1 Indonesia 5.1 5.2 5.0 0.0 4.8 -5.1 -0.4 Thailand 4.1 4.2 2.4 -5.0 4.1 -7.7 1.3 Europe and Central Asia 4.1 3.3 2.2 -4.7 3.6 -7.3 0.7 Russia 1.8 2.5 1.3 -6.0 2.7 -7.6 0.9 Turkey 7.5 2.8 0.9 -3.8 5.0 -6.8 1.0 Poland 4.9 5.3 4.1 -4.2 2.8 -7.8 -0.5 Latin America and the Caribbean 1.9 1.7 0.8 -7.2 2.8 -9.0 0.4 Brazil 1.3 1.3 1.1 -8.0 2.2 -10.0 -0.3 Mexico 2.1 2.2 -0.3 -7.5 3.0 -8.7 1.2 Argentina 2.7 -2.5 -2.2 -7.3 2.1 -6.0 0.7 Middle East and North Africa 1.1 0.9 -0.2 -4.2 2.3 -6.6 -0.4 Saudi Arabia -0.7 2.4 0.3 -3.8 2.5 -5.7 0.3 Iran 3.8 -4.7 -8.2 -5.3 2.1 -5.3 1.1 Egypt2 4.2 5.3 5.6 3.0 2.1 -2.8 -3.9 South Asia 6.5 6.5 4.7 -2.7 2.8 -8.2 -3.1 India3 7.0 6.1 4.2 -3.2 3.1 -9.0 -3.0 Pakistan2 5.2 5.5 1.9 -2.6 -0.2 -5.0 -3.2 Bangladesh2 7.3 7.9 8.2 1.6 1.0 -5.6 -6.3 Sub-Saharan Africa 2.6 2.6 2.2 -2.8 3.1 -5.8 0.0 Nigeria 0.8 1.9 2.2 -3.2 1.7 -5.3 -0.4 South Africa 1.4 0.8 0.2 -7.1 2.9 -8.0 1.6 Angola -0.1 -2.0 -0.9 -4.0 3.1 -5.5 0.7 Memorandum items: Real GDP1 High-income countries 2.4 2.2 1.7 -6.8 3.8 -8.3 2.3 Developing countries 4.8 4.4 3.7 -2.4 4.7 -6.7 0.2 Low-income countries 5.4 5.8 5.0 1.0 4.6 -4.4 -0.9 BRICS 5.3 5.3 4.7 -1.7 5.3 -6.6 0.4 World (2010 PPP weights)4 3.9 3.6 2.9 -4.1 4.3 -7.3 1.0 World trade volume5 5.9 4.0 0.8 -13.4 5.3 -15.3 2.8 Commodity prices6 Oil price 23.3 29.4 -10.2 -47.9 18.8 -42.5 16.9 Non-energy commodity price index 5.5 1.8 -4.2 -5.9 3.0 -6.0 1.3 Source: World Bank. 1. Headline aggregate growth rates are calculated using GDP weights at 2010 prices and market exchange rates. 2. GDP growth rates are on a fiscal year basis. Aggregates that include these countries are calculated using data compiled on a calendar year basis. Pakistan's growth rates are based on GDP at factor cost. The column labeled 2019 refers to FY2018/19. 3. The column labeled 2018 refers to FY2018/19. 4. World growth rates are calculated using purchasing power parity (PPP) weights, which attribute a greater share of global GDP to EMDEs than market exchange rates. 5. World trade volume of goods and non-factor services. 6. Oil price is the simple average of Brent, Dubai, and West Texas Intermediate prices. The non-energy index is the weighted average of 39 commodity prices (7 metals, 5 fertilizers, 27 agricultural commodities). For additional details, please see http://www.worldbank.org/commodities. Note: PPP = purchasing power parity; e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information. Consequently, projections presented here may differ from those contained in other World Bank documents, even if basic assessments of countries’ prospects do not differ at any given date. Country classifications and lists of emerging market and developing economies (EMDEs) are presented in Table 1.2. BRICS include: Brazil, Russia, India, China, and South Africa. Due to lack of reliable data of adequate quality, the World Bank is currently not publishing economic output, income, or growth data for Venezuela, and Venezuela is excluded from cross-country macroeconomic aggregates. Click here to download data. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 5 associated with their own domestic outbreaks, FIGURE 1.1 Global growth prospects EMDE GDP is forecast to contract by 2.5 percent The COVID-19 pandemic has resulted in a collapse of global economic in 2020. This would be well below the previous activity. EMDE financial conditions have tightened and commodity prices, trough in EMDE growth of 0.9 percent in 1982, especially oil prices, have plunged. Despite unprecedented macroeconomic policy support, the share of countries experiencing and the lowest rate since at least 1960, the earliest contractions in per capita GDP will reach its highest level since 1870. year with available aggregate data. EMDEs with large domestic COVID-19 outbreaks and A. Daily new COVID-19 cases B. Global growth 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 will be 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 C. Change in global activity indicators D. Commodity price changes since in 2020 contractions in per capita incomes this year, many January 2020 millions are likely to fall back into poverty. With advanced economies contracting, China experiencing record-low growth, and EMDE growth savaged by external and domestic headwinds, the global economy is expected to shrink by 5.2 percent this year in a baseline forecast. This would be the deepest global recession since World War II, and almost three E. Global policy rates F. Share of economies in recession, times as steep as the 2009 global recession (Box 1871-2021 1.1). The forecast assumes that the pandemic recedes in such a way that domestic mitigation measures can be lifted by mid-year, adverse global spillovers ease during the second half of the year, and dislocations in financial markets are not long- lasting. Although a moderate recovery is envisioned in 2021, with global growth reaching 4.2 percent, output is not expected to return to its previously expected levels (Figure 1.2.A). Source: Air Quality Open Data Platform; Airportia; Bank for International Settlements; Bloomberg; European Central Bank; Google COVID-19 Community Mobility Reports; Johns Hopkins University; Since uncertainty around the outlook remains J.P. Morgan; OpenTable; University of Oxford; World Bank. Note: EMDEs = emerging market and developing economies. exceptionally high, alternative scenarios help A. Figure shows 7-day moving averages. Last observation is May 27, 2020. B. Shaded areas indicate forecasts. Data for 2019 are estimates. Aggregate growth rates calculated illustrate the range of plausible global growth using GDP weights at 2010 prices and market exchange rates. outcomes in the near term (Figure 1.2.B). In C. Air pollution is the change in NO2 emissions over January 1 to May 28 in 2019 and 2020. Retail and recreation mobility is the percent change for May 21, 2020 from baseline, which is the median particular, the baseline forecast for 2020 could value for the corresponding day of the week during the 5-week period January 3-February 6, 2020, based on data from Google. Flight cancelations shows the cancelations relative to total planned prove optimistic (Box 1.3). If COVID-19 flights based on comparing currently operating flights in 2020 with flights that were operating 52 weeks ago in 2019 as of May 27, 2020. Open Table reservations shows the change in seated diners outbreaks persist longer than expected, restrictions at restaurants on the OpenTable network on May 27 in 2019 and 2020. For more information on flight cancelations data, go to https://www.airportia.com/coronavirus/. on movement and interactions may have to be D. Figure shows the change in the monthly average of commodity prices between January 2020 and maintained or reintroduced, prolonging the the last observation, which is May 2020. Price changes for “Base metals” and “Food” show World Bank Pink Sheet indexes. Oil price is unweighted average of Brent, WTI and Dubai prices. disruptions to domestic activity and further setting E. Average policy rates are weighted using 2018 U.S. dollar GDP. Sample includes 13 advanced economies and the Euro Area and 21 EMDEs. Bars show the number of central banks lowering or back confidence. Disruptions to activity would raising their policy rate in a given month. Last observation included is April 2020. F. Share of economies in recession, defined as an annual contraction in per capita GDP. weaken businesses’ ability to remain in operation Click here to download data and charts. 6 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 1.2 Global risks and policy challenges and service their debt, while the increase in risk The 2020 global recession is expected to be the deepest in eight decades, aversion could raise interest rates for higher-risk and the subsequent recovery will be insufficient to bring output to borrowers. With debt levels already at historic previously projected levels. Amid heightened uncertainty, worse outcomes highs, this could lead to cascading defaults and could arise if the pandemic and economic disruptions persist or cascading defaults amid high debt lead to financial crises. A lack of space is financial crises across many economies (Figure constraining fiscal responses in many EMDEs. Building resilient health 1.2.C). Under this downside scenario, global care systems is critical to prevent similar crises. With ongoing recessions exerting scarring effects on potential output, pursuing reforms that bolster growth would shrink almost 8 percent in 2020. long-term growth prospects will be essential. The recovery that follows would be markedly sluggish, hampered by severely impaired balance A. Level of output relative to January B. Growth in advanced economies sheets, heightened financial market stress and 2020 projections and EMDEs widespread bankruptcies in EMDEs. In 2021, global growth would barely begin to recover, increasing to just over 1 percent. In contrast, in an upside scenario, a sharp economic rebound would begin promptly if pandemic-control measures could be largely lifted in the near term, and fiscal and monetary policy responses succeed in supporting consumer and C. Government and non-financial D. EMDE discretionary fiscal support investor confidence, leading to a prompt corporate debt measures in 2020, by debt levels normalization of financial conditions and the unleashing of pent-up demand. However, even with these positive developments, the near-term contraction in global activity of more than 3 percent in 2020 would still be much larger than during the global recession of 2009, and EMDE growth would also be negative. Once pandemic- control measures are fully lifted, global growth would rebound markedly in 2021, to above 5 E. Health indicators in 2017 F. Cumulative EMDE potential output response after recessions percent. 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 Source: Bank for International Settlements; Ha, Kose and Ohnsorge (2019); International Monetary Fund; Johns Hopkins University; Organisation for Economic Co-operation and Development; World simultaneously grapple with a severe public health Bank. A. Figure shows the percent difference between the level of output in the January and June 2020 crisis with heavy human costs. Particularly editions of Global Economic Prospects. B. Shaded area indicates forecasts. Black lines indicate ranges based on the lower and upper bounds vulnerable EMDEs include those that have weak of growth in the scenarios described in Box 1.3. health systems; those that rely heavily on global C. Unweighted averages. Sample includes 88 commodity exporters and 65 commodity importers for government debt and 27 commodity exporters and 21 commodity importers for corporate debt. Latest trade, tourism, and remittances; those that are available data is 2018 for government debt, and 2019Q4 for 16 economies and 2017 or 2018 for 31 economies for corporate debt. prone to financial market disruptions; and those D. Figure shows median values. Total measures either planned or under consideration as of May 29, 2020 as a share of 2019 nominal GDP. Above (below) median indicates countries with government that depend on oil and other commodity exports. debt-to-GDP ratios above (below) a median of 51 in 2018. Sample includes 48 EMDEs. EMDEs where poverty and informality are E. Unweighted averages. Sample includes 26 advanced economies and 11 EMDEs as data are available. widespread, including many low-income F. Data and methodology are detailed in Chapter 3 Box 3.1 and Annex 3.4. Charts show impulse responses for 75 EMDEs from a local projections model. Dependent variable is cumulative slowdown countries, are also vulnerable, since their poor in potential output after a recession, financial crisis, or oil price plunge event. Year t is the year of the event. Bars show coefficient estimates; vertical lines show 90 percent confidence bands. have limited access to proper sanitation and Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 7 adequate social safety nets, and often suffer greater and social safety nets in many countries. It has also food insecurity (Box 1.2). exposed the severe consequences of widespread informality and financing constraints for small An arsenal of macroprudential support policies has and medium enterprises (SMEs) in many EMDEs been deployed in EMDEs to maintain financial (Box 1.4). There is a critical need to invest in sector resilience and promote lending during the resilient health care systems that prioritize national crisis. These include relaxing capital and liquidity health security, in order to prevent and mitigate coverage requirements, allowing banks to draw similar crises (Figure 1.2.E). down capital and liquidity buffers, and encouraging banks to offer temporary loan It is also necessary to put in place social benefit repayment holidays to distressed borrowers. systems that can provide an effective, flexible, and Further, many countries have initiated debt efficient safety net during disasters. Such systems moratoria and government guarantees on bank can be augmented by measures to deliver income loans to strengthen bank balance sheets and support and emergency financing to vulnerable support distressed borrowers. Policymakers would, groups such as the poor, urban slum dwellers, however, need to carefully balance some of these migrants, and informal firms. In particular, digital actions against jeopardizing the future stability of technologies can enhance the provision of cash the financial sector. Once economic activity begins transfers and other critical support measures, as to normalize, they will also need to prudently well as facilitate the flow of remittances. withdraw the large-scale policy stimulus provided during the crisis without endangering the In many countries, deep recessions triggered by recovery. COVID-19 will likely weigh on potential output for years to come (Figure 1.2.F; Chapter 3). Meanwhile, many EMDEs have introduced fiscal Governments can take steps to alleviate the measures to expand social safety nets and protect adverse impact of the crisis on potential output by those most vulnerable, including wage support to placing a renewed emphasis on reforms that can preserve jobs, increased access to unemployment boost long-term growth prospects. benefits, and targeted cash transfers to low-income households. In EMDEs with wider fiscal space, Major economies: Recent the policy response has been markedly greater than in those more constrained by higher debt levels developments and outlook (Figure 1.2.D). For many energy-exporting EMDEs, fiscal balances are deteriorating as oil All major economies have experienced COVID-19 prices have fallen below fiscal break-even prices. outbreaks, of varying intensity. Output in advanced Elevated debt burdens in some low- and middle- economies is set to contract sharply in 2020, as income countries also underscore the need for domestic demand and supply, trade, and finance temporary debt relief. In this context, global have all been severely disrupted. Assuming that the coordination and cooperation—of the measures pandemic does not lead to lasting damage to financial needed to slow the spread of the pandemic, and of systems, growth is expected to rebound in 2021, aided the economic actions needed to alleviate the by unprecedented support from fiscal, monetary, and economic damage, including international financial sector policies. In China, output appears to support—provide the greatest chance of achieving be recovering from the large drop at the start of the public health goals and enabling a robust global year, but the strength of the expected rebound is recovery. uncertain. In the near term, COVID-19 has underscored the Advanced economies have faced a very substantial need for governments to prioritize the timely and slump in activity as they grapple with the far- transparent dissemination of accurate information reaching consequences of the pandemic. As a in order to stem the spread of the disease, and to result, advanced-economy output is now projected build public trust. In the long term, the pandemic to slow dramatically, from an expansion of 1.6 has laid bare the weaknesses of national health care percent in 2019 to a contraction of 7 percent in 8 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 1.3 Advanced economies steps toward gradually relaxing restrictions in As the number of confirmed COVID-19 cases soared in advanced some countries, activity remains very weak. economies, governments implemented far-reaching lockdowns and other restrictions to slow the spread of the virus and ease the burden placed on health care systems. Consumer confidence has plummeted, as these United States measures have dramatically reduced economic activity. The domestic COVID-19 outbreak and associated A. Daily new cases and stringency B. Consumer confidence in major large-scale pandemic-control measures have index advanced economies massively disrupted activity. High-frequency service sector indicators point to an unprecedented collapse, especially for services and travel (Figures 1.4.A and 1.4.B). Compared to the global financial crisis, weekly unemployment claims have risen much faster, while industrial production and retail sales have fallen much more sharply (Figure 1.4.C). Meanwhile, the collapse in oil prices has depressed investment in the highly leveraged U.S. Source: Haver Analytics; Johns Hopkins University; University of Oxford; World Bank. shale oil sector (Figure 1.4.D; Gevorkyan and A. Figure shows day-on-day cumulative confirmed cases and containment measures. The stringency Semmler 2016). The Federal Reserve has cut rates index refers to the average sub-indices of nine mitigation measures: School closings, workplace closings, cancelation of public events and public transport, restriction on gatherings, stay-home to near-zero, and announced far-reaching requirements and restrictions to international and domestic travel and public information campaigns. The stringency index range is between 0 and 100, with 100 being the most stringent. Sample includes measures to stabilize the financial system. The 32 advanced economies as data are available. Last observation is May 18, 2020. B. Confidence data are normalized across countries using the mean and standard deviation from latter include unlimited purchases of U.S. 2015 to 2019. Asterisk indicates that 2020 data are as of the most recent monthly observation, which is May 2020. government debt and mortgage-backed Click here to download data and charts. obligations, as well as large-scale purchases of corporate bonds and of securities issued by lower levels of government. The U.S. government has 2020—8.4 percentage points below January also provided fiscal support approaching $3 forecasts. trillion, including over $1 trillion in loans to firms and to state and local governments. Further As the number of infections soared in advanced measures, such as another round of direct transfers economies, governments implemented restrictions to households, are under consideration. to slow the spread of the outbreak and ease the burden on health care systems (Figure 1.3.A). U.S. GDP is expected to contract by 6.1 percent These represent a combination of demand and in 2020—7.9 percentage points below previous supply shocks to activity. On the demand side, forecasts, reflecting the severe consequences of the these measures—coupled with elevated pandemic in the first half of the year, and an uncertainty and falling confidence—have caused assumed gradual recovery in the second half. It is declines in consumption and investment. In some subsequently projected to rebound to 4 percent in countries, heightened risk aversion and a flight to 2021, as large-scale policy support gains traction, safety have led to tighter credit conditions for amid an assumed recovery in consumer and normally eligible borrowers. investor confidence. On the supply side, the shutdown of many Euro Area businesses has disrupted supply chains, increased unemployment, and sharply reduced production. Widespread virus outbreaks throughout the Euro As a result, consumer confidence has plummeted Area have prompted governments to impose (Figure 1.3.B). Policymakers have promptly various mitigation measures such as nationwide provided an unprecedented degree of fiscal and lockdowns, extended school closures, and border monetary support to households, firms, and restrictions (Figure 1.5.A). These have signifi- financial markets, but conditions in advanced cantly disrupted domestic economic activity economies remain at considerable risk. Despite (Figure 1.5.B). Many Euro Area members are G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 9 heavily reliant on tourism, a sector virtually shut FIGURE 1.4 United States down by government policies, and particularly High-frequency indicators point to an unprecedented collapse in services prone to slow recoveries (Figure 1.5.C; Mann and travel. Industrial production and retail sales have fallen much more 2020). In contrast to the United States, the rise in sharply than during the global financial crisis. Meanwhile, the collapse in oil prices has substantially reduced investment in the highly leveraged U.S. unemployment has been modest so far, in large shale oil sector. part due to the widespread use of short-time work policies (Figure 1.5.D). A. Reduction in hours worked B. TSA passenger traffic In response, the European Central Bank has offered low-interest loans to banks, significantly boosted asset purchases, and allayed fears of member-country defaults by lifting distributional restrictions on its bond-buying program. Member governments have rolled out significant fiscal support packages. For example, Germany provided stimulus worth 4.5 percent of GDP— about twice the support it provided in 2009—in C. Industrial production and retail D. U.S. oil prices and oil structures addition to an envelope of over 20 percent of sales investment GDP in loan guarantees for the corporate sector. Italy, although constrained by existing elevated debt levels, announced fiscal stimulus in excess of 4 percent of GDP. Large member countries are also advancing a major recovery plan for the European Union, including grants for economies hardest hit by the crisis. Euro Area output is expected to contract by 9.1 Source: Bloomberg; Haver Analytics; Homebase; Federal Reserve Bank of St. Louis; Transportation percent in 2020—10.1 percentage points below Security Administration; World Bank. previous projections—with all major member A. Figure shows 7-day moving average. Sample covers 60,000 small businesses and 1 million hourly employees in the U.S. The data compare the hours worked for the observed day against the median countries experiencing recessions before a gradual hours worked for the same day of the week during the period January 4, 2020 to January 31, 2020 in order to compare the level of activity to pre-COVID-19 levels. Last observation is May 27, 2020. For recovery gets underway late in the year. Growth is more information on the data, go to https://joinhomebase.com/data/covid-19/. B. TSA = Transportation Security Administration. Figure shows 7-day moving average. Last forecast to rebound to 4.5 percent in 2021, observation is May 28, 2020. reflecting fading pandemic-related drag, and the C. Figure shows April 2020 for COVID-19 and the largest one-month decline over the period 2007-09 for the global financial crisis, which is September 2008 and November 2008 for industrial production eventual effects of accommodative fiscal and and retail sales, respectively. D. Figure shows quarterly data. Oil price is the quarterly average of the West Texas Intermediate monetary policy. benchmark. Oil structures investment reflects the real private fixed investment in mining exploration, shafts, and wells structures. Last observation for investment is 2020Q1 with forecast for 2020Q2 based on a regression of oil structures investment on oil price. Last observation for oil price is 2020Q2, which is based on data through May 28, 2020. Japan Click here to download data and charts. In Japan, preventive measures were able to slow the spread of the virus, but triggered a fall in economic activity, magnifying acute adverse spillovers via trade and financial channels. The funds from the December 2019 stimulus—to postponement of the Tokyo 2020 summer cushion the outbreak’s domestic impact. Olympics has compounded the adverse economic effects of the pandemic. To help support growth, Output is projected to shrink by 6.1 percent in the Bank of Japan has ramped up its securities and 2020, 6.8 percentage points below previous corporate bond purchases, expanding the size of its expectations. Weaker-than-expected outcomes balance sheet by over 10 percent of GDP since earlier in the year, as well as the severe effects of January. The government has also announced the pandemic, contribute to the downgrading. fiscal support packages cumulatively worth about Growth is expected to recover to 2.5 percent in 40 percent of GDP—in addition to repurposing 2021, aided by fiscal and monetary support. 10 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 1.5 Euro Area 1.6.A-1.6.C). However, companies continue to Widespread COVID-19 outbreaks throughout the Euro Area have prompted face funding shortages and depressed external governments to impose nationwide lockdowns, extended school closures, demand (Figure 1.6.D). The authorities have and other restrictions, leading to severe disruptions in economic activity. Many Euro Area members are heavily reliant on tourism, a sector that has implemented monetary and fiscal policies to been acutely affected by travel restrictions and consumer risk aversion. cushion the economic impact of the outbreak. The rise in Euro Area unemployment has been below that of the United These have included the provision of significant States, in large part because of the widespread use of shorter work-time policies. liquidity injections, tax relief, emergency health and welfare spending worth approximately 2.8 A. Cumulative confirmed COVID-19 B. Google mobility trends for retail percent of GDP, and the authorization of cases and mitigation measures and recreation additional special central and local government across Euro Area member countries bond issuances equivalent to about 2.6 percent of GDP (World Bank 2020a). Reflecting the major disruptions caused by the pandemic, growth is projected to decelerate sharply, from 6.1 percent in 2019 to 1 percent in 2020. This is 4.9 percentage points below previous projections, and the lowest growth rate in more than four decades. Growth is expected to rebound in 2021, reaching 6.9 percent, partly reflecting a C. Share of tourism in GDP in 2019 D. Change in continuing unemployment insurance claims projected recovery in global demand. Global trends The spread of the pandemic has essentially halted international travel and disrupted global value chains, resulting in a sharp contraction in global trade. A flight to safety has triggered sharp falls in global equity markets, unprecedented capital outflows Source: Google COVID-19 Community Mobility Reports; Haver Analytics; Johns Hopkins University; from EMDEs, rising credit-risk spreads, and University of Oxford; World Bank; World Travel and Tourism Council. A. “Stringency” refers to daily number of measures implemented across advanced economies and depreciations for many EMDE currencies. Falling include the following policy actions: School closings, workplace closings, cancelation of public events and public transport, restrictions to gatherings, and to international and domestic travel, and stay at demand has led to a sharp decline in most commodity home requirements. Last observation is May 18, 2020. prices, with a particularly substantial plunge in oil B. Data refer to May 21, 2020. C. Data represents the sum of direct and indirect impacts of the travel and tourism sector estimated prices. by the World Travel and Tourism Council. Euro Area is calculated using 2019 U.S. dollar GDP weights at 2010 prices and market exchange rates. D. Figure shows percent change between the monthly average of 2019 and the last observation for 2020. Last observation is April 2020. Global trade Click here to download data and charts. Recent indicators suggest that global trade is on track to fall more in 2020 than it did during the global financial crisis, partly owing to the China disruptions the COVID-19 pandemic has caused to international travel and global value chains Output contracted sharply in the first quarter, (Figures 1.7.A and 1.7.B). Trade is typically more with private consumption and non-financial volatile than output, and tends to fall particularly services being especially hard-hit by the pandemic sharply in times of crisis (Figure 1.7.C; Freund and an extended period of restrictions to stem it. 2009; Bussière et al. 2013; Bems, Johnson, and Yi Exports plunged, more than imports, as a result of 2010; Kose and Terrones 2015). Investment, temporary factory closures. Activity has been which is more cyclical and more trade-intensive normalizing gradually in the second quarter than other categories of expenditure, has declined following the relaxation of lockdowns (Figures worldwide as firms face financing problems and G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 11 delay expansion. Exporting firms tend to be FIGURE 1.6 China particularly active in credit markets, and more Economic activity collapsed in the first quarter as a result of the COVID-19 adversely affected when the cost of credit increases outbreak and related lockdowns and closures, although there is evidence (Ahn, Amiti, and Weinstein 2011; Chor and of a bottoming out. PMIs have generally rebounded, and road congestion and traded area of commercial buildings in major cities are Manova 2012). Disruptions in credit markets approaching their normal levels. However, industrial profits and played an important role in the contraction in government revenues have declined markedly. global trade during the global financial crisis and A. Purchasing Managers’ Index B. Congestion delay index, 100-city the subsequent weakness of the rebound. This average pattern is at risk of being repeated. The fall in activity has been concentrated in services sectors that are typically stable (Figure 1.7.D). Travel restrictions and concerns about COVID-19 have led to a precipitous fall in tourism—a sector that in recent years has accounted for about 6.5 percent of global exports of goods and services—with sharp declines in economies with the most severe outbreaks (Figure C. Commercial real estate sales in 30 D. Industrial profits and revenue large- and medium-sized cities 1.7.E). As the pandemic has spread, stringent border controls and production delays have weighed on trade. Measures to slow the outbreak have limited or delayed the supply of critical inputs, particularly in the automotive and electronics industries (Haren and Simchi-Levi 2020; Baldwin and Tomiura 2020). The collapse of air traffic has resulted in a steep rise in air freight costs, putting Source: Baidu; China National Bureau of Statistics; Haver Analytics; Wind; World Bank. Note: LNY = Lunar New Year. further strain on industries that rely on just-in- A. Official and Caixin Purchasing Managers’ Index (PMI). PMI readings above (below) 50 indicate expansion (contraction) in economic activity. Last observation is May 2020. time delivery of foreign-sourced intermediate B. Baidu's traffic congestion data is derived from Baidu's real-time traffic information map application. goods. Supplier delivery times have lengthened The traffic congestion delay index evaluates the degree of urban congestion, specifically the ratio of the average actuarial travel time to free travel time of urban residents. The congestion index ranges considerably and inventories have been depleted from 1 to 4, where 1 indicates smoothness, 2 indicates slow movement, 3 indicates congestion, and 4 indicates severe congestion. Number on the x-axis indicate days before and after Chinese Lunar New (Figure 1.7.F). Year. 7 day moving average. Last observation is May 27, 2020. C. Commercial real estate refers to commercial residential buildings (excluding affordable housing), office buildings, and buildings for commercial businesses. Hangzhou, Nanchang, Wuhan, Harbin, The sharp fall in activity in the first half of this Kunming, Yangzhou, Anqing, Nanning, Lanzhou, Jiangyin, and Foshan provide commercial buildings’ sales data (including residential, office and commercial building sales data). Beijing, Shanghai, year is expected to contribute to a contraction in Guangzhou, Shenzhen, Nanjing, Qingdao, Suzhou, Xiamen, Dalian, Wuxi, Fuzhou, Dongguan, Huizhou, Baotou, Changchun, Yueyang, Shaoguan, Chengdu, Changsha, Shijiazhuang, Tianjin global trade of about 13.4 percent in 2020. A provide only partial sales data on commercial residential buildings. Numbers on the x-axis indicate days before and after Chinese Lunar New Year. Figure shows 7-day moving average. Last gradual recovery is assumed to start during the observation is May 27, 2020. D. Figure shows seasonally adjusted profits for all industrial enterprises. Data for January and second half of the year as controls are lifted, travel February are not published by the statistical source due to the Chinese New Year. Haver Analytics returns to more typical levels, and manufacturers calculates figures for January and February by allocating the published February year-to-date figures to January and February using the number of working days as weights. Last observation is April rebuild inventories. This recovery is expected to be 2020. Click here to download data and charts. historically feeble, however, reflecting the exceptional character of the present crisis, as well as the length of time that it will take to restore International air travel may take a very long time confidence, to replace bankrupted firms, and to to re-attain the levels of recent years, as businesses establish virus-safe working and entertainment and tourists make fundamental reassessments of environments. In particular, services do not the trade-off between foreign trips and infection benefit as much as manufacturing when risks, airlines reduce passenger loads to increase inventories are restocked, and when purchases of spacing, and governments maintain tighter border durables pick up after a period of being deferred. controls. 12 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 1.7 Global trade Financial markets Based on incoming indicators, global trade is on track to fall more in 2020 than it did during the global financial crisis. Trade growth tends to fall Financial markets witnessed a historic flight to much more than activity during crises. The extent of the downturn is safety as the economic consequences of widespread magnified by particularly severe disruptions to trade in services, such as measures to contain COVID-19 became apparent. tourism, and by global value chains struggling with delayed shipments. Global equity valuations took an unprecedented A. Container shipping and new export plunge early in the year, while market volatility B. Trade growth orders spiked to its highest level since 2008 (Figures 1.8.A and 1.8.B). EMDEs suffered from record capital outflows accompanied by a rise in sovereign borrowing spreads, which was especially severe for countries with high government debt (Figures 1.8.C and 1.8.D). To contain financial stress, central banks injected liquidity into financial markets through a combination of direct credit provision to large C. GDP elasticity of global trade D. Global manufacturing and services investment-grade companies, expansion of the PMI range of assets they accept as collateral, and large- scale asset purchases—including of corporate debt in some countries (Hördahl and Shim 2020). To alleviate the sharp rise in demand for U.S. dollars for currency hedging and dollar-denominated debt financing, the Federal Reserve provided access to its U.S. dollar liquidity swap arrangements to a larger group of countries, including Brazil, Mexico, and the Republic of Korea (Avdjiev, Eren, and McGuire 2020). These measures appear E. Monthly tourist arrivals as a share F. Subcomponents of the global to have successfully averted a severe liquidity crisis of average since 2015 manufacturing PMI that appeared possible earlier in the year. Capital outflows from EMDEs have stabilized, while equity market valuations have retraced a considerable share of their earlier losses. Nonetheless, financial conditions remain fragile for many market participants. Disruptions in activity have interrupted cash flows and interfered with debt financing around the world. Spreads on Source: Haver Analytics; Institute of Shipping Economics and Logistics; World Bank. high-yield debt have risen substantially amid Note: PMI = Purchasing Managers’ Index. A.D. PMI readings above (below) 50 indicate expansion (contraction) in economic activity. widespread corporate bond downgrades, A. Figure shows 3-month moving averages. New export orders are for manufacturing and measured suggesting investors may have become more by PMI. Last observation is April 2020. B. Shaded area indicates forecasts. Trade is the average of import and export volumes. skeptical about the ability of riskier borrowers to C. Bars show the coefficient of a simple regression of global trade on GDP from 2011-2019 "during expansions" and using 2009, 1991, 1982, and 1975 "during recessions". Recession is defined as finance their debt. Many EMDEs have also defined as a contraction in real per capita GDP. These roughly correspond with more sophisticated estimates such as Bems, Johnson, and Yi (2010); Bussière et al. (2013); Constantinescu, Mattoo and experienced significant pressures on their Ruta (2015); and Freund (2009). currencies, with depreciations broadly correlated D. Manufacturing and services are measured by PMI. Last observation is April 2020. E. Figure shows the deviation from the unweighted country average for each month since 2015. with current account deficits (Figure 1.8.E). Sample includes 29 EMDEs and 22 advanced economies. Last observation is April 2020. F. Figure shows the global stocks of purchases and the suppliers’ delivery times PMI. For the stocks Foreign direct investment in many countries is of purchases, PMI readings above (below) 50 indicate expansion (contraction) in economic activity; the suppliers’ delivery times PMI readings above (below) 50 indicate slower (faster) deliveries. This is expected to fall considerably (Figure 1.8.F). reversed from how this subcomponent is normally presented, to reflect that the slowdown in deliveries Remittances—the largest source of foreign is a consequence of production disruptions rather than a sign that the economy is working near full capacity. Last observation is April 2020. exchange earnings for EMDEs in 2019—are also Click here to download data and charts. envisioned to contract sharply across most EMDE G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 13 BOX 1.1 How deep will the COVID-19 recession be? “The short-term collapse in global output now underway already seems likely to rival or exceed that of any recession in the last 150 years.” Kenneth Rogoff, Professor of Economics, Harvard University “The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II.” Jerome Powell, Chair, The U.S. Federal Reserve System Current projections suggest that the COVID-19 global recession will be the deepest since the end of World War II, with the largest fraction of economies experiencing declines in per capita output since 1870. Output of emerging market and developing economies (EMDEs) is expected to contract in 2020 for the first time in at least 60 years. The current global recession is also unique in that global growth forecasts have been revised down more steeply and rapidly than in any other recessions since at least 1990. The gradual nature of forecast downgrades in previous global recessions suggests that further downgrades may be in store as forecasters absorb new information about the evolution of the pandemic. As such, additional policy measures to support activity may be needed in the coming months. The COVID-19 pandemic has led to a deep global global recessions of the past 150 years. Second, it compares recession. The pandemic, and the aggressive restrictions the performance of different groups of economies— and voluntary restraints on human interaction adopted to advanced economies, EMDEs, low-income countries contain it, have already led to massive downturns in (LICs), and EMDE regions—during the current episode advanced economies, and to increasing disruptions in with their record in previous ones. Third, it compares the EMDEs. Global growth forecasts have been downgraded evolution of growth projections between the current and at an unusually rapid pace over the past three months. The previous global recessions to shed light on the likely future uncertain course of the pandemic, in the absence thus far trajectory of forecasts. of effective vaccines or treatments, has caused extraordinary economic uncertainty, including about the Methodology and database. The dates of global recessions possible depth and duration of the global recession, and are identified by two methods: a statistical method and a about how different countries will be affected. judgmental method.2 The former method defines a global recession as a decline in annual global real GDP per capita. Against this background, this box presents the first The latter method, similar to the one used for the United systematic comparison of the COVID-19 global recession States by the Business Cycle Dating Committee of the with previous global recession episodes over the past 150 National Bureau of Economic Research, considers whether years. It addresses three questions: there is strong evidence for a broad-based decline in key indicators of global economic activity in a given year. • How does the depth of the COVID-19 recession These two methods imply that a global recession is a compare with previous episodes? contraction in global real GDP per capita accompanied by a broad decline in various other measures of global • How does the current global recession differ from activity.3 earlier episodes in different groups of economies? • How does the evolution of growth forecasts during the current global recession differ from previous 2 Both methods follow the “classical” definition of a business cycle episodes? (Burns and Mitchell 1946), under which business cycle expansions are marked by increases in many measures of economic activity, and Contributions. The box makes three contributions to contractions by broad declines in activity. Both are widely used in the context of national business cycles, and often arrive at similar turning earlier work on global recessions.1 First, it puts the points (Claessens, Kose, and Terrones 2012). COVID-19 recession in historical context by analyzing the 3 Some employ a definition of global recession that relies on a simple threshold (Economist 2001, 2008; Financial Times 2020). e findings here suggest that it is misleading to employ a simple growth threshold Note: is box was prepared by M. Ayhan Kose and Naotaka (such as below 2.5 percent annual growth in global GDP) to identify Sugawara. global recessions. For example, if one assumes that a global recession takes 1 Kose, Sugawara, and Terrones (2019) present a review of the place whenever world real GDP growth is less than 2.5 percent, there are relevant literature on global recessions, analyze how different shocks lead a total of 54 years under this definition qualifying as global recessions to global recessions, and examine the interactions between global and over the period 1870-2020. Over 1960-2020, this definition leads to 16 national cycles. global recessions. 14 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.1 How deep will the COVID-19 recession be? (continued) FIGURE 1.1.1 Global recessions: 1870-2021 Since 1870, the global economy has experienced 14 global recessions. Current projections imply that the COVID-19 global recession will be the fourth deepest in this period and the most severe since the end of World War II. It is expected to involve per capita output contractions in an unprecedently high share of countries. A. Global GDP B. Global GDP growth C. Global per capita GDP growth D. Economies in recession Source: Bolt et al. (2018); Kose, Sugawara, and Terrones (2019, 2020); World Bank. Note: Data for 2020-21 are forecasts. Shaded areas refer to global recessions. C. For multi-year episodes, the cumulative contraction is shown. The per capita growth contraction in 1885 was less than -0.1 percent. D. Figure shows the proportion of economies in recession, defined as an annual contraction in per capita GDP. Sample includes 183 economies, though the sample size varies significantly by year. Click here to download data and charts. Multiple data sources are employed to construct annual a historically richer perspective on global recessions, the world GDP series for a large sample of economies over a analysis for this “historical period” is based on only the long period. The series covers up to 183 economies—36 statistical method (i.e., using per capita GDP) because of advanced economies and 147 EMDEs—over the period data limitations. The study of global recessions during the 1870-2021, though the sample size varies significantly by “modern period” since 1960 relies on both the statistical year.4 While the 1870-1959 period is critical in providing of countries in the sample increases over time. GDP series for 2020-21 4 e historical dataset covers the periods 1870-1949 (Bolt et al. are forecasts. e database also includes quarterly series that covers 106 2018) and 1950-59 (Kose, Sugawara, and Terrones 2020). e number economies over 1960:1-2019:4. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 15 BOX 1.1 How deep will the COVID-19 recession be? (continued) and judgmental methods and involves a wider range of conclusion and aftermath of World War I (Barro, Ursúa, measures of economic activity, including international and Weng 2020). In 2009, the Swine flu pandemic was trade, retail sales, employment, and oil consumption. not a contributory factor to the global recession triggered by the financial crisis. A historical collapse in global output Previous global recessions were driven by confluences of a Another global recession after a decade. Since 1870, the wide range of factors, including financial crises (1876; the world economy has experienced 14 global recessions: in 1930-32 Great Depression; 1982; 1991; 2009), large 1876, 1885, 1893, 1908, 1914, 1917-21, 1930-32, 1938, changes in monetary and fiscal policies (1938; 1982), 1945-46, 1975, 1982, 1991, 2009, and 2020 (Figures sharp movements in oil prices (1975; 1982), and wars 1.1.1.A and 1.1.1.B). In each of these episodes, there was a (1914; 1917-21; 1945-46).5 During the modern era, the contraction in global real per capita GDP. The historical 1975 global recession was mainly the result of a steep period, 1870-1959, saw nine global recessions—at least increase in oil prices in 1973-74. The 1982 episode was one in each decade. While there was no global recession triggered by a combination of factors, including monetary during the 1950s and 1960s, the following five decades policy responses, particularly by the U.S. Federal Reserve, saw a global recession again in almost every decade. to the sharp increase in inflation, and the repercussions of the monetary tightening, including the Latin American Deepest recession since World War II. Current projec- debt crisis. The 1991 global recession was associated with tions suggest that the COVID-19 recession will involve a financial disruptions and exchange rate crises in the 6.2 percent decline in global per capita GDP, making it European Monetary System and collapses in activity linked the deepest global recession since 1945-46, and more than to the initial stages of the transition from central planning twice as deep as the recession associated with the global in many Eastern European countries. financial crisis (Figure 1.1.1.C). Among the 14 global recession episodes of the past 150 years, it would rank as Highest synchronization ever. The fraction of economies the fourth deepest (after the 1914, 1930-32, and 1945-46 experiencing annual declines in national per capita GDP episodes). The current global recession is expected to tends to increase sharply during global recessions (Figure register an outright contraction in global GDP (of 5.2 1.1.1.D). Current forecasts suggest that in 2020, the percent) as did eight other episodes. highest share of economies will experience contractions in per capita GDP since 1870—more than 90 percent, even Duration: One and done? The current global recession is higher than the proportion of about 85 percent of projected to last only one year: in other words, the growth countries in recession at the height of the Great rate of global per capita GDP is projected to turn positive Depression of 1930-32. in 2021. This is mostly consistent with experience of prior global recessions: although recoveries took longer to begin Deep recessions in major country groups in a few deeper recessions prior to 1960, global recessions and regions since then have lasted only one year in terms of annual data. The quarterly data show more variation in the Its highly synchronized nature also means that the duration of global recessions but the average is still about COVID-19 global recession will involve most advanced one year: the durations of the four previous post-1960 economies and EMDEs (Table 1.1.1). In 2020, both global recessions ranged between two quarters (1991 groups will experience the largest declines in their growth episode) and five quarters (1975 and 1982 episodes) with rates of the past sixty years. Advanced economies are an average of about four quarters. Many private forecasters expected to experience a 7 percent drop in output, while expect the COVID-19 global recession to last only two EMDEs will mark their first output contraction, by 2.5 quarters, with major advanced economies returning to percent, in at least the past sixty years. Per capita output growth in the third quarter of 2020 after recording sharp growth in EMDEs will be 6.5 percentage points lower contractions in the first and second quarters of the year. The first driven solely by a pandemic. The COVID-19 5 e events surrounding these episodes are discussed in detail by recession is unique as it is the only such episode, at least Allen (2009), Baffes et al. (2015), Eichengreen (2015), Fels (1951, 1952), since 1870, to have been triggered solely by a pandemic Hamilton (2013), Knoop (2004), Kose et al. (2020), Kose and Terrones and the actions taken to contain it. The prolonged global (2015), Reinhart and Rogoff (2009), Roose (1948), and Temin (1989). e sharp drop in global GDP recorded in 1946 reflects the readjustment recession of 1917-21 was partly driven by the 1918-20 to a peace-time economy after World War II (De Long 1996; Jones Spanish flu pandemic but it also stemmed from the 1972). 16 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.1 How deep will the COVID-19 recession be? (continued) FIGURE 1.1.2 Global activity during global recessions: 1960-2021 Current forecasts suggest that the COVID-19 recession will involve the sharpest deterioration in multiple measures of economic activity since 1960. A. GDP B. Per capita GDP C. Retail sales volume D. Trade volume E. Unemployment rate F. Oil consumption Source: Haver Analytics; International Energy Agency; International Monetary Fund; Kose, Sugawara, and Terrones (2019, 2020); Organisation for Economic Co- operation and Development; World Bank. Note: Year “t” denotes the year of global recessions (shaded in light gray). The darker shaded area refers to the range of the three global recessions—1975, 1982, and 1991—with available data. GDP, per capita GDP, retail sales, trade, and oil consumption are index numbers equal to 100 one year before year “t” (i.e., t-1 = 100). Retail sales for 2020 are based on data for the first quarter and shown as a year-on-year percent change. It shows that retail sales declined by around 4 percent in 2020Q1. Unemployment rates for 2020-21 are based on forecasts by the International Monetary Fund in April 2020. Oil consumption for 2020 is taken from forecast data by the International Energy Agency in May 2020. Click here to download data and charts. than its long-term average during global expansions. These Although the magnitude will vary across EMDE regions, economies are expected to register a much weaker growth current projections indicate that all regions will experience performance than in the global financial crisis partly sharp growth downturns, and five out of six are projected because they entered the current episode with larger to fall into outright recession (Table 1.1.2). The majority external and fiscal imbalances than they had a decade ago, of EMDE regions will experience the lowest growth in at so that they have less room for policy maneuver (Kose and least sixty years and all of them will see declines in per Ohnsorge 2019). capita income. EMDE regions with a large number of commodity exporters will see especially deep contractions LICs are projected to experience positive GDP growth this in 2020. For example, Latin America and the Caribbean is year, but at the lowest rate in the past 25 years. Since projected to suffer not only the largest growth decline of many of these economies are commodity exporters, in the six regions, but also its deepest recession of the past addition to the COVID-19 shock, they are being sixty years. The contraction in Sub-Saharan Africa is also negatively affected by the sharp drop in prices of industrial expected to be the largest over the same period. The two commodities. The projected fall in their per capita income other heavily commodity dependent regions, the Middle growth to -1.6 percent implies that they will see a East and North Africa region and the Europe and Central substantial increase in poverty rates this year. Asia region, will also suffer deep recessions this year with G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 17 BOX 1.1 How deep will the COVID-19 recession be? (continued) TABLE 1.1.1 Growth of GDP and per capita GDP in global recessions Global recession years All years (1960-2020) 1975 1982 1991 2009 2020 Average Non-recession Full period World GDP 1.1 0.4 1.3 -1.8 -5.2 -0.8 3.7 3.3 Per capita GDP -0.8 -1.3 -0.3 -2.9 -6.2 -2.3 2.1 1.7 Advanced economies GDP 0.2 0.3 1.3 -3.4 -7.0 -1.7 3.3 2.8 Per capita GDP -0.7 -0.3 0.6 -4.0 -7.3 -2.3 2.5 2.1 EMDEs GDP 4.2 0.9 1.5 1.8 -2.5 1.2 4.8 4.5 Per capita GDP 2.0 -1.2 -0.4 0.4 -3.6 -0.5 2.9 2.7 LICs GDP 0.0 1.0 -0.7 5.9 1.0 1.5 3.6 3.4 Per capita GDP -2.4 -1.6 -3.6 3.0 -1.6 -1.2 0.9 0.7 Note: Percent changes in GDP and per capita GDP in respective groups are presented. “Non-recession” refers to all years excluding the five global recession years. TABLE 1.1.2 Growth of GDP and per capita GDP in global recessions, by region Global recession years All years (1960-2020) 1975 1982 1991 2009 2020 Average Non-recession Full period East Asia and Pacific GDP 6.6 6.3 8.3 7.5 0.5 5.9 7.2 7.1 Per capita GDP 4.4 4.6 6.7 6.7 -0.1 4.5 5.6 5.5 Europe and Central Asia GDP 6.2 3.0 -5.8 -5.1 -4.7 -1.3 3.5 3.1 Per capita GDP 5.3 2.1 -6.2 -5.4 -5.0 -1.8 2.9 2.5 Latin America and the Caribbean GDP 3.8 -0.6 3.3 -1.8 -7.2 -0.5 3.8 3.5 Per capita GDP 1.4 -2.8 1.4 -2.9 -8.1 -2.2 1.9 1.6 Middle East and North Africa GDP -1.3 -6.3 6.9 0.5 -4.2 -0.9 5.0 4.5 Per capita GDP -3.9 -9.4 4.4 -1.6 -5.8 -3.3 2.5 2.0 South Asia GDP 7.5 3.8 2.3 4.8 -2.7 3.1 5.3 5.1 Per capita GDP 5.0 1.3 0.1 3.3 -3.8 1.2 3.2 3.1 Sub-Saharan Africa GDP 0.3 0.3 0.2 3.2 -2.8 0.2 3.7 3.4 Per capita GDP -2.4 -2.6 -2.6 0.5 -5.3 -2.5 1.0 0.7 Note: Percent changes in GDP and per capita GDP in respective regions are presented. Only EMDEs are included. “Non-recession” refers to all years excluding the five global recession years. 18 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.1 How deep will the COVID-19 recession be? (continued) per capita growth 7.9 percentage points lower than their downgrades have reflected record declines in high- historical average. frequency indicators of activity as many countries have implemented widespread mitigation measures to get ahead South Asia, a region composed entirely of commodity of the health crisis and as many people have undertaken importers, will experience its first decline in GDP for more voluntary “social distancing.” To shed light on the likely than forty years with per capita growth 7 percentage points future evolution of growth projections, the pattern of below its long-term average. Although still suffering from a forecast downgrades this year is compared with those of sharp decline in per capita GDP, output in East Asia and previous global recessions. The analysis here employs Pacific is expected to expand this year, as it did in previous forecasts published by Consensus Economics, a firm that global recessions. This outcome is mainly due to the surveys professional forecasters.6 expected recovery in China, which has already started relaxing its lockdown measures and shows early signs of a The COVID-19 recession has seen by far the fastest and rebound in activity. However, the region will still end up steepest downgrades in growth forecasts among all the with its weakest growth performance for more than 50 global recessions for which the consensus forecast data are years because all other major regional economies will available—the recessions since 1990 (Figure 1.1.3.A). experience severe downturns this year. After staying above 2 percent in February, the 2020 global GDP growth forecast has been downgraded by around 6.6 Broad-based plunge in multiple sectors percentage points since mid-March (Figure 1.1.3.B). As the health crisis has intensified, advanced economies have The COVID-19 global recession is expected to be been subject to much larger forecast downgrades, with reflected in the sharpest contractions in six decades in their 2020 growth forecasts being reduced in only thirteen many indicators of global activity (Figure 1.1.2). Most weeks by around 8 percentage points (from early March to notably, while services-related activities were often early June). EMDE growth forecasts for 2020 were also relatively resilient during previous global recessions, high- lowered, by about 6.1 percentage points, during the same frequency indicators suggest that the COVID-19 shock period. has led to a near sudden stop in a large swath of services, reflecting both regulated and voluntary reductions in The speed and magnitude of the growth forecast human interactions that could threaten infection. Current downgrades for both advanced economies and EMDEs forecasts suggest that, partly owing to an unprecedented have been unprecedented, even compared to those that weakening in services-related activities, global trade and oil occurred around the 2009 global recession (Figures consumption will see record drops this year, and the global 1.1.3.C and 1.1.3.D). In particular, in the current global rate of unemployment will climb to its highest level since recession, GDP growth forecasts of three major economies at least 1965, when available data begin. In addition, (the United States, Euro Area, and China) were quickly industrial production and retail sales are likely to register revised downward by significantly more than in previous record drops this year. episodes. For example, the U.S. growth forecast has been downgraded by about 8.7 percentage points over the past The current forecasts indicate that global economic three months while it was reduced by about 4 percentage recovery is expected to gain momentum next year, with a points over 12 months during the 2009 episode. The rebound in world output similar in gradient to those COVID-19 recession has also seen a record increase in following prior global recessions, and global employment uncertainty surrounding global growth forecasts, measured and oil consumption recovering strongly. However, this by the dispersion of individual forecasts, since April as the rebound would not be enough for output to return to its health crisis deepened in advanced economies (Figure pre-recession trend level (Chapter 3). The delay in return 1.1.3.E). The increase in forecast uncertainty reflects the to the trend level of global output is consistent with long- record increase in worldwide uncertainty over the past lasting hysteresis effects associated with deep recessions (Cerra, Fatás, and Saxena 2020; Ma, Rogers, and Zhou 2020). 6 As forecasts by Consensus Economics reflect perspectives of many forecasters using a wide range of methodologies, they tend to be more stable than projections made by a single entity. However, there are also a Fastest and steepest growth downgrades few shortcomings associated with their information content (Crowe 2010). e data sample covers high-frequency forecasts (daily, monthly) Since mid-March, the speed and size of downgrades in of up to 85 economies—33 advanced economies and 52 EMDEs—over global growth forecasts have been remarkable. These the period 1990-2020. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 19 BOX 1.1 How deep will the COVID-19 recession be? (continued) FIGURE 1.1.3 Evolution of forecasts during global recessions The COVID-19 recession has seen the fastest and steepest downgrades in growth projections among all the global recessions for which data for consensus forecasts are available, that is, since 1990. In previous such episodes, growth forecasts were gradually downgraded over periods much longer than that which has thus far elapsed in the current recession. Uncertainty around global growth forecasts has increased sharply as the health crisis has intensified over the past three months. A. Consensus forecasts of global GDP B. Consensus forecasts of GDP growth C. Consensus forecasts of GDP growth growth for 2020, February-June 2020 for 2009, July 2008-July 2009 D. Changes in consensus forecasts of E. Dispersion of global GDP growth F. Global uncertainty GDP growth forecasts Source: Ahir, Bloom, and Furceri (2018); Consensus Economics; World Bank. A. Year “t” denotes the year of global recessions. Data for 1991 are for advanced economies only due to data availability. B. Average GDP growth for 2020, based on 59 economies (including 32 advanced economies and 27 EMDEs) for which data for consensus forecasts are available, weighted by GDP in constant 2010 U.S. dollars for 2019. Growth is computed each business day as a moving average of the latest revised forecasts. Horizontal axis shows month and day. Last observation is June 1, 2020. C. Average GDP growth for 2009 (based on 84 economies, including 33 advanced economies and 51 EMDEs), weighted by GDP in constant 2010 U.S. dollars for 2008. The July 2008-July 2009 period is selected because of the relative stability of forecasts prior to and after this period. D. Changes in consensus growth forecasts for 2009 and 2020, in percentage points. For 2009, changes represent differences in forecasts between July 2008 and July 2009 (based on the monthly surveys). For 2020, changes represent differences in forecasts between February 18, 2020, and June 1, 2020. Growth is computed each business day as a moving average of the latest revised forecasts. E. Consensus global growth forecasts for 2009 and 2020 in denoted months. Ranges show the minimum-maximum of growth forecasts. F. The index is computed by counting the percent of word “uncertain” (or its variant) in the Economist Intelligence Unit country reports. Long-term average refers to average over 1960-2020. Last observation is 2020Q1. Click here to download data and charts. three months (Figure 1.1.3.F). If the future trajectory of episodes.7 In previous global recessions, an initial adverse forecasts follows the typical pattern and worldwide development was often followed by a series of disruptions uncertainty remains elevated, there may well be further downgrades in global growth in coming months. 7 Forecasters tend to be slow in internalizing adverse developments in their projections and are often unable to correctly predict in advance the Global recessions: From bad to worse? duration of national recessions (Ahir and Loungani 2014; An and Loungani 2020; Aromí 2019). In light of the heightened uncertainty The experience of past global recessions suggests that it about the growth outlook, it is useful to examine alternative scenarios that can illustrate the range of likely growth outcomes in the near term. takes time for forecasters to process incoming data and However, these scenarios are often adjusted in response to the changes in fully recognize the magnitude of recessions, which are rare the baseline forecasts. 20 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.1 How deep will the COVID-19 recession be? (continued) that spread worldwide through trade, financial, and global recession driven by a pandemic, because of their confidence linkages. A sharp decline in global growth was very limited experience with them, than of previous global ultimately an outcome driven by all of these developments. recessions, which were triggered by more run-of-the-mill Forecasters gradually downgraded their projections as they financial and policy shocks. better grasped the likely growth consequences of new developments. Conclusion The 2009 global recession provides a very good example of the evolving nature of these episodes and its implications The COVID-19 recession is unique in many respects. It is for the trajectory of forecasts. The initial trigger for the the first recession to have been triggered solely by a global financial crisis was problems in certain segments of pandemic during the past 150 years, and current forecasts the mortgage markets in the United States, but suggest that it will be the most severe since the end of dislocations emanating from these markets soon engulfed World War II. The recession this year is likely to be the the entire U.S. financial system. The high degree of deepest one in advanced economies since the end of World interconnectedness between U.S. and other financial War II, and the first output contraction in EMDEs in at markets then caused the crisis to spread to other advanced least the past six decades. Importantly, it is also expected to economies and some EMDEs. As these events progressed, trigger per capita GDP contractions in the largest share of global growth forecasts were downgraded steadily between economies since 1870. September 2008 and July 2009. The current episode is also unique because it has been As in previous global recessions, the early consequences of accompanied by the fastest and steepest global growth the initial shock—the pandemic in this case—may be forecast downgrades in recorded history. In previous global followed by further adverse developments. It may take recession episodes, growth projections were gradually longer than expected to suppress outbreaks of COVID-19 downgraded over a longer period as forecasters processed in different parts of the world (Box 3.3). Initial disruptions incoming data and reassessed the implications. If the past triggered by the pandemic could lead to financial crises in is any guide, there may be further downgrades in store as vulnerable EMDEs. Moreover, the uniqueness of the forecasters better understand the growth repercussions of COVID-19 global recession brings another challenge: this exceptional global recession. Further policy measures professional forecasters and economists have a more to support activity, in addition to the large-scale initiatives limited understanding of the growth implications of a already introduced, may be needed in the coming months. regions as travel restrictions and widespread losses attacks or during previous global recessions of service sector jobs discourage labor migration (Figure 1.9.C). Controls to slow the spread of the and weigh on incomes of migrant workers (World pandemic have resulted in a sharp fall in travel and Bank 2020b). In a number of EMDEs, banking transport, which accounts for two-thirds of oil system profitability is being eroded by a rise in consumption. Oil demand is expected to fall by nonperforming loans. 8.6 percent in 2020. Such a decline would be unprecedented, surpassing the previous record fall Commodity markets of 4 percent in 1980 (Figure 1.9.D). Most commodity prices declined in the first half Global oil production is also starting to fall, of the year because of the sharp fall in global although at a slower pace than demand. In April, demand (World Bank 2020c; Figure 1.9.A). Brent OPEC and its partners agreed to new production crude oil prices fell almost 70 percent from late cuts, starting with a reduction of 9.7mb/d in May January to mid-April, before retracing some of and June, and gradually tapering thereafter. these losses in recent weeks (Figure 1.9.B). The Production in non-OPEC+ countries is also decline in oil prices since January has been larger starting to decline. The U.S. Energy Information than in the aftermath of the September 11, 2001 Administration expects U.S. production to fall by G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 21 just under 2 mb/d from current levels to a low of FIGURE 1.8 Global finance 11mb/d in 2020Q4. Overall, oil prices are A massive flight to safety caused sharp declines in asset valuations and expected to average $32 per barrel in 2020 and heightened financial market volatility around the world. Earlier in the year, $38 per barrel in 2021—$26 and $21 per barrel capital flowed out of EMDEs at a pace far exceeding the worst days of the global financial crisis, resulting in higher spreads and weaker currencies, below January forecasts, respectively. particularly for more vulnerable EMDEs. FDI inflows to EMDEs are expected to slow considerably. Demand for metals has also fallen. Prices are anticipated to decline 16 percent in 2020 before A. Global stock market B. Stock market volatility indexes showing a modest increase in 2021. This forecast is predicated on a recovery of Chinese demand, which accounts for around 50 percent of the consumption of base metals. Agricultural prices, which weakened over the first half of the year, are expected to decline only marginally in 2020 as a whole, as they are less sensitive to economic activity than industrial commodities, particularly at higher-income levels C. EMDE portfolio flows D. Spreads on EMDE debt (World Bank 2018a). Despite production levels and stocks for most staple foods being near all- time highs, there are growing concerns about food security. Food availability is being strained due to supply chain disruptions and restrictions on movement (FAO 2020a). Further, in EMDEs with a large number of poor, income losses from disruptions in economic activity could increase food insecurity. Some countries have announced temporary restrictive trade policies such as export E. EMDE exchange rates F. Projected change in FDI inflows to EMDEs, by region bans, similar to those that contributed to spikes in international food prices in 2007-08 and 2010-11. While ample supplies mean that prices are likely to remain stable at the global level, localized price spikes could further erode food security. Emerging market and developing economies Source: Bloomberg; Dealogic; Haver Analytics; Institute of International Finance; International EMDEs are forecast to contract this year due to the Monetary Fund; J.P. Morgan; World Bank. A. Stock market represented by the MSCI ACWI Index, which is a global market capitalization COVID-19 pandemic. The impact is expected to be weighted index representing equity markets in 23 advanced economies and 26 EMDEs. Cumulative decline relative to peak. Last observation is May 28, 2020. most severe for EMDEs with large domestic outbreaks B. GFC = Global financial crisis. Figure shows the volatility index for each region. Data during the and those that rely heavily on global trade, tourism, GFC are available for the Euro Area and the United States. Last observation is May 29, 2020. C. The dates for the start of each episode are as follows: COVID-19, January 20, 2020; 2018 sell-off, commodity exports, and external financing. Per May 2, 2018; Taper tantrum, May 21, 2013; Global financial crisis, September 7, 2008. Sample includes 10 EMDEs due to data availability. Data are calculated using nominal U.S. dollar GDP for capita incomes are projected to contract deeply as a the corresponding year of each episode. Last observation is May 28, 2020. D. Average cumulative change in spreads on government bonds from January 1, 2020 to May 28, result, causing the first net rise in global poverty in 2020. Sample includes 25 EMDEs. High government debt: EMDEs in the top 75 percentile by the more than 20 years. Growth in EMDEs is projected level of general government debt in 2019; low government debt: EMDEs in bottom 25 percentile by the level of general government debt in 2019. Orange lines indicate interquartile ranges. to pick up in 2021, on the back of firming trade and E. Average cumulative changes in exchange rates since January 1, 2020 based on 14 EMDEs with estimated current account deficits in 2019 and eight EMDEs with estimated current account surpluses investment as the effects of the pandemic wane. in 2019. Vertical orange lines indicate the interquartile range. Last observation is May 28, 2020. F. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Prospects for subdued commodity prices, however, are Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. Data expected to temper the recovery in commodity for 2020 are estimates by the Institute for International Finance. Sample includes 56 EMDEs. Click here to download data and charts. exporters. 22 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 1.9 Commodity markets unemployment, and led to a sharp decline in retail Commodity prices fell sharply in the first half of 2020, owing to a collapse sales. Uncertainty over the spread of the virus and in demand resulting from the COVID-19 pandemic. The fall was greatest in the lifting of restrictions have coincided with the oil prices, partly reflecting weaker demand for transport and travel. A erosion of business confidence and a decline in renewed OPEC+ agreement in April proved insufficient to bolster prices, which have fallen more than in previous major events. The decline in investment. Businesses have also had to contend demand expected for 2020 is unprecedented by historical standards. with delivery delays in intermediate inputs, plunging demand, and limited access to financing. A. Commodity price changes since January 2020 B. Brent crude oil price Domestic COVID-19 outbreaks are beginning to overwhelm health care systems in a rising number of EMDEs because of the small size of their health care systems and limited hospital capacity. EMDEs have also faced unprecedented external headwinds from much weaker activity in major economies, sharp declines in commodity prices, disruptions to global supply chains and tourism, markedly lower remittances, and financial market turmoil. Manufacturing activity and new export C. Oil prices during past episodes of D. Years with the largest declines in stress oil demand orders have sharply contracted, particularly in EMDEs with a large presence of manufacturing or export-oriented firms (EAP, ECA; World Bank 2020a, 2020d). Increasing supply-chain disruptions are likely, as shipments are interrupted by temporary export bans or border restrictions. Tourist arrivals collapsed in the first half of 2020 alongside widespread international border closures and travel restrictions. EMDEs that rely heavily on Source: Bloomberg; BP Statistical Review; Energy Information Administration; International Energy tourism faced large declines in services activity, Agency; Organization of Petroleum Exporting Countries; World Bank. Note: January 22, 2020 is the date that the WHO first observed human-to-human COVID-19 particularly in hospitality, food, entertainment, transmission. A. Figure shows the change in the monthly average of commodity prices between January 2020 and and retail services. In EMDEs where remittances the last observation, which is May 2020. Price changes for “Base metals” and “Food” show World Bank Pink Sheet indexes. Oil price is unweighted average of Brent, WTI and Dubai prices. are an important source of income, private B. Vertical lines denote January 22, 2020; March 9, 2020; April 13, 2020. Last observation is May 28, consumption has fallen sharply as migrant workers 2020. C. Start dates for events are the first trading day before a major event occurred: September 10, 2001 became idle or furloughed as a result of the for 9/11 and January 22, 2020 for COVID-19. If data are unavailable, the start date is the first day of available data prior to the event date. Shaded area indicates range over the four global recessions: downturn in business activity in host countries 1974, 1981, 1990, and 2008. Last observation is May 28, 2020. D. Figure shows the 10 largest declines in oil demand since 1965. Years on the x-axis indicate the (Figure 1.10.B; World Bank 2020b). year in which the decline occurred. Data for 2020 are IEA estimates. Click here to download data and charts. Commodity exporters The drastic reduction in demand and prices for oil Recent developments and industrial metals is a major headwind for commodity exporters, as commodities accounted The pandemic, and the associated domestic for more than 75 percent of exports in 2019 in the disruptions and global spillovers, has dealt a average member of this group. Extraction significant blow to EMDEs. Many have adopted investment has fallen sharply, loss of revenues has restrictions to stem the pandemic, including forced some governments into procyclical fiscal economy-wide lockdowns, international border tightening, and the deterioration in terms of trade and school closures, and restrictions on domestic has weighed on consumption, particularly in travel (Figure 1.10.A). In many EMDEs, efforts to regions with large numbers of commodity slow the spread of the virus have weighed heavily exporters (LAC, MENA, SSA; World Bank on private consumption, generated widespread 2020e, 2020f, 2020g). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 23 In addition, commodity exporters are grappling FIGURE 1.10 EMDE recent developments with domestic outbreaks and the side effects of Activity in EMDEs has markedly declined in response to the pandemic, mitigation measures. The number of these with necessary measures such as lockdowns and other restrictions measures was initially higher in commodity weighing heavily on both demand and supply. Private consumption will suffer acutely, including in economies dependent on remittance inflows. exporters than in commodity importers, in part EMDEs with weak health systems are particularly vulnerable to the reflecting greater fear about the consequences of pandemic’s impact. Nearly 80 percent of EMDEs are expected to suffer output contractions this year. Activity in LICs has also slowed sharply and domestic outbreaks in countries where the financial conditions have tightened in some economies. capacity of the public health system is low. As a share of GDP, government health care spending A. Stringency measures and COVID-19 B. Change in remittance inflows in cases in EMDEs and LICs 2020, by EMDE region among commodity exporters is on average 30 percent lower than in commodity importers (Figure 1.10.C). Activity indicators in EMDE commodity exporters have declined to multi-year lows. Whereas three-quarters of commodity-exporting EMDEs managed to avoid recession in 2009 despite collapsing commodity prices, more than two-thirds of them are expected to contract in C. Health care spending in EMDEs and D. Share of economies experiencing 2020 (Figure 1.10.D). This is largely due to the LICs in 2016 annual contractions in activity wider global spread and the larger magnitude of the shock. In addition, it reflects the lingering weakness and eroded buffers from the 2014-16 commodity price collapse (Chapter 4). Commodity exporters entered this year with weaker external and fiscal positions than before the global financial crisis, as subdued external demand and low commodity prices reduced E. Change in activity indicators in F. LIC sovereign borrowing costs current account balances, while persistent fiscal EMDEs and LICs deficits contributed to rising debt levels. A number of commodity exporters have announced fiscal stimulus, while some have also partially reallocated spending to provide targeted support. Several central banks have provided monetary support, despite currency depreciations and substantial capital outflows. Commodity importers Source: Air Quality Open Data Platform; Bloomberg; Google COVID-19 Community Mobility Reports; Haver Analytics; Johns Hopkins University; Kose, Sugawara, and Terrones (2020); Oxford University; World Bank; World Bank (2020b). Growth in most commodity importers has been Note: EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, LICs = Low-income countries, LMICs= Low- and Middle-Income countries, MNA = Middle curtailed by severe domestic virus outbreaks and East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. restrictions to stem the pandemic, all of which A. Sample includes 144 EMDEs, of which 91 are commodity exporters, 64 are commodity importers, and 33 are LICs. Last observation is May 28, 2020. have heavily weighed on consumption and A.E. Aggregates calculated with U.S. dollar GDP weights at 2010 prices and market exchange rates. B. Figure shows the simple average of the projected change between 2019 and 2020 remittances as investment (World Bank 2020f, 2020g, 2020h). a share of 2019 GDP. Sample includes 141 EMDEs. C. Sample includes 150 EMDEs, with 58 and 82 commodity importers and exporters, and 25 LICs. Although commodity importers on average have D. The horizontal axis indicates the year of each global recession. Sample includes 86 EMDE more developed health care systems than commodity exporters and 61 EMDE commodity importers. Shaded area indicates forecasts. E. Data reflect monthly percent change relative to the baseline period of January 3, 2020 to February commodity exporters, there is considerable 6, 2020. “Retail and recreation” reflect data on visits and length of stay and are calculated by Google. “Air pollution” measured as particle matter (PM2.5) air pollution. Sample includes 93 EMDEs and 15 variation across regions. In Central European LICs for “Retail and recreation” and 53 EMDEs and 7 LICs for “Air pollution”. The last observation is May 21, 2020 for “Retail and recreation” and May 29, 2020 for “Air pollution”. economies, the number of hospital beds per F. Data for Ethiopia, Mozambique, and Rwanda reflect yields on the 2024, 2031, and 2023 person is similar to that in the Euro Area, while in Eurobonds, respectively. Last observation is May 29, 2020. Click here to download data and charts. 24 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.2 Recent developments and outlook for low-income countries (LICs) The COVID-19 pandemic has exerted a particularly heavy humanitarian and economic toll on low-income countries (LICs), in light of their underlying vulnerabilities. While activity among this group is expected to firm next year, the outlook is subject to substantial downside risks. These include the possibility that mitigation and other control efforts to stem domestic outbreaks are unsuccessful or that measures to slow the spread—such as border closures—induce a food crisis. Recent developments disruption to activity (Figure 1.2.2.A). Aggregate activity in LICs is expected to rebound in 2021, with growth The COVID-19 pandemic has spread rapidly and severely rising to 4.6 percent as headwinds related to the pandemic disrupted activity in low-income countries (LICs; Figure fade. However, significant uncertainty surrounds the pace 1.2.1.A). The virus has infected tens of thousands and and timing of the projected recovery. It rests heavily on the taken a heavy human toll, with weak health care capacity assumption that the pandemic recedes in such a way that in LICs contributing to elevated mortality rates. The mitigation measures are gradually lifted from the middle of necessary measures implemented to slow the domestic this year—and that activity in major trading partners spread of the virus have weighed heavily on activity in the rebounds. first half of this year (Figures 1.2.1.B and 1.2.1.C). With the global economy ravaged by the pandemic, LICs face In industrial commodity exporters, growth is expected to reduced external demand, falling commodity prices, a contract by 1.3 percent in 2020, as low commodity prices dramatic decrease in tourism activity, weakening foreign compound domestic disruptions. The projected pickup in direct investment, sharply higher borrowing costs, as well 2021 is underpinned by the recovery in demand from key as an expected fall in remittances—a key source of foreign trading partners and firming commodity prices (Central funding and support for household incomes in many LICs African Republic, Chad, Democratic Republic of Congo, (Figures 1.2.1.D - 1.2.1.F). Guinea, Mozambique, Niger). In some countries, growth will be spurred further by investment in new production Several LICs have experienced severe domestic outbreaks capacity (Chad, Mozambique, Niger). In Niger, however, (Afghanistan, Democratic Republic of Congo, Guinea); lower oil prices risk delaying completion of the country’s however, limited testing capacity is likely understating the new oil production infrastructure. In Liberia, activity is intensity of the pandemic. Efforts to slow the spread forecast to recover from two years of stagnation thanks to through social distancing have been difficult, particularly the adoption of structural reforms and the achievement of in densely populated urban areas where large populations greater price stability. often live in informal settlements without access to proper sanitation. Growth among other LICs is expected to fall to 1.6 percent in 2020, from 5.2 percent last year, before More broadly, activity among industrial commodity- recovering in 2021. In Ethiopia, growth is expected to fall exporting LICs has slowed markedly during the first half to a 17-year low of 3.2 percent this year—from 9 percent of this year, reflecting the impact of growing domestic in 2019. The projected rebound in 2021 is expected to be outbreaks, weakening demand in key trading partners, and underpinned by the implementation of reforms, such as sharply lower commodity prices (Chad, Mozambique, addressing foreign exchange shortages, to boost private Tajikistan). Activity in many agricultural commodity investment. An assumed improvement in political stability exporters has also been severely affected, with its impact and more stable business environments are projected to amplified in those with large tourism sectors or strong further support activity (Guinea-Bissau, Haiti). In others, trade links with China, the Euro Area, and the United the recovery from this year’s coronavirus pandemic will be States (Madagascar, Nepal, Rwanda, Uganda). aided by increased private sector investment due to continued reforms to improve business environments Outlook (Benin, Nepal, Rwanda, Togo). Economic growth. Growth among the LICs is expected to Prospects for per capita income convergence and poverty slow markedly to 1 percent in 2020—the slowest pace in alleviation. Per capita GDP in LICs is expected to contract at least 25 years—reflecting the pandemic’s broad-based by 1.6 percent in 2020, likely causing a large share of the population to slip back into extreme poverty, while those Note: is box was prepared by Rudi Steinbach. Research assistance already in extreme poverty could descend further into was provided by Maria Hazel Macadangdang. destitution (Figure 1.2.2.B). Amid widespread informality, G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 25 BOX 1.2 Recent developments and outlook for low-income countries (LICs) (continued) FIGURE 1.2.1 Recent developments in low-income countries The COVID-19 pandemic has spread to almost all LICs, infecting thousands and exacting a heavy human toll. Activity has slowed sharply this year as countries work to slow the spread of the virus. As the global economy falls into recession, LICs face reduced external demand, sharply higher borrowing costs, and an expected fall in remittance inflows—a key source of foreign funding in LICs. A. Coronavirus infections in LICs B. Activity in LICs as reflected by C. Stringency of containment measures changes in community mobility and air in LICs pollution D. GDP growth in major LIC trading E. LIC sovereign borrowing costs F. Remittances in LICs in 2019 partners Source: Bloomberg; Google LLC; Direction of Trade Statistics (International Monetary Fund); Johns Hopkins University; Oxford COVID-19 Government Response Tracker (OxCGRT); World Bank. Note: LICs = low-income countries. A. Sample includes 29 countries. Last observation is May 29, 2020. B. “Retail and recreation” reflect how visits and length of stay at places such as restaurants, cafes, shopping centers, theme parks, museums, libraries, and movie theaters have changed relative to the baseline period January 3 to February 6, 2020. “Grocery and pharmacy” reflect places such as grocery markets, food warehouses, farmers markets, specialty food shops, drug stores, and pharmacies. “Transit stations” reflect places such as public transport hubs such as subway, bus, and train stations. The data are calculated by Google based on aggregated and anonymized location history of a subset of its users. Data reflect monthly percent changes relative to the baseline. “Air pollution” reflects monthly percent changes in particle matter (PM2.5) air pollution relative to the baseline period January 3 to February 6, 2020. Sample for “Retail and recreation”, “Grocery and pharmacy”, and “Transit stations” includes 15 LICs. Sample for “Air pollution” includes 3 LICs. C. Stringency index records the number and strictness of government policies. It is calculated by OxCGRT based on publicly available information on 13 indicators of government response, including policies such as school closures, travel bans, and fiscal and monetary measures. Sample includes 17 LICs. Last observation is May 28, 2020. D. “Share of LIC exports” reflects goods exports. E. Data for Ethiopia, Mozambique, and Rwanda reflect yields on the 2024, 2031, and 2023 Eurobonds, respectively. Last observation is May 29, 2020. F. Remittances and ODA samples include 31 and 26 LICs, respectively. Click here to download data and charts. options to buffer temporary income losses are mostly Disruptions to education systems as a result of school limited. Among fragile LICs—where the incidence of closures have also brought school feeding programs to a extreme poverty is higher—the fall in incomes is projected halt in many LICs (WFP, forthcoming; Figure 1.2.2.C). to be steeper, with per capita GDP contracting by an For the most vulnerable populations, these disruptions are estimated 4.6 percent this year (World Bank 2020i). The likely to exacerbate malnutrition and affect human capital pandemic could leave long-lasting scars on the poor. development—exacting losses that may not be recoverable. 26 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.2 Recent developments and outlook for low-income countries (LICs) (continued) FIGURE 1.2.2 Outlook and risks Growth this year is forecast to fall to the weakest pace in a generation, but pandemic mitigation measures are expected to support a rebound in 2021. A longer-lasting and more severe pandemic would trigger an even steeper collapse in activity. Per capita growth has decelerated sharply and contracted among fragile LICs, reversing progress in poverty reduction. Disruptions to school feeding programs are likely to exact human losses that may not be recoverable. Health sectors in LICs have limited capacity to respond to larger outbreaks. Food insecurity in several LICs could be exacerbated by an ongoing locust outbreak. A. GDP growth B. Growth per capita C. Children affected by disruptions to school feeding programs in LICs D. Health sector preparedness in LICs E. Food insecurity in LICs F. Agricultural GDP growth in years of locust outbreaks Source: Johns Hopkins Center for Health Security and NTI, Global Health Security Index; World Bank; World Food Programme. Note: Shaded area indicates forecasts. LICs = low-income countries. Fragile LICs are LICs affected by fragility, conflict, and violence. A. Aggregate growth rates calculated using GDP weights at 2010 prices and market exchange rates. Other LICs include agricultural commodity exporters and commodity importers. Industrial- commodity exporting LICs include metal and oil exporters. B. Aggregate per capita growth rates calculated by dividing the total GDP at 2010 prices and market exchange rates for each subgroup by its total population. Sample includes 27 LICs and 14 “Fragile LICs”. C. Calculated based on World Food Programme’s implementation plan as of March 2020. D. “Early detection and reporting” reflects countries’ capacity for detecting and reporting epidemics of potential international concern; “Rapid response and mitigation” reflects their ability to respond to and mitigate the spread of an epidemic; and “Sufficient and robust health sector” reflects the capacity of health sectors to treat the sick and protect health workers. Data reflects 2019. Sample includes 31 LICs, 123 EMDEs, and 35 advanced economies. EMDEs exclude LICs. E. “Number of people in crisis” reflects those classified as Integrated Food Security Phase Classification (IPC/CH) Phase 3, i.e., in acute food insecurity crisis or worse, in 2019. “Population share” reflects the sample median. Whiskers reflect the interquartile range. Sample includes 25 LICs. F. Brackets reflect years of past locust outbreaks. Click here to download data and charts. Risks in EMDEs (Figure 1.2.2.D; Dahab et al. 2020; Fugazzola et al. 2020; Sussman 2020). In addition to the dire human Risks to the outlook are firmly to the downside. A major consequences of a larger-scale domestic outbreak, previous risk is that domestic outbreaks are not brought under epidemics among LICs suggest economic activity could all control as currently assumed. Instead, they could intensify but collapse (World Bank 2014). and affect larger shares of the population. The risk of propagation is high as LICs’ ability to cope would be With government debt rising sharply in recent years, most limited, with often weak administrative capacity and LICs have limited fiscal space to address the current insufficient health care systems—government per capita pandemic (Calderón and Zeufack 2020; Kose et al. 2020; spending on health care that is less than 5 percent of that World Bank 2020g). Slowing domestic activity is bound G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 27 BOX 1.2 Recent developments and outlook for low-income countries (LICs) (continued) TABLE 1.2.1 Low-income country forecastsa Percentage point (Real GDP growth at market prices in percent, unless indicated otherwise) differences from January 2020 projections 2017 2018 2019e 2020f 2021f 2020f 2021f Low Income Country, GDPb 5.4 5.8 5.0 1.0 4.6 -4.4 -0.9 Afghanistan 2.7 1.8 2.9 -5.5 1.0 -8.5 -2.5 Benin 5.8 6.7 6.9 3.2 6.0 -3.5 -0.7 Burkina Faso 6.3 6.8 5.7 2.0 5.8 -4.0 -0.2 Burundi 0.5 1.6 1.8 1.0 2.3 -1.0 0.2 Central African Republicc 4.5 3.7 3.1 0.8 3.5 -4.1 -1.4 Chad -3.0 2.6 3.2 -0.2 4.7 -5.7 -0.1 Congo, Dem. Rep. 3.7 5.8 4.4 -2.2 3.5 -6.1 0.1 Eritreac -10.0 13.0 3.7 -0.7 5.7 -4.2 1.7 Ethiopiad 10.0 7.9 9.0 3.2 3.6 -3.1 -2.8 Gambia, The 4.8 6.6 6.0 2.5 6.5 -3.8 0.7 Guinea 10.3 6.2 5.6 2.1 7.9 -3.9 1.9 Guinea-Bissau 5.9 3.8 4.7 -1.6 3.1 -6.5 -1.9 Haitid 1.2 1.5 -0.9 -3.5 1.0 -2.1 1.5 Liberia 2.5 1.2 -2.3 -2.6 4.0 -4.0 0.6 Madagascar 3.9 4.6 4.8 -1.2 4.0 -6.5 -0.4 Malawi 4.0 3.5 4.4 2.0 3.5 -2.8 -1.7 Mali 5.3 4.7 5.1 0.9 4.0 -4.1 -0.9 Mozambique 3.7 3.4 2.2 1.3 3.6 -2.4 -0.6 Nepald 8.2 6.7 7.0 1.8 2.1 -4.6 -4.4 Niger 4.9 6.5 6.3 1.0 8.1 -5.0 2.5 Rwanda 6.1 8.6 9.4 2.0 6.9 -6.1 -1.1 Sierra Leone 3.8 3.5 5.1 -2.3 4.0 -7.2 -0.9 South Sudanc,d -6.9 -3.5 3.2 -4.3 -23.6 -14.6 -29.0 Tajikistan 7.6 7.3 7.5 -2.0 3.7 -7.5 -1.3 Tanzania 6.8 5.4 5.8 2.5 5.5 -3.3 -0.6 Togo 4.4 4.9 5.3 1.0 4.0 -4.5 -1.5 Ugandad 3.9 6.2 6.5 3.3 3.7 -3.2 -2.2 Source: World Bank. Note: World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. a. Democratic People’s Republic of Korea, Somalia, Syria, and Yemen are not forecast due to data limitations. b. Aggregate growth rate calculated using GDP weights at 2010 prices and market exchange rates. c. Percentage point differences are relative to the World Bank’s October 2019 forecast. The January 2020 Global Economic Prospects did not include forecasts for Central African Republic, Eritrea, and South Sudan. d. GDP growth based on fiscal year data. For Nepal and South Sudan, the year 2019 refers to FY2018/19. Click here to download data. to dampen fiscal revenues, while spending has increased to financial institutions have made emergency support buttress health care systems, improve testing infrastructure, packages available to assist governments in their response enforce containment measures, and provide limited fiscal to the pandemic. They have also called on both official support for the economy (Steel and Phillips 2020). Few and private bilateral creditors to suspend debt payments LIC governments, however, have the resources to provide from these fiscally constrained LICs. In response, official income support for vulnerable businesses and households creditors among the G20 and the Paris Club have who are experiencing income losses. For many LICs, these temporarily suspended debt service payments for the additional fiscal pressures are putting debt sustainability at poorest countries that request forbearance. This will allow risk. Absent immediate external assistance, which may several LICs to concentrate more of their resources on involve temporary debt relief from bilateral creditors, the fighting the pandemic. However, given the scale of the pandemic may push some LICs toward sovereign default. pandemic, further external assistance from the To help alleviate these funding shortfalls, international international community may be needed. 28 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.2 Recent developments and outlook for low-income countries (LICs) (continued) Even before the COVID-19 pandemic hit, almost one- Republic of Congo, Eritrea, Ethiopia, Somalia, South fifth of the LIC population was already experiencing an Sudan, Uganda, Tanzania). Although the locust infestation acute food insecurity crisis (Figure 1.2.2.E; FSIN 2020). was largely confined to more arid areas and also did not The pandemic has further increased food insecurity in coincide with the peak growing season in most countries, many LICs, including through disruptions to imports and the outbreak has not yet been brought under control— the effect of mitigation measures on supply chains and partly due to pandemic-related supply chain disruptions distribution networks (World Bank 2020g, 2020c). These delaying delivery of pesticides—and the next wave of disruptions may also lead to food price spikes that further locusts is expected to be larger and hatch in the midst of erode incomes of the poor, with evidence that prices of the May-June growing season. Past locust infestations such certain staples have already risen (World Bank 2019a, as the 2003-05 outbreak in North and West Africa have 2020g, 2020j). Food insecurity could also be prolonged by cost harvests equivalent to US$ 2.5 billion—roughly 0.5 the lack of access to critical inputs such as seeds and percent of LIC aggregate GDP (Figure 1.2.2.F; Shu’aibu fertilizer, which could weigh on upcoming harvests. et al. 2013). Absent effective intervention, this locust infestation could further weigh on food security, and may The pandemic has also come on the heels of a locust have longer-term welfare implications in vulnerable infestation at the start of this year among several LICs in populations (Conte, Piemontese and Tapsoba 2020; Devi East Africa that damaged agricultural crops (Democratic 2020). some other commodity importers it is below the Low-income countries EMDE median. Growth in low-income countries (LICs) slowed Commodity importers that are deeply integrated sharply in the first half of 2020 (Box 1.2). The in global trade and value chains are particularly COVID-19 pandemic has spread to almost all exposed to global developments. Manufacturing LICs, and domestic mitigation measures have firms in ECA have experienced a sustained decline severely disrupted activity (Figure 1.10.E). in exports to the Euro Area (Bulgaria, Hungary, Spillovers from recessions in major economies Poland, Romania, Turkey). Mexico has been have added to the problem—particularly in those affected by falling exports to the United States, LICs with strong trade linkages to China and the while much of the manufacturing industry in EAP Euro Area. In the average LIC, commodities has seen shipments to China decline. account for two-thirds of goods exports, and the deterioration in world markets has weighed Although the pandemic has contributed to steep heavily on industrial commodity exporters (Chad, declines in oil and other commodity prices, the Democratic Republic of Congo, Ethiopia, benefit for commodity importers has been more Tajikistan). Reduced tourism amid global travel than offset by the immensely negative impact of restrictions has also tempered growth in some COVID-19 on external and domestic demand. countries (Ethiopia, Madagascar, Uganda). Moreover, fiscal space is narrower than it was prior to the global financial crisis. Years of higher Heightened investor risk aversion has tightened spending combined with lower domestic revenue financial conditions for the few LICs that have mobilization have led to widening fiscal deficits. borrowed from international capital markets, At the same time non-financial corporate debt has while contractions in major economies have risen significantly. Despite the deterioration in reduced remittance flows—an important source of fiscal positions, a number of commodity importers foreign funding in a number of LICs (World Bank have announced stimulus packages (India, 2020b, 2020d, 2020g; Figure 1.10.F). In Pakistan, Poland, Thailand, Turkey). In addition, addition, already-fragile fiscal positions among central banks in many commodity importers have several LICs have deteriorated further as enacted policy rate cuts. decelerating growth and reduced export earnings G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 29 have weighed on fiscal revenues, while efforts to FIGURE 1.11 EMDE outlook buttress health systems and slow the spread of the The drop in 2020 aggregate EMDE growth is expected to be the worst on virus have created new demands for government record, with that of LICs also falling sharply. Severe economic contractions spending. Multilateral organizations have provided are expected in countries that are dependent on tourism, are deeply integrated in global value chains, or rely on industrial commodity exports. emergency funding packages to support LIC The pandemic will exacerbate the weakness in investment, and deep governments in their efforts to protect the lives recessions will likely weigh on potential growth for years to come. Prolonged school closures could have lasting implications for poverty. and livelihoods of those most vulnerable; however, given the scale of the pandemic, further external A. Growth in EMDEs B. Average size of forecast assistance from the broader global development downgrade in 2020, by EMDE group community may be needed. Outlook Growth outlook Aggregate EMDE activity is expected to contract by 2.5 percent in 2020—6.6 percentage points below previous forecasts, and the worst rate since at least 1960, the earliest year when aggregate C. Inbound tourism from 2014-18, by D. Actual and Consensus forecasts EMDE group for investment growth in EMDEs GDP data are available (Figure 1.11.A). The projected fall in activity is broad-based, with nearly 80 percent of EMDEs expected to register negative growth this year. All EMDE regions will be affected (Chapter 2; Special Focus). Forecast downgrades are larger and the recessions are deeper in EMDEs with the most severe COVID- 19 outbreaks or those most susceptible to global spillovers, such as economies that are heavily dependent on tourism (Croatia, Maldives, E. Cumulative EMDE potential output F. School closures response after recessions Seychelles, Thailand), economies deeply embedded in global value chains (Bulgaria, Mexico, Poland), and major exporters of industrial commodities (Chile, Nigeria, Russian Federation, South Africa; Figure 1.11.B). Growth in EMDEs is projected to rebound in 2021, to 4.6 percent, supported by the expected pickup in China and a recovery of trade flows and investment. Excluding China, EMDE growth is Source: Consensus Economics; Ha, Kose, and Ohnsorge (2019); Haver Analytics; UNESCO; World Bank; World Tourism Organization. envisioned to recover at a more modest pace next Note: LICs = Low-income countries, FCVs = fragile, conflict, and violence-affected economies. A.D. Aggregates are calculated using U.S. dollar GDP weights at 2010 prices and market exchange year, reflecting headwinds for commodity rates. Shaded areas indicate forecasts. A. Historical low is calculated over the period 1970-2018. exporters amid subdued commodity prices and a B. Figure shows the simple average of forecast downgrades expected in 2020. Orange vertical lines weak rebound in services. Economies dependent indicate the interquartile range. “Tourism reliant” indicates tourism as a share of GDP above the EMDE median value. “Limited health capacity” indicates health expenditure as percent of GDP below on tourism will be subject to an additional drag on EMDE median. “Industrial commodity exporters” are defined in Table 1.2. “Other EMDEs” indicates EMDEs not included in other categories. Sample includes 144 EMDEs, of which 69 rely on tourism, growth (Figure 1.11.C). 71 have limited health capacity, 49 are industrial commodity exporters, and 31 are FCVs. C. Sample includes 146 EMDEs, of which 84 are commodity exporters and 62 are commodity importers. Through its effect on investment, as well as the D. Blue bars denote actual investment growth. Consensus forecasts aggregate calculated as a simple average of surveys based on data availability. Sample includes 48 economies. loss of human capital among idled and furloughed E. Data and methodology are detailed in Chapter 3 Box 3.1 and Annex 3.4. Charts show impulse responses for 75 EMDEs from a local projections model. Dependent variable is cumulative slowdown workers, COVID-19 is likely to dampen long- in potential output after a recession, financial crisis, or oil price plunge event. Year t is the year of the term growth prospects and productivity. In many event. Bars show coefficient estimates; vertical lines show 90 percent confidence bands. F. Number of countries that have either recommended or required school closings as part of cases, the pandemic is expected to exacerbate the measures to contain the domestic spread of COVID-19. Last observation is May 28, 2020. Click here to download data and charts. 30 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.3 Scenarios of possible global growth outcomes Since near-term global growth projections are subject to an unusual degree of uncertainty, this box presents three scenarios to illustrate possible global growth trajectories for 2020-21. In addition to a scenario consistent with baseline forecasts, a downside scenario explores the possibility of a deeper and more protracted global recession, while an upside scenario illustrates a prompt recovery. Even in the upside scenario, the 2020 global recession would be about twice as deep as the 2009 global recession. While the pandemic will have the most severe impact on advanced economies, emerging markets and developing economies (EMDEs) will also be substantially affected, with the magnitude of the downturn and subsequent recovery varying across EMDE regions. The range of plausible global growth outcomes remains Baseline scenario exceptionally wide. The ultimate outcome will depend on the evolution of the pandemic, the extent and duration of Growth paths measures to stem the pandemic, the size and effectiveness The baseline scenario envisions that the global economy of policy responses, and the spillovers emanating from will fall into a deep global recession. Global output in major economies. This box presents three alternative 2020 would contract 5.2 percent (Figure 1.3.1). This drop scenarios to help illustrate the possible growth outcomes. would be roughly three times the rate of decline The first scenario is consistent with the baseline forecast experienced during the 2009 global recession. Global trade presented in Table 1.1. With risks to the baseline forecast would fall about 13 percent, in part due to the centrality of tilted to the downside, a more adverse scenario is also several of the economies with the largest outbreaks in examined. This downside scenario assumes that flareups of global value chains (Baldwin and Tomiura 2020). the virus require stringent control measures—such as While advanced economies would be hardest hit, aggregate lockdowns and school and business closures—to remain in activity in EMDEs would also contract in 2020—for the place through the third quarter of 2020 in many countries first time in decades, in contrast to the continued and includes heightened financial stress in a number of expansion these economies delivered in 2009. All EMDE EMDEs. In contrast, an upside scenario explores how rapid regions would be affected, albeit in varying degrees. The fiscal and monetary policy responses may succeed in impact will be larger and the recessions deeper in EMDE supporting consumer and investor confidence, leading to a regions with the most severe COVID-19 outbreaks and prompt normalization of domestic economic activity and the most stringent restrictions to stem the pandemic, and financial conditions, and the unleashing of pent-up those most susceptible to global spillovers, such as demand. economies that are heavily dependent on tourism, economies deeply embedded in global value chains, and Methodology major exporters of industrial commodities. In particular, Scenarios for global growth are developed by layering a set the largest contractions this year are foreseen to be of adverse common shocks related to the COVID-19 experienced in LAC and ECA given their exposure to outbreak onto the January 2020 Global Economic Prospects spillovers from major economies, followed by MNA and forecasts for major economies and other economic SSA partly reflecting the large fall in commodity prices. aggregates. Shocks include restrictions to slow the spread A recovery would get underway in the second half of 2020 of the virus (measured as number of weeks), a sharp once lockdowns and other restrictions are gradually increase in global risk aversion proxied by an exogenous unwound; however, despite large-scale fiscal and monetary increase in the VIX, and a collapse in inbound tourism, policy support, this recovery would be hesitant. Even as which are cushioned in part by large-scale monetary and employment picks up, households would only slowly fiscal policy support. Moreover, each economy is expected increase consumption—particularly when it requires social to experience adverse spillovers from its major trading interaction—amid concerns of possible infection. Firms partners. The relative magnitude of each shock is scaled would hold back on increasing investment until they are using a variety of quantitative tools, including a suite of confident about a vigorous rebound. International travel global and regional vector autoregression models.1 Note: This box was prepared by Carlos Arteta and Justin-Damien Guénette, with contributions from Hideaki Matsuoka, Franz Ulrich In addition, national accounting exercises provide a regional Ruch and Sergiy Kasyanenko. quantification of the economic impact of domestic mitigation measures 1 Vector autoregression models based on Huidrom et al. (2020) and other disruptions related to COVID-19. As discussed below, the provide well-grounded rules of thumb for the impact of financial turmoil growth impacts of fiscal and monetary policy actions are quantified using on output and the magnitude of global spillovers from major economies. the Oxford Global Economic Model. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 31 BOX 1.3 Scenarios of possible global growth outcomes (continued) FIGURE 1.3.1 Possible global growth outcomes The ultimate impact of COVID-19 on global, advanced economy, and emerging and developing economy (EMDE) growth, as well as on world trade, will depend primarily on the severity and duration of the necessary pandemic-control measures and related financial turmoil, as well as the ability of policymakers to buffer economic disruptions. All EMDE regions will be affected, albeit to varying degrees. A. Global growth B. Growth in advanced economies C. Growth in EMDEs D. Trade growth E. Growth in EMDE regions in 2020 F. Growth in EMDE regions in 2021 Aggregate growth rates calculated using GDP weights at 2010 prices and market exchange rates. Baseline scenario: three months of mitigation measures would be enough to stem the pandemic. A recovery would get underway once mitigation measures are lifted but would be hesitant. Downside scenario: Three months of stringent lockdowns would prove insufficient and another three months of mitigation would be required before the pandemic can be brought under control. Upside scenario: Mitigation measures would be lifted after three months, and all major economies would sputter back to life in the third quarter of 2020. Monetary and fiscal stimulus would remain in place and would be highly effective in supporting growth over the next 18 months. Click here to download data and charts. would resume only slowly, weighed down by remaining Households will be reluctant to undertake many activities travel restrictions. that require face-to-face interaction, such as tourism. Where possible, workers will make greater use of Despite lingering social-distancing practices, the lifting of teleworking arrangements, reducing the discretionary control measures by the end of 2020 would set the stage consumption that arises from daily professional for a rebound in global growth in 2021. That said, the interactions. envisioned global recovery next year is moderate, with the level of global output in 2021 still 5.9 percent below that Second, households and firms will strive to rebuild of January forecasts. This reflects various headwinds that precautionary savings and strengthen balance sheets next will weigh on activity over the medium term. First, the year, following the precipitous declines in incomes pandemic will likely cause notable shifts in consumption experienced in 2020. Low-income households—which and work patterns that will dampen aggregate demand. have the highest marginal propensity to consume—will be Some social-distancing habits will persist, despite the particularly cautious, as they grapple with lingering eventual development and dissemination of a vaccine. unemployment and precarious financial situations. Many 32 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.3 Scenarios of possible global growth outcomes (continued) firms, facing sharply higher debt and persistent 2020. Past increases in borrowing costs and financial uncertainty, will opt to cut costs, delay expansion plans, market stress are assumed to weigh on activity throughout and invest in labor-saving technologies. Moreover, the the remainder of 2020. positive effects from fiscal support to households and firms is expected to fade, as existing stimulus measures are Commodity markets. Amid plunging global growth and phased out. financial market stress, oil prices are likely to further decline, on net, reaching a trough in the second quarter, Assumptions before recovering as activity stabilizes. Non-energy commodity prices would also fall, with a particularly large The baseline scenario is predicated on several assumptions decline in metals prices. about the evolution of activity, financial and commodity markets, and policy responses. Policy responses. In most countries, stringent control measures and large-scale support to the health sector Activity. Outbreaks in advanced economies continue to should help slow the pandemic but will also accentuate the slow, allowing most countries to continue to lift lockdown pandemic’s heavy toll on economic activity. Large fiscal measures through 2020Q2; however, some control support is provided to liquidity-constrained households measures remain in place during the third quarter in order and firms, but the effectiveness of policy measures is to prevent flare-ups. Outbreaks in EMDEs and the hampered in part by delays and elevated uncertainty.3 This stringency of related lockdown measures reach their peaks will help avoid lasting damage from the economic somewhat later. During the lockdown period, all downturn even if it provides only limited immediate boost economies experience a precipitous collapse in a to output growth. Aggressive monetary and financial sector substantial share of domestic private consumption that policy interventions, including conventional and requires social interactions, as well as of business unconventional monetary measures, are expected to investment and employment.2 alleviate financial market volatility, but not fully control it For example, even in EMDEs excluding China that are in until outbreaks subside. the least open quartile by trade openness would see output Downside scenario: More stringent lockdown losses of about 8 percent, on average, in 2020— about one-third less than the output losses of those in the most measures trade-open quartile. These impacts, however, do not yet In this scenario, global output would shrink by almost 8 take into account the extraordinary policy stimulus being percent in 2020, as an additional three months of stringent implemented, nor any additional spillovers from turmoil lockdown measures are assumed to be required before the in financial or commodity markets as well as country- pandemic can be brought under control, increasing the specific factors. severity of the impact on global growth. During these This would put considerable strain on balance sheets of additional three months, measures that had previously households and smaller firms that do not have access to begun to ease are quickly and aggressively re-introduced. capital markets (Islam and Maitra 2012). Moreover, Despite additional fiscal policy support, vulnerable firms activity is further hampered by a global collapse in would exit, vulnerable households would sharply curtail tourism. In general, domestic disruptions in EMDEs are consumption, and travel would remain deeply depressed. magnified by large spillovers from the sharp decline in Disruptions to global value chains would exacerbate the activity in major economies. collapse in global trade, which is envisioned to contract by about a quarter. These disruptions would also magnify the Financial markets. Despite interventions by central banks, size of cross-border spillovers and lead to widespread bouts of financial market stress persist; financial market volatility is expected to largely subside in the second half of 3 Despite monetary policy at or near the zero-lower bound, fiscal stimulus may be less effective when some sectors are completely shut 2 Simulations of a large-scale global macroeconometric model suggest down (Guerrieri et al. 2020). Fiscal multipliers may be lower due to high debt levels across many advanced and EMDE economies (Huidrom et al. that the impact of a coincidence of such domestic shocks around the 2019). The effectiveness of fiscal policy may also be hampered by high world will be large (Oxford Economics 2019). Relative to the baseline, levels of informality, which can complicate the delivery of supportive global output in 2020 would collapse by 12 percent, while that of measures (Chapter 3). Widespread informality, coupled with low EMDEs would fall by about 9 percent. In 2020, the impact of these financial inclusion, can also reduce the effectiveness of monetary policy domestic policy shocks would be considerably larger than spillovers from (Alberola-Ila and Urrutia 2019). external shocks. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 33 BOX 1.3 Scenarios of possible global growth outcomes (continued) interruptions in production. Persistent and severe financial quarter in advanced economies, and somewhat later in market turmoil would cause a notable spike in EMDEs. All major economies would sputter back to life in bankruptcies worldwide and trigger serious bouts of the third quarter of 2020. During the lockdown period, financial distress in many EMDEs. Simultaneously, a long most of the consumption that requires any social period of low oil prices would lead to elevated financial interaction would be suspended, and external tourism stress in some vulnerable oil exporters. would collapse amid temporary border restrictions, as in the baseline case (OECD 2020). Nevertheless, and in The prolonged period of stringent lockdowns would weigh contrast to baseline projections, a sharp economic rebound heavily on advanced economies, with output contracting would promptly get underway as businesses re-open, trade by nearly 10 percent in 2020. Output in EMDEs would and travel barriers are lifted, and confidence rebounds. contract by almost 5 percent, with the largest declines in Financial conditions would ease substantially, and capital commodity-exporting EMDEs, including those located in would quickly flow back into EMDEs, resuming its pre- the LAC and ECA regions. The recovery that follows pandemic search for yield. Extraordinary monetary and would be markedly sluggish, hampered by severely fiscal stimulus would remain in place and, once activity impaired balance sheets, heightened financial market stress resumes, would be highly effective in supporting growth and widespread bankruptcies in EMDEs. In 2021, global over the next 18 months. That said, even in this upside growth would barely begin to recover, increasing to 1.3 scenario, global output would contract in 2020 by about 4 percent, while growth in EMDEs would rise to a modest percent—more than twice the pace registered in the 2009 2.7 percent. global recession—and EMDE growth would also be negative. Global trade would fall by almost 10 percent, Upside scenario: Prompt recovery also worse than 2009. Once mitigation measures are fully In this scenario, as in the baseline, pandemic-control lifted, global growth would rebound markedly in 2021, measures would be largely lifted by the end of the second above 5 percent. weakness in private investment that has been a malnutrition early in life can permanently impair feature of the past decade (Figure 1.11.D; World learning abilities. Bank 2018a). In previous epidemics, investment declined by nearly 10 percent five years following The fallout from COVID-19 will be particularly the event, reflecting substantial risk aversion amid severe in countries with widespread informality heightened economic uncertainty. In many and limited safety nets (ILO 2020a). In the aver- EMDEs, deep recessions will weigh on potential age EMDE, informal activity accounts for one- output for a prolonged period (Figure 1.11.E; third of output and two-thirds of employment. In Chapter 3). EMDEs with large informal sectors, workers and firms have limited options to buffer temporary The pandemic has also disrupted schooling at all income losses, while also being more vulnerable to levels, with many EMDEs having fully or partially adverse health impacts. Additionally, temporary closed their education systems in an effort to workers in the formal economy suffer from gaps in contain its spread (UNESCO 2020). Extended social safety nets and social protection. school closures, along with disruptions to early childhood development programs, are expected to Growth in LICs is projected to fall to 1 percent in set back learning, raise dropout rates, and slow 2020—the lowest rate in more than 25 years. human capital development (Figure 1.11.F; Among fragile LICs, activity will slow to a crawl, Armitage and Nellumns 2020; Burgess and reflecting the pandemic’s severe disruption to Sievertsen 2020; Wang et al. 2020; World Bank activity in countries least equipped to lessen its 2020k, 2020l). Growing food insecurity, impact. The expected growth pickup in LICs in including disruptions to school feeding programs, 2021 assumes that both domestic activity and could also lower long-term productivity, as external demand recover as the pandemic fades, 34 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 1.12 EMDE per capita income growth and unlikely that the Sustainable Development Goal poverty (SDG) of reducing global extreme poverty to 3 Per capita incomes in EMDEs have fallen sharply amid the pandemic, percent of the global population over the next markedly affecting living standards and tipping many millions back into decade would be achieved (World Bank 2018b). poverty. Among oil and metals exporters, in which contractions in per capita incomes have been particularly steep, poverty rates tend to be This goal is now even further out of reach. higher. In some regions, lower commodity prices could constrain fiscal Household incomes are expected to be weighed revenues needed for critical development spending. down by sharp income losses from diminished employment opportunities and lost earnings due A. EMDE per capita growth B. Level of EMDE per capita incomes relative to January 2020 to illness, as well as reduced remittance receipts. As a result, per capita incomes among more than 90 percent of EMDEs are expected to contract in 2020, markedly affecting living standards and causing many millions to fall back into poverty (ILO 2020a; Lakner et al. 2020; World Bank 2020a; Figures 1.12.A and 1.12.B). The crisis is also likely to worsen inequality, as various factors render the poor more vulnerable to the effects of the pandemic, including their limited access to C. Extreme poverty rates D. Infrastructure gaps and commodity health care and lack of resources to cushion revenues income losses (Furceri, Loungani, and Ostry 2020). Per capita income losses are forecast to be steepest in ECA, LAC, MENA, and SSA. These four regions are home to many oil exporters, which will be severely affected by the precipitous fall in oil prices. Commodity exporters, particularly those in Sub-Saharan Africa, typically have sizable Source: ICTD/UNU-WIDER; Rozenberg and Fay (2019); World Bank. populations living in extreme poverty (Figure Note: EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. 1.12.C). Falling per capita incomes in Sub- A. Sample includes 144 EMDEs, of which 29 are oil exporters and 20 are metal exporters. B. Bars show the percent difference between the level of per capita GDP in the January and June Saharan Africa—home to 60 percent of the 2020 editions of Global Economic Prospects. Orange whiskers indicate the interquartile range. Sample includes 144 EMDEs. world’s extreme poor—are likely to further C. Sample includes 127 EMDEs, of which 24 are oil exporters and 20 are metal exporters. concentrate global poverty in the region (Lakner et D. "Infrastructure investment needs" reflect the GDP-weighted average annual cost of investment in the preferred scenario between 2015–30. The preferred scenario minimizes overall costs and relies al. 2020; World Bank 2020i). In some countries, on what are considered “reasonable” assumptions (Rozenberg and Fay 2019). "Resource revenues" reflect simple averages of total natural resource revenues, including natural resource revenues constrained fiscal revenues due to commodity reported as “tax revenue” or “non-tax revenue” in 2017. Natural resources are here defined as natural resources that include a significant component of economic rent, primarily from oil and mining prices remaining lower over the long term are activities. Sample includes 80 EMDEs. likely to further weigh on needed development Click here to download data and charts. spending—particularly on health, education, and infrastructure—pushing even more SDGs out of and that commodity prices firm from current reach (Figure 1.12.D). levels as global demand recovers. Among exporters of industrial commodities, growth is projected to be spurred further by investment in new Global outlook and risks production capacity (Chad, Mozambique, Niger), The pandemic is pushing the global economy into while continued reforms to improve business recession, with a projected contraction of 5.2 percent environments will aid the recovery in some others in 2020—the worst rate in post-war history. Any (Benin, Ethiopia, Nepal, Rwanda, Togo). numerical forecast for the period ahead, however, is subject to unprecedented levels of uncertainty. Risks Per capita income growth and poverty are firmly tilted to the downside and include a more Even before the pandemic, it was increasingly protracted pandemic and hence a prolongation of G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 35 mitigation measures, financial crises, a further drop FIGURE 1.13 Risks to the outlook in commodity prices, and a slower recovery due to The global economy is experiencing one of the sharpest contractions on lasting impacts on consumers and firms and a retreat record. Forecasts for activity in both advanced economies and EMDEs were downgraded substantially and much more rapidly than in 2009. Even from global value chains. These factors could lead to after recovering in 2021, activity is expected to remain far below previously a substantially greater loss of output in the near term. projected levels. Substantial uncertainty surrounds possible growth outcomes, and there remains a heightened probability of even weaker outcomes if downside risks materialize. Global outlook Lockdowns and other restrictions, while necessary A. Consensus growth forecasts: Advanced economies B. Consensus growth forecasts: EMDEs to slow the spread of the virus, have been accompanied by a sharp reduction in economic activity (Baldwin and Weder di Mauro 2020; Boissay, Rees, and Rungcharoenkitkul 2020; Eichenbaum, Rebelo, and Trabandt 2020; Gourinchas 2020). Their gradual removal is expected to pave the way for a partial recovery in the second half of the year. On this assumption, the world economy is projected to contract by 5.2 percent in 2020. If this forecast materializes, the C. Level of output relative to January D. Global output growth around global fall in global output would be more than double projections recessions that of the 2009 global recession. The severity and speed of the disruptions to the global economy have been reflected in the strikingly steep downgrades, for advanced economies and EMDEs, by all major forecasters (Figures 1.13.A and 1.13.B). Within one month, as widespread restrictions were implemented in large segments of the world economy, consensus Source: Consensus Economics; World Bank. forecasts for global growth in 2020 were A.B. Market growth forecasts are based on estimates from Consensus Forecasts. Figure starts in July 2008 for the 2009 global financial crisis and February 2020 for the COVID-19 outbreak. Last downgraded by more than 5 percentage points—a observation is May 26, 2020. C. Figure shows the percent difference between the level of output in the January and June 2020 magnitude of forecast downgrades that took nine editions of Global Economic Prospects. months in the wake of the global financial crisis. D. A global recession is defined as a contraction in real per capita GDP. Output growth in respective years and period. Growth rates in 2020 and 2021 are the baseline forecasts (shaded in gray). Black lines indicate ranges based on the lower and upper bounds of growth in the scenarios described in Box 1.3. The projected depth of the 2020 global recession Click here to download data and charts. depends on the weighting methodology used to compute the rate of global growth. Advanced economies account for 60 percent of global Since the contraction in advanced economies is activity using market exchange rate weights, as in much more pronounced than that of EMDEs, the these baseline projections, while they account for use of PPP weights—which assign greater weight only 40 percent when using purchasing power to EMDEs than market exchange rate-based parity (PPP) weights. Major advanced weights—yields a less severe global recession. economies—in particular, the Euro Area—are Global output is projected to shrink 4.1 percent in expected to contract precipitously this year. In 2020 using PPP weights, consistent with the contrast, some large EMDEs—most notably baseline contraction of 5.2 percent using market China—are projected to continue to expand, exchange rates. Advanced economies account for albeit more slowly than previously anticipated. As essentially all of the 1.1 percentage point a result, advanced economies are expected to difference between the two methods. Regardless of shrink by 7 percent in 2020, while EMDEs are the weighting methodology, this year’s contraction envisioned to contract by 2.5 percent. will be highly synchronized internationally, with 36 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.4 How does informality aggravate the impact of COVID-19? COVID-19 will take an especially heavy humanitarian and economic toll on emerging markets and developing economies (EMDEs) with large informal sectors. Participants in the informal sector—workers and small enterprises—are often not registered with the government and hence have no access to government benefits. Informality is associated with underdevelopment in a wide range of areas, such as widespread poverty, lack of access to financial systems, deficient public health and medical resources, and weak social safety nets. These vulnerabilities have amplified the economic shock to livelihoods from COVID-19 and threatened to throw large numbers of people into extreme poverty. The impact is likely to be particularly severe on women, due to their outsized participation in sectors that are more affected by the pandemic. While the effects of the crisis continue, it is critical to implement effective delivery channels to quickly provide the support that informal workers and firms need to survive. Unconditional support programs would be advisable in many EMDEs. Given their limited resources, low-income countries will require increased international funding for the effective implementation of such programs. Informal activity is widespread in emerging markets and 40 percent of GDP in those regions between 2010 and developing economies (EMDEs; World Bank 2019a; 2016. e share of self-employment, another measure of Figure 1.4.1). Participants generally are not registered with informality, is highest in Sub-Saharan Africa, South Asia, the government and do not have access to social benefits, and East Asia and the Pacific, ranging from 50 percent to with their activity largely unmonitored by authorities. e 62 percent of total employment. Informality is particularly informal sector is often associated with underdevelopment, prominent in some EMDEs. For example, in 2016, the labor-intensive industry, less educated and poorly paid informal economy accounted for more than 60 percent of workers, limited access to financial and medical service, GDP in the Democratic Republic of Congo and and poor or non-existent coverage by social security. ese Zimbabwe. e sector accounted for 90 percent of total features are likely to intensify the spread of COVID-19 employment in countries like Mali, Mozambique, and among informal workers and worsen its adverse health and Côte d’Ivoire. In Kenya and India, about 8 out of 10 economic impacts. Confirmed COVID-19 cases have been workers were self-employed.1 rising rapidly in EMDEs with extensive informality since the end of March, despite a low level of testing. Characteristics of informal workers. Workers in the informal sector tend to be lower-skilled and lower-paid, Against this background, this box addresses the following with less access to finance or social safety nets than workers questions. in the formal sector (Loayza 2018; Perry et al. 2007; World Bank 2019a). ey often live and work in crowded • What is the role of the informal economy in EMDEs? conditions and conduct all transactions in cash—factors that enable the spread of disease (Chodorow-Reich et al. • How may widespread informality alter the impact of 2020; Surico and Galeotti 2020). Informal workers on the pandemic? average have incomes 19 percent lower than formal workers, and have limited savings (World Bank 2019a; • How do policies to mitigate the impact of pandemic Figure 1.4.2). In the one-third of EMDEs with the most need to be tailored in the presence of large informal pervasive informality, 40 percent of the population would economies? be driven into poverty if they had to cover direct out-of- pocket payments for an unexpected health care emergency. Informality in EMDEs In these economies, unemployment benefits are only available to a miniscule fraction of the population (on Widespread informality in EMDEs. e informal sector, average, less than 2.5 percent). on average, accounts for about a third of official GDP and about 70 percent of total employment in EMDEs (World Characteristics of informal firms. Informal firms tend to Bank 2019a; Figure 1.4.1). Informal enterprises account be labor-intensive and more prevalent in the services for 8 out of every 10 enterprises in the world (ILO sector. ese have been hard hit by measures to curtail 2020b). e size of the informal economy varies widely across regions and countries. e share of informal output is highest in Sub-Saharan Africa, Europe and Central Asia, 1 Common employment measures of informality are self-employment and Latin America and the Caribbean, averaging around and informal employment, relative to total employment. The self-employed work on their own account, or with one or a few partners, or in a cooperative. Informal employment comprises all workers of the informal Note: This box was prepared by Shu Yu. sector and informal workers outside the informal sector (see World Bank 2019a for details). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 37 BOX 1.4 How does informality aggravate the impact of COVID-19? (continued) FIGURE 1.4.1 Informality in EMDEs Informality is prominent in emerging markets and developing economies (EMDEs). In Sub-Saharan Africa, Europe and Central Asia, and Latin America and the Caribbean, the share of informal output averages about 40 percent of GDP. The share of self-employment, another gauge of informality, in Sub-Saharan Africa, South Asia, and East Asia and the Pacific, ranges from 50 to more than 60 percent of total employment. Confirmed COVID-19 cases have been growing rapidly in countries with above-median informality since the end of March, despite the lack of testing. A. Informality in EMDEs B. Informality across EMDE regions C. COVID-19 cases and the extent of informality Source: Elgin et al. (forthcoming); World Bank, World Development Indicators; Haver Analytics; International Labour Organization. Notes: EAP=East Asia Pacific, ECA=Europe and Central Asia, MNA=Middle East and North Africa, SAR=South Asia, SSA=Sub-Saharan Africa. A. Unweighted averages. Informal employment (in red) uses self-employment shares (with additional informal employment shares in shaded red) in the closest (latest) available year around 1990 and 2016. World averages between 1990 and 2016 are in yellow. B. Mean of informal output (DGE-based estimates) and employment estimate (share of self-employment) in each region during 2010-16. C. Bars show the total number of confirmed COVID-19 cases (in thousands) for EMDEs (excluding China) with above-median informality and EMDEs (excluding China) with below-median informality on March 24, 2020 and on May 27, 2020. Informality is measured by DGE-based informal output in percent of official GDP in 2016. Click here to download data and charts. social interactions (Benjamin and Mbaye 2012; Surico and less sanitary conditions, and only have access to weak Galeotti 2020). In EMDE service sectors, about 72 public health and medical systems (Figure 1.4.3).2 In percent of firms are informal, compared with 33 percent in the one third of EMDEs with the most pervasive manufacturing sectors (see Amin, Ohnsorge, and Okou informality, sanitation facilities are accessible to only 2019 for sample coverage). Agricultural employment in 34 percent of the population, and clean drinking EMDEs is roughly 90 percent informal. Epidemic-control water is available to only 55 percent of the measures have already disrupted access to markets and population, compared to 80 percent in the one third inputs and may also eventually threaten the food security where informality is least pervasive. Hand-washing of smallholder farmers (Cullen 2020; FAO 2020b; ILO facilities are available for only 40 percent of the 2018). population in the former group. Access to medical care is also extremely limited, with only three-fifths Broader development challenges. A larger informal the number of doctors and nurses per 1,000 people economy is associated with weaker economic, fiscal, than the EMDEs with the least informality. In institutional, and developmental outcomes. GDP per countries like Malawi and Kenya, thousands of people capita in countries with above-median informality is about have access to only one or two ICU beds (Murthy, one-third to one-half that of countries below the median Leligdowicz, and Adhikari 2015). informality (World Bank 2019a). Health systems in EMDEs with more informality are relatively underdeveloped, and government capacity to mount an 2 In the one third of EMDEs with the most pervasive informality, 5.3 effective policy response to pandemics is limited. percent of the population is aged 65 or above, compared with 6.2 percent in the one third of EMDEs with the least pervasive informality. In the • Health and sanitation. Although the populations of one third of EMDEs with the most pervasive informality, the number of deaths per 1,000 people caused by communicable diseases and maternal, EMDEs with the most pervasive informality tend to prenatal and nutrition conditions are about two times higher than in the be younger, they also tend to be less healthy, live in one third of EMDEs with the least pervasive informality. 38 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.4 How does informality aggravate the impact of COVID-19? (continued) FIGURE 1.4.2 Features of the informal sector Informal workers are often employed in the agricultural or services sectors, poorly paid, with limited access to social benefits, and at risk of impoverishing health expenditures. A. Income in the informal sector B. Agricultural sector C. Risk of impoverishing expenditure for surgical care D. Social insurance E. Informality in manufacturing and F. Wage premium for formal over services informal employment Source: Elgin et al. (forthcoming); Amin, Ohnsorge, and Okou (2019), World Bank, Enterprise Survey; World Development Indicators; World Bank (2019a); Global Surgery and Social Change (PGSSC) at Harvard Medical School. A. Firm productivity is measured as sales per worker. “***” indicates the group differences between formal and informal firms are not zero at 10 percent significance level. B-D. Bars are group means calculated for EMDEs with “high informality” (i.e., the highest one-third EMDEs by DGE-based informal output measure) and those with “low informality” (i.e., the highest one-third EMDEs by DGE-based informal output measure) over the period 2010-16. “***” indicates the group differences are not zero at 10 percent significance level. D. Adequacy of social insurance programs are measured in percent of total welfare of beneficiary households. E. Data coverage of the share of informal (formal) firms in the manufacturing (service) sector is the same in Amin, Ohnsorge, and Okou (2019). F. The wage premium is obtained from 18 empirical studies on the wage gap between formal and informal workers. See World Bank (2019a) for details. UKR=Ukraine, VNM=Vietnam, RUS=Russia, BRA=Brazil, MEX=Mexico, MDG=Madagascar, PER=Peru, ECU=Ecuador, TUR=Turkey, CRI=Costa Rica, ZAF=South Africa, SLV=El Salvador. The number of studies or estimates for each country is shown in parenthesis; country means are calculated using a random-effects meta-analysis model. Click here to download data and charts. • Government policy effectiveness. Countries with countries with more pervasive informality (Loayza, pervasive informality are less likely to have the Oviedo, and Servén 2006). Moreover, less than a institutional and fiscal capacity to mount an effective quarter of informal firms use bank accounts and about response to the pandemic. Tax avoidance is prevalent one-half of small informal firms identified lack of in the informal sector, resulting in limited fiscal access to finance as a major obstacle to their resources (Besley and Persson 2014). For example, operations, which makes it difficult to use the government revenues and expenditures in the EMDEs financial system to channel support to the informal with the most pervasive informality are 5-10 economy (Farazi 2014; Schneider, Buehn, and percentage points of GDP, on average, below those Montenegro 2010). e rising availability of digital with the least pervasive informality (World Bank payments—whether on mobile phones, cards, or 2019a; Figure 1.4.3). In addition, governments are online—provided an alternative financial channel for less effective, and corruption is more rampant, in governments to reach the informal sector. However, it G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 39 BOX 1.4 How does informality aggravate the impact of COVID-19? (continued) FIGURE 1.4.3 Development challenges Pervasive informality is associated with short life expectancy, lack of access to medical resources, limited sanitation facilities, and other health-system shortfalls. Countries with high levels of informality have significantly lower government revenues and expenditures, have substantially less effective government, and exhibit greater corruption. A. Life expectancy B. Access to medical resources C. Access to water, sanitation and hygiene facilities D. Mortality and health E. Government effectiveness F. Fiscal indicators Source: Elgin et al. (forthcoming); World Bank, World Development Indicators, World Bank (2019a), World Governance Indicators; IMF Government Financial Statistics; The Program in Global Surgery and Social Change (PGSSC) at Harvard Medical School; WHO/UNICEF Joint Monitoring Programme (JMP) for Water Supply, Sanitation and Hygiene; WHO. Note: Here “high informality” are the third of EMDEs with the highest informality by the share of DGE-based informal output while “low informality” are the third of EMDEs with the lowest informality by the share of DGE-based informal output. A-C. Bars are group means calculated for EMDEs with “high informality” and those with “low informality” over the period 2010-16. “***” indicates the group differences are not zero at 10 percent significance level. D. Bars are group means calculated for EMDEs with “high informality” and those with “low informality” over the period 2010-16 (2016 for DALY). Death rates are computed for all death causes and deaths caused by communicable diseases and maternal, prenatal and nutrition conditions. DALYS are the number of healthy life years per person lost to diseases (“All” or “COM” for communicable diseases and maternal, prenatal and nutrition conditions). E. Bars show group means calculated for EMDEs with “high informality” and those with “low informality” over 2010-2016. Government effectiveness index is rescaled to range from 0 to 20, with a higher value indicating a more effective government. “***” indicates the group differences are not zero at 10 percent significance level. F. The 2000-16 average fiscal indicators among the third of EMDEs with the highest (“high”) and lowest (“low”) informality by the share of DGE-based informal output averaged during 2000-16. Sample includes 70 non-energy-exporting EMDEs with populations above 3 million people. “***” indicates the group differences are not zero at 10 percent significance level. Click here to download data and charts. registration also makes it a challenge to provide remains in doubt that whether sufficient cash-in and effective support to informal workers and firm via cash-out points are in place to allow people using official fiscal measures (such as tax deduction). digital payments to deposit and withdraw cash safely and reliably (World Bank 2017).3 e lack of Impact of the COVID-19 outbreak e impact of COVID-19 is likely to be worse in EMDEs 3These cash-in and cash-out points are often in the form of a bank with widespread informality, as it is expected to intensify agent, a mobile money agent, or an automated teller machine (ATM; the pandemic’s adverse health and economic consequences Klapper and Singer 2017). while weakening the effect of policies. 40 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 1.4 How does informality aggravate the impact of COVID-19? (continued) Health consequences. Health consequences of the and a potential expansion of the informal economy (ILO pandemic are expected to be more adverse in EMDEs with 2020b). more pervasive informality. In these countries, lack of an adequate public health system worsens the transmission of Past pandemics, such as the Ebola epidemic in West Africa infectious disease. Access to clean water and handwashing in 2014-15, provide a stark illustration of the vulnerability facilities is often difficult or unfeasible. Living quarters and of smallholder farmers (World Bank 2015).5 e working environments are often overcrowded and agricultural sector has the highest level of informal insanitary. In Sub-Saharan Africa where informality is employment—estimated at more than 90 percent (ILO pervasive, 70 percent of city dwellers live in crowded slums 2018). Farmers producing for the urban market may (World Bank 2019b). Lack of medical facilities and a experience massive income losses as they are unable to sell generally less healthy population are likely to worsen the their produce during the lockdowns (ILO 2020d).6 Small severity of infections and to limit the ability to treat those informal firms play a critical role in the food supply chain infected (Dahab et al. 2020). e absence of social safety and are likely to run into operational distress and nets will mean that informal market participants will be insolvency due to logistical breakdowns during unable to afford to stay at home, or to adhere to social- containment periods (FAO 2020b; World Bank 2020g; distancing requirements, which will undermine policy ILO 2020b). Since they are among the poorest and most efforts to slow down the spread of COVID-19 (Loayza vulnerable groups of society, informal workers, especially and Pennings 2020). farmers, may have reduced access to food in the event of sharp income losses. Economic consequences. Lockdowns hit informal market participants especially hard in the service sector, where In countries with wide-spread informality, governments informal firms and employment are particularly common may have neither the resources nor the administrative (Panizza 2020). For instance, in South Asia, about one out structures in place to effectively deliver well-targeted relief of four households currently living in poverty is engaged in to those most in need (Muralidharan, Niehaus, and informal activities in the service and construction sectors, Sukhtankar 2016). In a number of EMDEs with which have been significantly affected by closures and widespread informality, existing social benefit systems, disruptions (World Bank 2020j). In addition, women are such as ration cards, are plagued by corruption that overrepresented in service sectors that are subject to high weakens their capacity to deliver support to the most risks during the pandemic: 42 percent of women workers vulnerable (Peisakhin and Pinto 2010; World Bank 2004). are working in sectors such as wholesale and retail trade, compared to 32 percent of men (ILO 2020c). Also, about Policy implications 80 percent of informal firms rely on internal funds and Informality adds to the challenges of dealing with the financing from family and moneylenders for working capital, making them especially vulnerable to the pandemic. Fiscal resources need to be used to strengthen disruption to cashflows caused by mitigation and other the public health system to prevent, contain, and treat the control measures (Farazi 2014). Informal workers too have virus, and support the livelihoods of informal participants limited financial resources to buffer temporary income during the outbreak. As conventional measures—such as losses during the containment period, making them more wage subsidies and tax relief—would hardly reach informal likely to be pushed into poverty.4 e health crisis also firms and workers, innovative emergency measures should causes immediate revenue losses for firms, forcing them to be considered to deliver income support to informal temporarily or permanently close their businesses. is could trigger an unprecedented surge in unemployment 5 In 2014-2016, the Ebola outbreak was followed by an economic crisis in West Africa, triggered by massive health and social spending to cope with the outbreak and compounded by the almost simultaneous 4 It is estimated that in the absence of any alternative income sources, collapse in commodity prices (World Bank 2014; Cangul, Sdralevich, and Sian 2017). lost labor income during the containment period could result in an 6 Farmers may be increasingly impacted by the health crisis, if the increase in relative poverty for informal workers and their families of more than 21 percentage points in upper-middle-income countries and virus spreads further into rural areas (ILO 2020c). In the case of Senegal 56 points in lower and low-income countries (ILO 2020c). This could and India, the inability of informal (or self-employed) workers to earn a lead to further increase in income inequality among workers (ILO living and gain access to health care has led to migration from urban to 2020a). rural areas, which may cause the virus to spread further. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 41 BOX 1.4 How does informality aggravate the impact of COVID-19? (continued) workers, and credit support to informal firms (World group, social group) targeting may help expand Bank 2020g).7 When managing the trade-off between program coverage by identifying vulnerable groups coverage and costs, policymakers need to strive for a that are not on any existing registry (Loayza and maximum reach of informal participants during the crisis, Pennings 2020; World Bank 2019a, 2020a, 2020m). prioritizing temporary and reversable measures to minimize the fiscal burden afterwards. In some situations, • Facilitate access to finance to informal firms. To however, the crisis has exposed gaps in a patchwork of support informal firms, access to finance should be social security facilities that should be filled, perhaps in the provided to help firms stay in business, keep jobs, and context of a through reform. maintain links to local and global value chains (World Bank 2020a, 2020n). Such support could be • Expand existing social safety nets. e first line of provided, potentially under government guarantees, response includes existing social protection and social by commercial banks, microfinance institutions, assistance programs that could be quickly scaled up digital lending platforms, corporate supply chains, or and expanded to provide immediate but temporary other intermediaries. Easier access to credit, relief to families whose earnings have been adversely collateralization of existing properties, and online or affected by the outbreak (World Bank 2020a, 2020e). mobile banking should help owners of informal firms Food aid, cash (or in-kind) transfers, rent or utility to tap the available financial resources, especially with bill waivers, can be particularly effective in countries the help of digital technologies.10 with pervasive informality, as they are easy to implement and have wide reach outside the formal • Consider untargeted and unconditional programs sector (Özler 2020).8 when needed. Targeted programs reduce the risk that payments end up with those who do not need it, • Utilize flexible platforms and technologies to reach especially in the absence of effective targeting and informal workers. Cash transfer and other support delivery systems (Gentilini 2020; Loayza and programs could utilize various existing registries and Pennings 2020). In EMDEs where informality is platforms that have a wider coverage than banking or pervasive and most of the population is either poor or tax systems (Aker et al. 2016; Aron 2018). Such near-poor, simple untargeted transfers may be better. platforms should have sufficient coverages, provide Attempts to exclude the relatively few who are not in possibilities to establish identities, and connect need would likely slow relief down and reduce the accounts with beneficiaries (World Bank 2020m). desired coverage of informal workers (Özler 2020). In Examples include existing national social registries practice, support programs that made formalization a (e.g., Brazil), new online platforms ( ailand and condition of assistance have reduced the number of Brazil), new mobile payment devices (Morocco), and intended beneficiaries and have not offered net databases in health (Morocco) and energy (El benefits to many informal enterprises (Campos, Salvador) sectors. Public transfers via mobile money Goldstein, and McKenzie 2018). During the have been shown to improve food security and assets emergency and the potentially weak recovery right as compared to manual cash transfers in the short- afterwards, the need is to quickly reach as many term (Aker et al. 2016; Haushofer and Shapiro informal workers and firms as possible. To this end, in 2016).9 “Big data” analyses and geographic (or age- many EMDEs, unconditional support programs would be advisable. Given their limited resources, low-income countries would require international funding for the effective implementation of such 7 See the policy section of Chapter 1 for details on the conventional programs. measures. See ILO (2020b) for details on the importance of reducing the exposure of informal workers and their families to the virus and the risks of contagion and while ensuring their access to health care. 8 Where conditional programs exist, waiving conditionality for a period could ensure wider coverage in the context of a health emergency (World Bank 2020a). See World Bank (2020m) for a summary of country examples. 10 Moving to digital wage payments can also contribute to women’s 9 Cash-in and cash-out points—a bank agent, a mobile money agent, economic empowerment, which merits special attention from policy or an automated teller machine—should be provided to ensure the makers when promoting formal business participation (Klapper 2017; success of public transfers via digital platforms (World Bank 2017). Klapper, Miller, and Hess 2019). 42 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 sharp disruptions to real and financial activity in economic and financial distress among commodity many economies and across many sectors. producers. It is less likely but also possible that activity is stronger than expected if a combination Historically, global recessions have tended to be of positive news on the flattening of the curve, followed within a year by a global recovery— new treatments and vaccine development, and characterized by a broad-based rebound in aggressive and effective policy support set the stage activity—as was the case immediately after the for the beginning of a solid rebound in economic global financial crisis. While a global recovery is activity during the second half of 2020. envisioned in 2021, it is likely to be subdued. Output is not expected to return to its previously In light of the large uncertainties around the near- expected level (Figure 1.13.C). This reflects the term outlook, Box 1.3 provides illustrative fact that the pandemic will likely lead to a slow scenarios that describe how the baseline forecast— and incomplete return to activities that require which envisions a 5.2 contraction in global activity face-to-face interaction, such as tourism, as some this year—would be adjusted if various degree of social distancing continues. combinations of these risks to near-term activity were to materialize. In all, depending on the Many firms, households, and governments are ultimate outcome, global output in 2020 might weathering the 2020 global recession by relying on decline by about 4 percent under an upside savings and debt; as a result, a period of scenario, but by more than 7 percent under a deleveraging is likely to follow as they rebuild worst-case scenario (Figure 1.13.D). Even in the precautionary savings and strengthen their balance best-case scenario, the 2020 global recession will sheets. At the same time, the large and sudden loss be about twice as deep as the global financial crisis. of income in 2020 has pushed many individuals into unemployment and companies into There is also a possibility that activity will remain bankruptcy, destroying valuable economic very weak beyond the near term, even after relationships that will take time to rebuild. Lower restrictions are lifted. The aftermath of the spending and continued uncertainty will likely pandemic may cause lasting changes in consumer lead to persistent weakness in investment and the and business behavior, and high debt burdens innovation embodied therein, with consequences could hold back investment. The crisis could for growth and productivity. Moreover, the catalyze a retreat from, and fragmentation of, financial turmoil and commodity price collapse global value chains. Social unrest could erupt. If engendered by the pandemic will likely have these risks materialize, long-term growth prospects significant long-term effects on potential growth will be dampened, and goals for development and in many economies (Chapter 3). poverty reduction would be in severe jeopardy. Risks to the outlook More protracted pandemic The global economy is experiencing one of the sharpest recessions on record and, given the Despite the best efforts of policymakers, a renewed unprecedented nature of the shock, forecasts are surge in cases remains a real possibility, especially subject to a large degree of uncertainty. Downside if there are delays in the development and rollout risks could deepen the recession or delay the of test-and-trace measures and vaccines. Recent recovery. In the short run, the contraction would events and model-based analyses show the toll of deepen if a protracted pandemic required an uncontained pandemics on human and economic extension of control measures. Policy support development (McKibbin and Fernando 2020; might fail to soften the economic blow to Verikios et al. 2011; Burns, van der Mensbrugghe, households and firms to the degree assumed in the and Timmer 2006). A sharp rise in the number of forecast. A prolonged disruption to economic patients requiring hospitalization amid a second activity could exacerbate financial stress, which wave of infections could overwhelm even the most could lead to widespread financial crises. Lower- robust health care systems in advanced economies, for-longer commodity prices could trigger let alone those of EMDEs (Figure 1.14.A). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 43 In these circumstances, the necessary extension of FIGURE 1.14 More protracted pandemic policies to slow the spread of the outbreak and A sharp rise in the number of patients requiring hospitalization amid a save lives would likely precipitate a renewed second wave of infections could quickly overwhelm many EMDE health collapse in private consumption. The ability of care systems. Many households would struggle to access funds to smooth over a longer period of lost incomes. The ability of welfare systems to households to procure the funds needed to cushion such income losses varies considerably by country, and tends to maintain consumption at a basic level would be be lower in commodity-exporting EMDEs and, particularly, LICs. This suggests that a protracted pandemic could severely worsen development further strained, given previous income losses and outcomes. already low levels of savings (Figure 1.14.B). The ability of welfare systems to cushion income losses A. Health indicators in 2017 B. Percent of households able to varies considerably by country, and is considerably procure emergency funds in 2017 lower in LICs (Figures 1.14.C and 1.14.D). Meanwhile, domestic investment would grind to a halt amid extreme uncertainty, and development outcomes would worsen appreciably. Prolonged restrictions would severely limit the ability of fiscal or monetary policy to cushion the blow to activity. Firms would be hampered by a chronic lack of demand, by a growing shortage of inputs, and by the need to provide more space and virus safety C. Unemployment benefit coverage D. Coverage of social insurance and share of temporary workers, by programs among EMDEs precautions for employees. Fiscal stimulus may be EMDE group less effective when some sectors are completely shut down (Guerrieri et al. 2020). In such a case, the result would be a deeper-than-expected global recession, with particularly pernicious effects in economies burdened with more elevated debt-to- GDP ratios. Financial crises and debt burdens Thus far, an extraordinary policy response has Source: Demirgüç-Kunt et al. (2018); Organisation for Economic Co-operation and Development; World Bank. prevented the slowdown in activity from Note: LICs = Low-income countries. A. Unweighted averages. Sample includes 26 advanced economies and 11 EMDEs—Chile, China, becoming a financial crisis. In many countries, Colombia, Costa Rica, Hungary, India, Indonesia, Mexico, Poland, Russia, and Turkey—as data are fiscal measures have replaced a proportion of lost available. B. Figure measures financial resilience by region. Data are based on a household survey on whether incomes and mitigated default risk, loan or not individuals would be able to procure an amount equal to 1/20 of gross national income (GNI) per capita in local currency within the next month. Aggregates are calculated as simple averages. guarantees have helped keep businesses afloat, and C. Figure shows simple averages. Unemployment benefit coverage indicates share of unemployed workers receiving unemployment benefits as reported by the ILO for the most recent year available. liquidity provision by central banks have kept the Share of temporary workers based on most recent survey in the World Bank’s Enterprise Surveys financial system functional. However, should the database. Sample includes 27 commodity exporters, 23 commodity importers, and 5 LICs. D. Aggregates calculated using population weights for the latest available year of data for each impact of the pandemic continue to grow, country. Sample includes 106 EMDEs, of which 60 are commodity exporters, 46 are commodity importers, and 21 are LICs. Coverage of social insurance programs shows share of population financial crises may follow, resulting in a collapse participating in programs that provide old age contributory pensions (including survivors and disability) and social security and health insurance benefits (including occupational injury benefits, in lending, a longer global recession, and a slower paid sick leave, maternity and other social insurance). Click here to download data and charts. recovery. Rising levels of debt have made the global financial system more vulnerable to financial than it was in 2007 (Kose et al. 2020). In market stress. Since the global financial crisis, addition, more than a quarter of corporate debt in global debt has risen to 230 percent of GDP, with the average EMDE is denominated in foreign EMDE debt reaching a historic high of 170 currency. percent of GDP by 2019 (Figure 1.15.A). In almost 40 percent of EMDEs, government debt is The need to service and roll over this sizable debt now at least 20 percentage points of GDP higher increases EMDEs’ vulnerability to spikes in 44 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 1.15 Financial crises and debt burdens debt service costs relative to earnings, and are Prior to the COVID-19 outbreak, many countries had accumulated typically below investment grade (Figure 1.15.D; considerable amounts of public and private debt, much of it denominated BIS 2019). in foreign currencies. The need to service and roll over this debt increases countries’ vulnerability to spikes in borrowing costs, sharp currency movements, and financial stress. Highly leveraged companies in advanced Even if the global financial system avoids a crisis, economies are also vulnerable to rising borrowing costs. the debt accumulated in response to the pandemic may weigh on growth in the longer run. As global A. Global debt B. EMDE sovereign borrowing costs activity rebounds, interest rates are likely to rise. Higher debt service costs must be financed through higher taxes, additional borrowing, or by a reduction in other expenditures. In circumstances of scarce domestic savings, and limited access to foreign funds, additional borrowing may crowd out private investment. In addition, the loosening of macroprudential standards to support credit provision during the crisis may reduce balance sheet transparency and C. Change in nominal broad effective D. U.S. corporate bond yields weaken market discipline in the longer term, exchange rate potentially contributing to future financial instability. Lasting effects on consumers and firms The damage to economic activity from the pandemic could also extend well beyond the near term through a lasting negative effect on both consumers and producers (Chapter 3). Precipitous Source: Federal Reserve Bank of St. Louis; Haver Analytics; International Monetary Fund; J.P. losses of income brought on by lockdowns, firm Morgan; Kose et al. (2017); World Bank. A. Shaded area indicates forecasts. Aggregates are calculated using nominal U.S. dollar GDP closures, and travel restrictions could erode the weights. Sample includes 27 advanced economies and the Euro Area and 153 EMDEs. B. Sample includes 50 EMDEs. Standard deviation calculated over period from January 2, 2015 to confidence of both workers and firms about last observation, which is May 27, 2020. prospects for future labor income and profits. A C. Figure shows the 7-day moving average of the J.P. Morgan nominal broad effective exchange rate for each region. Last observation is May 28, 2020. protracted erosion in confidence could cause D. Last observation is May 28, 2020. Click here to download data and charts. households to cut back on spending and firms to curtail investment, weighing heavily on both aggregate demand and supply (Ilut and Schneider borrowing costs and falls in domestic currency 2014; Bhandari, Borovicka, and Ho 2019). values, both of which have already taken place (Figures 1.15.B and 1.15.C). Large and prolonged For workers, recessions can cause a substantial and flights to safety, or a series of ratings downgrades, permanent loss in lifetime earnings (Oreopoulos, could trigger cascading debt defaults and financial von Wachter, and Heisz 2012). Consumption stress. Full-fledged financial crises would cause would also be reduced if greater uncertainty and a further declines in consumption and investment. higher perceived risk of unemployment permanently increase consumers’ savings rate Financial systems in advanced economies also (Mody, Ohnsorge, and Sandri 2012). Chronically contain pockets of vulnerability. Yields on lower higher unemployment would dampen human quality corporate borrowing have surged, capital accumulation, weighing appreciably on reflecting a higher perceived risk of default, long-term growth. particularly on the rapidly growing share of debt issuances in the form of leveraged loans. These are For firms, greater uncertainty could discourage loans to firms that are highly indebted, have high investment as well as new market entry and G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 45 permanently lower productivity (Aghion and FIGURE 1.16 Retreat from global value chains Durlauf 2014). Subsidized or government- After decades of rapid expansion, the role of global value chains in global guaranteed credit provided in response to the trade has stalled over the past decade. COVID-19 has strained them pandemic may help unprofitable firms to persist, further. Tensions could arise regarding China’s purchase commitments under the Phase One U.S.-China trade agreement. A ramping up of tariffs deterring newer entrants and suppressing on U.S.-Euro Area trade would affect a sizable share of global trade. aggregate productivity (Caballero, Hoshi, and Kashyap 2008). A. Global value chains as a share of B. Change in container throughput global trade volumes Retreat from global value chains The initial spread of the pandemic was fastest in three economies closely integrated in global value chains: China, the Euro Area, and the United States. Global value chains expanded rapidly until the global financial crisis, and decelerated—in some cases reversed—thereafter as business investment decelerated and the pace of trade reform slowed (Figure 1.16.A; World Bank C. China’s purchase commitments D. Bilateral U.S.-China trade and U.S.-Euro Area trade in 2018 2020o). The spread of the pandemic has significantly disrupted the supply of key intermediate inputs and threatened the viability of many transportation companies (Figure 1.16.B). This threatens to lead to a more permanent retreat from global value chains if it bankrupts large numbers of participating companies or causes firms to consider reshoring production (Special Focus). Source: Bown (2020); Institute of Shipping Economics and Logistics; International Monetary Fund; United Nations Comtrade database; World Bank. In addition, global value chains are at risk through A. Data are from World Development Report 2020. financing stress. Export-oriented firms tend to be B. Last observation is April 2020. C. Shaded area indicates purchase commitments in the Phase One trade agreement. larger and more dependent on borrowing to D. Trade is the average of import and export values. Click here to download data and charts. finance operations (Bruno, Kim, and Shin 2018). An inability to service debt due to currently high borrowing costs and weak cash flow could cause firms to exit the market, leaving gaps in value chains that new entrants may not be able to fill in a timely manner. and a further fall in trade at a time when the global economy is already fragile. Global value chains could also come under pressure from renewed trade tensions. Before Trade tensions between other countries have also COVID-19, rising tariffs were already straining been simmering. Tensions between the Euro Area the networks of companies that undertake U.S.- and the United States have so far affected a small China trade, only partly alleviated by the Phase amount of trade, but a tit-for-tat escalation of One agreement. The centerpiece of this agreement tariffs could have effects on global trade on a is China’s commitment to buy $200 billion in similar scale to the disruptions from previous additional products from the United States U.S.-China tensions (Figure 1.16.D). More (Figure 1.16.C). A renewed set of trade broadly, many governments concerned about the restrictions between the two countries, linked to shortages of essential products revealed by the either a shortfall in purchases or policy crisis have imposed trade restrictions to protect disagreements, could trigger a rise in uncertainty domestic supplies of these items. 46 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 1.17 Monetary and financial policies in knowledge diffusion and the economies of scale advanced economies that come with specialization. In the wake of the COVID-19 outbreak, advanced-economy central banks have moved quickly to cut interest rates. In addition, they have ramped up Lower-for-longer commodity prices and other their use of unconventional instruments, to levels beyond those seen during region-specific risks the global financial crisis. Moreover, authorities have put in place currency swap lines to boost global liquidity and buffers against exchange rate volatility, as well as a slew of financial policies to support financial and The global economy remains vulnerable to a banking systems. variety of regional risks, many of them stemming from the pandemic. A persistent period of low oil A. Cumulative change in policy rates B. Unconventional monetary policy in prices could weigh on activity in regions with a major advanced economies large number of oil exporters, particularly MENA. Current prices are below the fiscal break-even level for many producers. Some oil exporters may be able to maintain spending during a lengthy period of low prices, but many more would be forced into pro-cyclical austerity at the same time the domestic economy needs support. More generally, the combination of more persistent effects of the pandemic at the global level, widening domestic C. Monetary policies across advanced D. Financial policies across advanced outbreaks, and lower commodity prices could economies economies result in severe economic damage in commodity- exporting EMDEs, leading to falling investment, declines in consumption and confidence, and procyclical fiscal tightening (Frankel 2011). While a wide range of countries have suffered from domestic outbreaks, some regions are vulnerable to more severe outbreaks and macroeconomic effects. This risk is particularly Source: Bank for International Settlements; Bloomberg; European Central Bank; Haver Analytics; acute for SSA, which lacks the necessary World Bank; Yale Program on Financial Stability. infrastructure, personnel, and government funding A. Average changes in policy rates are weighted by 2018 GDP at 2010 prices and market exchange rates. Sample includes 19 advanced economies. Last observation is May 28, 2020. to contain a wider outbreak. Should economic B. "COVID-19" reflects recently increases in central bank balance sheets since January 2020 and are expressed as a share of 2019 nominal GDP. "Global financial crisis" asset purchases reflect the costs escalate, simmering social unrest in some increase in central bank balance sheets between August 2008 and December 2009 as a share of 2008 nominal GDP. Last observation is May 2020. regions could worsen. C.D. Sample includes 27 advanced economies and the Euro Area. Last observation is May 27, 2020. Click here to download data and charts. Social unrest could also be triggered by food shortages. The number of people facing acute food insecurity could double to more than 260 million in 2020, with serious consequences for health The experience of pandemic-related disruptions (WFP 2020a, 2020b). While global food stocks and persistent trade policy uncertainty may cause are elevated, the combination of falling household some businesses to re-assess whether the gains incomes and currency depreciation is contributing from participation in global value chains are worth to food insecurity in many EMDE regions, the risk of further disruptions. A retreat of export- particularly SSA. Disruptions to the supply of oriented firms, which tend to be more productive agricultural inputs such as chemicals, fertilizers, than their domestically oriented counterparts, seeds or labor shortages could diminish next would have persistent adverse effects on economy- season’s crop (World Bank 2020c). Natural wide productivity (Barattieri, Cacciatore, and disasters and climate events could also result in Ghironi 2019). A large-scale shrinking from global localized shortages, as exemplified by the plague of value chains has the potential to further reduce locusts currently threatening harvests in East already-low growth and productivity, by slowing Africa. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 47 Upside risk: Swift recovery and unleashed FIGURE 1.18 Fiscal policies in advanced economies pent-up demand Many countries have introduced unprecedented and wide-ranging fiscal support programs to offset the impact of the pandemic. These Although global growth will be sharply negative in are providing some relief to vulnerable households and firms, and 2020, it is possible that the lifting of the aggressive cushioning the drop in domestic demand and employment. policy measures put in place in response to the pandemic sets the stage for the start of a robust A. Fiscal support measures in major advanced economies B. Fiscal policies across advanced economies recovery in economic activity at some point in the second half of 2020. A breakthrough in the development of vaccines against COVID-19 is also possible. The promise of an earlier-than- expected end to the pandemic could reinvigorate consumer and investor confidence, unleashing pent-up demand for a broad range of goods and services. This recovery would be boosted by lagged effects from the substantial fiscal and monetary Source: Bloomberg; International Monetary Fund; Morgan Stanley; Yale Program on Financial policy support already in place. The resumption of Stability; World Bank. activity could extend across EMDEs, as they A. Total of measures either planned or under consideration as of May 28, 2020. Share of 2019 nominal GDP. Global financial crisis indicates fiscal measures implemented over the period 2008-09. benefit from a policy-fueled recovery in major B. Sample includes 27 advanced economies and the Euro Area. Last observation is May 27, 2020. Click here to download data and charts. economies, renewed capital inflows, and firming global commodity demand. Policy challenges At the same time, monetary authorities have Challenges in advanced economies implemented extraordinary measures to ease tight credit markets. The Federal Reserve has pledged to Authorities in advanced economies face the urgent purchase a wide array of obligations, including challenge of containing COVID-19, finding the most corporate and municipal debt. The ECB has lifted effective treatments for this new disease, and distributional restrictions on its bond-buying developing a vaccine, as well as containing the program (Figures 1.17.B and 1.17.C). The Bank economic fallout from the pandemic. Monetary of England has begun directly financing authorities in advanced economies are using government expenditures. In the medium term, quantitative easing on an enormous scale and central banks may need to further enhance their developing new tools to bolster demand and financial toolkit to guard against the possibility of market functioning. Large-scale fiscal policy responses persistently weak growth and below-target have been implemented to support activity and inflation (Draghi and Yellen 2020). enhance social safety nets. As the world struggles through the health and economic impacts of the Inflation in most advanced economies was already pandemic, international policy coordination is below target at the start of the year. Weaker critical. In the longer run, advanced economies need demand and the fall in oil prices have added to address gaps in epidemic preparedness and social deflationary pressure, causing inflation safety nets laid bare by the outbreak. This is especially expectations to decline (Conflitti and Cristadoro important in rapidly aging societies. 2018). Recent analysis suggests that a pandemic significantly depresses the natural rate of interest Monetary and financial policies (Jordà, Singh, and Taylor 2020). With nominal rates at their effective lower bound, a combination Advanced economy central banks moved quickly of lower inflation expectations and lower natural to ease monetary policy in the wake of the rates acts as a headwind to growth, further pandemic, bringing policy rates in most advanced complicating the conduct of monetary policy economies close to or below zero (Figure 1.17.A). (Obstfeld, Arezki, and Milesi-Ferretti 2016). 48 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 1.19 Structural policies in advanced economies testing to better assess risks facing the banking Bolstering the resilience and pandemic preparedness of health care sector, while increasing attention to crisis systems is critical in rapidly aging economies. The introduction of flexible management policies to swiftly resolve rising and well-targeted social safety nets, including enhanced unemployment bankruptcies. Moreover, payment systems need to benefits, could help support the recovery and cushion the impact of future severe downturns. be bolstered to ensure the rapid disbursement of relief payments and to ensure a smooth flow of A. Health security in advanced B. Public unemployment spending in transactions environments of limited physical economies 2015 interactions. Fiscal policy Many countries have proposed or implemented large fiscal support packages, covering a wide range of measures aimed at replacing lost household incomes and firm revenues. These include easing or delaying payment obligations for taxes, utilities, rents, or debt service (Figures Source: Global Health Index (2019); Organisation for Economic Co-operation and Development; World Bank. 1.18.A and 1.18.B; CFRTV 2020). In an A. All data are normalized through a scale from 0 to 100, where 100 represents the best health security conditions. Prevention refers to preventing the emergence of pathogens and a potential environment of exceptionally accommodative outbreak. Early detection measures the government's capacity to detect and report spread of epidemics. Rapid response indicates the ability of a government to mitigate the spread of an monetary policy, fiscal policy has a key role in epidemic. The robustness of the health sector indicates the capacity of treating the sick and providing preventing the pandemic from having a protracted safety for health care workers. Sample includes 34 advanced economies. B. Aggregates are calculated as simple averages. adverse effect on activity (Miyamoto, Nguyen, and Click here to download data and charts. Sergeyev 2018). The temporary support measures for households, and grants and loan guarantees to firms should Financial systems are being tested by sharply help mitigate a sharp retrenchment in consumer falling valuations, heightened volatility, and rising spending, preserve employment and job-specific risks of default due to lost incomes, especially in human capital, and prevent widespread locked-down sectors. A number of countries have bankruptcies in key sectors. The expansion of implemented macroprudential measures—among government assistance, in its multiple forms, need other financial policies—to provide the liquidity to be directed to those with the most pressing backstop necessary for domestic banks to offer needs. To this end, governments need to ensure broad loan forbearance to consumers and that its fiscal support reaches those that do not businesses (Figure 1.17.D). These policies include have regular income even in normal times, such as widespread easing of bank capital requirements, the self-employed, temporary workers, and those and encouraging banks to work with borrowers to in the “gig” economy. avoid the need for increasing loan-loss provisions. Authorities have also resorted to prudential Beyond the short run, deficit-financed increases in policies, including an easing of bank liquidity government spending can further support activity buffers below Basel III liquidity coverage ratios by averting a decline in the natural rate of (Benediktsdottir, Feldberg, and Liang 2020). interest—thereby increasing the effectiveness of monetary policy—and simultaneously alleviating a While temporary regulatory easing may be shortage of safe financial assets (Goy and van den appropriate to ameliorate the current crisis, End 2020). Moreover, countries with borrowing policymakers could plan for the appropriate capacity may benefit from additional public restoration of prudential norms once activity has investment, which can boost productivity growth normalized, lest a combination of sharply higher and offset some of the output losses from the vulnerabilities and laxer regulation sow the seeds current recession. of future crises. In particular, prudential authorities need to step up surveillance and stress In the Euro Area, the pressing need of fiscally- G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 49 constrained sovereigns has renewed calls for an FIGURE 1.20 EMDE monetary and financial policy area-wide fiscal response, including the possibility The fall in oil prices and collapse in activity have helped lower EMDE of fiscal burden sharing (Alesina and Giavazzi inflation, on average. However, some countries have experienced 2020; Wyplosz 2020). Once the effects of the substantial currency weakness. EMDE central banks have introduced unprecedented monetary policy measures to support activity and market pandemic have passed and a solid recovery is liquidity, including unconventional policies such as asset purchases. underway, it will be important for advanced EMDEs with asset purchase programs have seen sharper declines in government bond yields. An arsenal of macroprudential policies has also economies to establish credible medium-term been deployed to provide immediate relief to distressed borrowers. plans to ensure the rebuilding of fiscal space for future needs. A. EMDE inflation and oil prices B. External financing needs in 2020, by year-to-date currency depreciation Structural policies The pandemic underscores the critical need to bolster the resilience of health care systems. This is especially important in rapidly aging societies, as older populations face the greatest pandemic- related health risks. In the near term, health policy efforts need to be devoted to mitigating and treating COVID-19, including by supporting the development of a vaccine, providing much needed C. Monetary policy in EMDEs D. Central bank asset purchases in EMDEs support to front-line health workers, and building public trust via timely evidence-based messaging. Once the immediate crisis has passed, govern- ments need to strive to meet their collective International Health Regulations obligations “to prevent, protect against, control and provide a public- health response to the international spread of disease” (WHO 2016; GPMB 2019). Gaps in epidemic preparedness—in particular disease E. Government bond yields following F. Macroprudential and other prevention, detection, and surveillance—need to asset purchase program monetary policies in EMDEs announcements be addressed and health care systems need to be stress-tested routinely, to ensure that there is the necessary capacity to take successful action (Figure 1.19.A). For example, several advanced econ- omies—even those ranked highly in their ability to detect and respond to the outbreak—struggled to develop and disseminate testing kits. More broadly, governments need to strengthen clinical and general health care. In the longer run, efforts Source: Haver Analytics; Institute of International Finance; International Monetary Fund; World Bank; will be needed to create and maintain a resilient Yale Program on Financial Stability. Note: EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the pandemic preparedness system that continuously Caribbean, MNA = Middle East and North Africa, SAR = South Asia, and SSA = Sub-Saharan Africa. A. Aggregates calculated using 2019 real U.S. dollar GDP weights. "Headline" and “Core” samples invests in global surveillance functions, as well as include 15 and 11 EMDEs. Last observation is April 2020. research and development for pandemic vaccines B. Figure shows median values. External financing needs are calculated as the sum of the current account balance and external debt amortization due in 2020 relative to either GDP or foreign (Johns Hopkins Center for Health Security 2019). reserves. EMDEs that are “Above median” reflect those who have depreciated against the U.S. dollar by more than the median EMDE. Sample includes 26 EMDEs. Last observation is May 28, 2020. C. Sample includes 72 EMDEs. Last observation is May 2020. Given the delays associated with the D. Announced central bank asset purchases, expressed relative to nominal local-currency GDP in 2019. Other EMDEs have also announced similar programs; however, their size is dependent on implementation of discretionary fiscal policy and market conditions (Hungary, Poland, Romania, South Africa). Last observation is May 29, 2020. E. Bars show the median percent change in 10-year government bond yields for EMDEs that have the increasingly constrained role of monetary announced asset purchase programs, one day, one week, and one month after the announcement. policy, social safety nets, including enhanced Diamonds show the change in the median EMDE yield on corresponding dates. Sample includes 24 EMDEs of which 10 announced asset purchases. Last observation is May 29, 2020. unemployment benefits, need to be designed to be F. Sample includes 26 EMDEs. Last observation is May 28, 2020. Click here to download data and charts. 50 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 flexible, efficiently administered, and well-targeted services (US$200 billion above its 2017 levels over (Figure 1.19.B). Government-funded policies to the next two years) could lead to renewed trade encourage firms to retain labor in economic tensions, unless a comprehensive and durable downturns, including by supporting and trade agreement is reached. subsidizing shorter working hours, can play an important role in limiting the human cost of the In the longer term, a holistic “one health” downturn and accelerating the subsequent approach to policies that enhance domestic health recovery (Herzog-Stein, Horn, and Stein 2013; security, food safety, and epidemic preparedness Contessi and Li 2013). and transparency is needed to build resilience and restore confidence (World Bank 2019c; El Challenges in emerging market and Zowalaty and Järhult 2020; World Bank 2020a). developing economies Those policies could be complemented by productivity-enhancing reforms that encourage EMDEs face the immediate challenge of providing investment in human capital, reduce regulatory support to front-line health workers, broadening burdens, and address market distortions given the access to medical services to detect and treat COVID- role of state-owned enterprises in the economy. 19, and prioritizing the timely and transparent Reforming the rigid and inefficient “hukou” dissemination of accurate information. Central banks household registration system could be prioritized are confronted with the challenge of implementing (Song 2014; World Bank and DRC 2014). measures to support the flow of credit and preserve the functioning of financial markets during the crisis, EMDE monetary and financial policies while guarding against the potential buildup of systemic risks in the financial sector. Many EMDEs Policymakers in many EMDEs have responded have limited fiscal space to address the crisis, swiftly to the pandemic with a variety of monetary highlighting the role of international assistance. and financial policies, including both traditional Spending will need to be reprioritized to the most and novel measures, as supporting the flow of urgent needs to preserve lives and protect the most credit and preserving the functioning of financial vulnerable. In the longer run, the pandemic markets are critical in alleviating its immediate highlights the urgency of investing in resilient health economic impact. The fall in oil prices, along with care systems, addressing the challenges posed by weak demand in the majority of countries, has widespread informality, and pursuing growth- dampened a pickup in EMDE inflation that enhancing structural reforms. COVID-19 is a global commenced in late-2019 and has helped central crisis that calls for global solutions focused on banks focus on supporting activity (Figure protecting the most vulnerable populations. 1.20.A). In a few economies, however, disruptions to food supply chains or labor shortages are Policy challenges in China pushing food prices up (Colombia, Ecuador, Philippines, Vietnam). In addition, significant China’s sharp economic slowdown and the currency weakness following substantial capital ensuing policy response have exacerbated the outflows could constrain the scope for further country’s challenge of buttressing economic conventional monetary policy easing to support activity without compounding financial stability growth in some economies, particularly those with risks. However, if short-term cyclical risks large external financing needs and limited foreign intensify, available policy space could be re- reserve buffers (Figure 1.20.B; Hofmann, Shim, deployed to stabilize the economy, while and Shin 2020). reinforcing the economy’s shift toward consumption, services, and private sector growth. In the face of severe economic disruptions and Global economic and trade flow disruptions could generally contained inflation pressures, EMDE complicate the implementation of the U.S.-China central banks have embarked on monetary policy Phase One deal. Failure by China to meet its easing at an unprecedented scale (Figure 1.20.C; purchasing commitments of U.S. goods and Brandao-Marques et al. 2020). A number of G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 51 central banks sharply lowered their policy rates, risks over the medium to long term, central banks and some have complemented this easing with could communicate their intentions to primarily unconventional monetary policies such as asset rely on conventional policy tools once the purchase programs—a first for most EMDEs economy recovers and activity normalizes. (Chile, Colombia, Hungary, India, Indonesia, Philippines, Poland, Romania, Thailand, Turkey, A variety of macroprudential policies have been South Africa; Figure 1.20.D). These purchases— employed in a targeted fashion to help ease which are mostly of government bonds but also funding stresses and support credit provision private sector securities—helped stabilize yields of (Figure 1.20.F). In many EMDEs, banking sectors longer-dated securities which had been rising entered the current crisis better capitalized than sharply amid liquidity strains in many countries, before the global financial crisis, allowing despite policy rates being lowered (Chile, regulators to relax capital requirements including Colombia, South Africa, Turkey; Figure 1.20.E; countercyclical and conservation buffers, as well as Arslan, Drehmann, and Hofmann 2020; Hartley capital surcharges that were imposed on and Rebucci 2020; Hördahl and Shim 2020). systemically important financial institutions (Fang et al. 2020). In a number of economies, regulatory To help accommodate slowing economic activity, forbearance has been used to ease liquidity EMDE central banks with sufficient monetary coverage and funding requirements, and to relax policy room could ease their stances further, while loan-loss provisioning standards. To help preserve reaffirming long-term inflation objectives. The banks’ capital, dividend payments and executive effectiveness of conventional monetary policy bonuses have been prohibited in a few countries. easing may, however, be reduced while lockdowns To help provide immediate relief to distressed are still in place. Monetary policy easing could also borrowers, interest rate caps have been imposed in be less effective in economies with large informal some countries, while commercial banks in others sectors and low financial inclusion (Alberola-Ila have been encouraged to offer temporary loan and Urrutia 2019; Box 1.4). In economies where repayment holidays to firms and households. the solvency of private sector enterprises and Some countries have also prohibited the households are at risk due to their cash flows being reclassification of distressed borrowers for the disrupted, or banks’ appetite to lend wane, central duration of the pandemic. banks could complement conventional monetary Regulators’ adjustments of macroprudential policy easing with additional liquidity provision to policies may help prevent an adverse feedback loop enable banks to continue extending credit to these where persistently weak activity as a result of the entities (Didier et al. 2020). pandemic causes a rise in bankruptcies and non- Central banks in EMDEs may face challenges performing loans that erode bank asset quality, arising from their asset purchase programs, which leading to increasingly constrained bank lending are a new addition to the monetary policy toolkit that further weighs on growth and hinders the for most EMDEs. These policies could potentially projected recovery. However, policymakers would be ineffective in the absence of credible policy need to carefully balance these actions— frameworks and transparent communication. particularly those that relate to extended Moreover, if investors fear that the central bank’s regulatory forbearance and deviate from minimum independence is threatened and the institution is prudential standards—against the potential being used to fund large fiscal deficits, these buildup of greater systemic risks in the financial policies may result in unsustainable increases in sector (Drehmann et al. 2020; Garcia Mora inflation, risk premia and government bond yields, 2020). Committing to time-bound and and contribute to capital outflows, exchange rate transparent policy actions that are based on depreciation, and financial instability. Given these rigorous risk assessments could help mitigate some risks, asset purchase programs in EMDEs may of these risks. In the event that prolonged strains remain a tool reserved for extreme shocks, such as threaten to collapse financial sectors, governments the current global recession. To alleviate these may need to recapitalize troubled institutions, 52 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 1.21 EMDE fiscal policy while committing to divest ownership over the Many EMDEs have implemented substantial fiscal measures to help stem medium term once stability has been restored (Al the pandemic’s impact on activity and increase public support to the most Tuwaijri et al. 2020). In general, once economic vulnerable, despite entering the crisis with limited fiscal space. In EMDEs with narrow buffers, policymakers can reprioritize spending to manage activity begins to normalize, EMDE policymakers fiscal sustainability concerns and to boost spending efficiency. Energy would need to carefully withdraw the large-scale exporters will have to confront narrowing budgetary space as oil prices policy stimulus provided during the crisis without remain below break-even prices. The recent plunge in oil prices could provide EMDEs with the opportunity to reduce or eliminate energy endangering the recovery. subsidies, to discourage wasteful energy consumption, and to reallocate spending to programs that better target the poor. EMDE fiscal policy A. Size of economic support B. Primary fiscal balance in 2019 Many EMDEs have announced fiscal policy measures in 2020, by EMDE region versus 2021, by EMDE group support to confront the immediate health crisis and preserve lives, as well as to limit the magnitude of the economic contraction and hasten the eventual recovery. At least three-fourths of EMDEs have increased their funding of health care systems to expand testing and hospital capacity. Fiscal support has targeted the expansion of social protection coverage, including wage subsidies to protect jobs, cash transfers to households, and increased access to C. Discretionary fiscal support D. Fiscal and external break-even measures in 2020, by debt levels prices in 2020 unemployment benefits (Figure 1.21.A). Measures have also been implemented to ensure continued access to critical public service delivery to vulnerable groups, including low-income households and the elderly (Argentina, Indonesia, Pakistan, Russia, the Philippines). Fiscal space, however, is constrained in some of the worst- affected EMDEs, limiting the scope of fiscal support and highlighting the need for improving the allocation and efficiency of spending (Figure E. Fiscal sustainability gaps F. Energy subsidies in 2018 1.21.B). To support firms, policymakers have provided access to credit, loan guarantees, and vouchers or cash for critical employers and affected sectors such as tourism. Temporary revenue-side measures to ease the financial burden on households and firms have complemented these efforts and include tax filing and payment deferrals, income and VAT Source: Air Quality Open Data Platform; International Energy Agency; International Monetary Fund; Kose et al. (2017); World Bank. tax cuts, and social contribution reductions. Note: EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Announced government support packages have Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. A.C. Total measures either planned or under consideration as of May 29, 2020. averaged 5.4 percent of GDP in EMDEs, and are A. Aggregates are calculated using 2019 nominal U.S. dollar GDP. Sample includes 29 EMDEs. B. Figure shows median values for each EMDE group. “Other EMDEs” indicates EMDEs not included at least 10 percent of GDP in some cases (India, in other categories. “Tourism reliant” indicates tourism as a share of GDP above the EMDE median value. “Oil exporters” and “metal exporters” are defined in Table 1.2. Sample includes 79 EMDEs. Malaysia, Poland, Qatar, South Africa, Thailand). C. Figure shows median values. Above (below) median indicates countries with government debt-to- GDP ratios above (below) a median of 51 in 2018. Sample includes 48 EMDEs. While most EMDEs have managed to implement D. Break-even prices refer to the oil price at which either the fiscal or current account balance is zero. E. Fiscal sustainability gaps are measured as the difference between the overall balance and the discretionary fiscal support packages, countries debt-stabilizing overall balance under current condition. A negative (positive) bar indicates government debt is on a rising (falling) trajectory. Yellow whiskers indicate the interquartile range. with more policy space have generally provided Data for 2020 are World Bank staff estimates based on the April 2020 Fiscal Monitor. F. Sample includes 37 EMDEs, of which 23 are oil exporters and 14 are oil importers. greater support. Packages in countries with wider Click here to download data and charts. space are almost twice the average of those in G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 53 countries with narrower space (Figure 1.21.C; FIGURE 1.22 EMDE structural policies Balajee, Tomar, and Udupa 2020). This latter A rising frequency of biological disasters in EMDEs, including epidemics, group includes many industrial commodity highlights the critical need for resilient health care systems, and for exporters, reflecting the loss of revenue due to the improved emergency preparedness. Extensive informality across EMDEs is associated with worse economic and fiscal outcomes, deficient health and collapse in commodity prices. Expenditures have sanitation systems, and weaker social safety nets. SMEs across EMDEs been prioritized and reallocated toward income face significant financing constraints, including limited access to credit. COVID-19 will likely dampen long-term growth, as exemplified by previous support and health spending to conserve space severe epidemics. (Algeria, Brazil, Ghana, Nigeria, Saudi Arabia). A. Frequency of biological disasters in B. EMDE health security, by region EMDEs with available fiscal space and affordable EMDEs, 1960-2018 financing conditions could consider additional stimulus if the effects of the pandemic persist. This could be accompanied by measures to help credibly restore medium-term fiscal sustainability, including those that strengthen fiscal frameworks, increase domestic revenue mobilization and spending efficiency, and raise fiscal and debt transparency (IMF 2020a; Koh and Yu 2019; Munoz and Olaberria 2019; Tandberg and Allen 2020). The timing and sequencing of additional C. Social insurance D. Access to sanitation stimulus measures should also be carefully executed to optimize limited government resources—liquidity injections, for instance, are best implemented before critical firms or industries default, but policies aimed at bolstering demand may be more effective after lockdowns are lifted (Blanchard 2020; Izvorski et al. 2020). Government debt, however, has reached a record high of 51 percent of GDP in EMDEs and the E. Firms without access to credit F. Effect of epidemics on output fiscal surpluses achieved prior to the global financial crisis have turned into deficits; as a result, many EMDEs have limited room to ease their fiscal stances (Kose et al. 2020; Ruch 2019). Oil- exporting EMDEs face the added challenge of a collapse in revenue from oil extraction, with oil prices now well below their average fiscal break- even points (Figure 1.21.D; Arezki and Nguyen 2020). Deficits in these economies were already rising prior to the pandemic and will likely further Source: Bosio, Djankov, and Jolevski (2020); Elgin et al. (forthcoming); EM-DAT; Global Health Index (2019); World Bank; WHO/UNICEF Joint Monitoring Programme (JMP) for Water Supply, Sanitation deteriorate, placing debt on a more unsustainable and Hygiene. B.E. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the path (Figure 1.21.E; World Bank 2020p). Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. A. Biological and epidemic episodes follow EMDAT definitions. The sample includes 35 advanced economies and 135 EMDEs, of which 27 are LICs. Pressures on EMDE public balance sheets could B. Figure reports overall average for each EMDE region compared to the advanced economy be magnified by tighter external financing average. Maximum value of index is 100. C. Adequacy of social insurance programs is measured in percent of total welfare of beneficiary conditions and rising debt service costs. Caution is households. C.D. Bars are group means calculated for EMDEs with high (low) informality—i.e., the highest especially warranted where public and private (lowest) one-third of EMDEs by DGE-based informal output measures—over the period 2010-16. *** indicates the group differences are not zero at 10 percent significance level. Refer to Box 1.4 for balance sheets are intertwined, especially if adverse details. financing conditions trigger the realization of E. Aggregates calculated using U.S. dollar GDP weights at 2010 prices and market exchange rates. F. Bars show the estimated impacts of the 4 most severe epidemics on output levels relative to non- contingent liabilities (Bova et al. 2016; Feyen and affected EMDEs. Orange lines display the range of estimates with 90 percentile significance. Sample includes 30 advanced economies and 86 EMDEs. Refer to Box 3.2 in Chapter 3 for more details. Zuccardi 2019). Narrower fiscal space and tighter Click here to download data and charts. 54 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 financing conditions highlight the need for prevent and to better cope with future health and temporary debt relief and international assistance economic crises (Figure 1.22A; World Bank to help EMDEs confront the immediate health 2020g). It also highlights the formidable crisis head on, protect jobs and workers, and to challenges of weaker health systems, widespread avoid procyclical fiscal policy, which could informality, and small and medium enterprise otherwise exacerbate the downturn (Loayza and (SME) financing constraints in EMDEs. The deep Pennings 2020; Hevia and Neumeyer 2020). contractions caused by the pandemic, and their adverse consequences for potential output, In light of limited fiscal space, EMDEs may want underscores the need for a renewed emphasis on to preemptively identify priority expenditures that structural reform to set the stage for sustained need to be safeguarded if financing shrinks, such economic growth. So too does the increased as education and health measures, as well as lower- frequency of extreme weather events, which are a priority, poorly targeted, or inefficiently spent growing threat to food supplies, housing, and expenditures that yield lower growth dividends infrastructure, especially in already-deprived and that can be delayed or suspended (IMF 2018; communities. Herrera Aguilera and Ouedraogo 2020). While lockdowns persist, governments should focus on Pandemic preparedness of health systems mitigating the damage from interruptions in household and corporate incomes (Blanchard Since 2003, there have been several serious 2020). A supplemental budget can also be epidemics—including of SARS, Ebola, avian flu, considered, especially if increased access to public and now COVID-19. These experiences under- services, including food banks, and expanded score the importance for EMDEs to provide social safety nets are needed to protect the most broad-based access to medical services to identify vulnerable. and treat acute symptoms during health emergencies. As part of comprehensive measures Steps can be taken to bolster EMDE fiscal space to alleviate the stress on health systems, front-line and flatten the debt curve once the immediate health workers need to be supported with crisis subsides. EMDEs that temporarily cut taxes protective equipment and strengthened hazardous- or suspended fiscal rules should provide clear exit waste management. At the same time, govern- strategies to preserve the credibility of medium- ments need to seek to prioritize the timely and term fiscal frameworks (Gbohoui and Medas transparent dissemination of accurate information 2020). These steps can be complemented by better on infections in order to build public trust. prioritizing public expenditures and enhancing the Emergency health policies must be adapted to the review of public investment projects. The recent unique challenges of many EMDEs, including downturn in oil prices also provides a window of weaker health systems, crowded housing con- opportunity to put in place mechanisms that ditions, and limited access to water and sanitation. permanently eliminate costly and poorly targeted After taking stock of the current pandemic, energy subsidies, particularly in EMDE oil enhancing health security in EMDEs will first exporters where these subsidies, on average, require the development of national epidemic accounted for 4.2 percent of GDP in 2018 (Figure preparedness strategies which highlight existing 1.21.F; Coady et al. 2017; Guénette 2020; IEA gaps (Figure 1.22.B; Johns Hopkins Center for 2015; Stocker et al. 2018; Chapter 4). Reductions Health Security 2019). Funding can be allocated in energy subsidies could provide longer-run in national budgets to implement these strategies efficiency dividends by freeing resources to boost and address any gaps. In general, funding for investment in green energy and technology. epidemic preparedness tends to be allocated in EMDE structural policies waves during crises rather than smoothly and efficiently over time; therefore, it is vital that The pandemic, coupled with the rising frequency countries routinely stress-test their health systems of biological and other natural disasters, highlights to monitor progress and demonstrate the system’s the critical need to invest in health care capacity to viability in a crisis (Yamey et al. 2017). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 55 More broadly, authorities need to take steps to dependent on internal funds and moneylenders strengthen clinical and general health care, invest for working capital (Farazi 2014). More broadly, in access to clean water and sanitation, and tighten SMEs across EMDEs face significant financing food safety standards. In particular, boosting constraints as higher information asymmetries investment in the foundational capacity for caused by their lack of established track records national health systems—by developing a robust and publicly available information discourage public health workforce—is critical for enhancing bank lending (Figure 1.22.E; Abraham and long-term preparedness and the quality of national Schmukler 2017). health outcomes (Johns Hopkins Center for Health Security 2019). Maintaining effective In light of this, policy support is needed to public health safety nets—including unrestricted increase the availability of finance for urgent access to emergency medical care—will also be capital needs. Governments could temporarily essential to removing barriers to testing and incentivize lenders—including commercial and treatment. A lesson from the current crisis is that domestic development banks and digital investments in public health infrastructure must platforms—to redirect credit to SMEs through be continuously sustained, even during quiet risk-sharing measures such as public credit times, when it may appear that the system has guarantees. In doing so, policies could be put in redundant capacity. In an epidemic, such place to increase funds available for financial redundancy pays ample dividends. sector institutions without access to central bank liquidity facilities. In addition, governments could Informality and SME financing constraints consider temporary equity injections to prevent highly productive firms from exiting the market. Informality is widespread across EMDEs, with the Authorities could implement well-regulated credit informal sector, on average, accounting for about a information sharing mechanisms to minimize third of official GDP and about 70 percent of information asymmetries. Well-enforced collateral total employment in EMDEs (World Bank laws enhance the use of movable assets as 2019a). Extensive informality is associated with collateral, and thereby reduce risks to lenders. For weaker economic and fiscal outcomes, reduced the duration of the crisis at least, government efficacy of monetary policy, deficient health and might consider public credit guarantees as a means sanitation systems, and weaker social safety nets to redirect credit to SMEs, with sunset clauses. (Figures 1.22.C and 1.22.D; Box 1.4; Alberola-Ila and Urrutia 2019). This leaves countries with Given the substantial challenge posed by widespread informality severely constrained in widespread informality and SME financing their ability to address the health, economic and constraints, pandemic-control measures will need social challenges of COVID-19. A general lack of to be complemented with measures that support adequate medical infrastructure may worsen the the income of the most vulnerable firms and severity of infection outcomes (Dahab et al. households, including those households that have 2020). At the same time, economic pressures been pushed into poverty by the crisis. Authorities associated with poverty—which is expected to rise also need to preserve access to essential health and sharply as a result of the pandemic—may nutrition services. Similarly, maintaining access to undermine efforts to slow the spread of the virus education is critical for avoiding irreversible losses (Lakner et al. 2020; Loayza and Pennings 2020). in long-term human capital. In countries lacking The impact is likely to be particularly severe on adequate income redistribution systems, policies women, since they have an outsized participation such as untargeted cash transfers, public works in informal activities. programs and food aid may minimize delays in providing assistance. The delivery of cash transfer The sudden stop of activity caused by lockdowns and other support policies can be enhanced with and other mitigation measures would have dire the use of digital technologies, including mobile consequences for many firms in EMDEs. Forced payment platforms (Box 1.4; Pazarbasioglu et al. closures could quickly lead to the widespread 2020). Prompt financial support from the collapse of informal firms, as they are highly 56 CHAPTER 1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 international community can play a key role in shocks (Chapter 4). Lastly, policymakers can financing these efforts in countries without the develop new insurance frameworks that enhance necessary fiscal capacity. the quality and transparency of risk sharing during systemic economic disruptions. Setting the stage for a robust recovery Global coordination and cooperation Beyond the unprecedented near-term damage, COVID-19 will likely dampen long-term growth, The pandemic underscores the crucial value of as exemplified by previous severe epidemics global coordination and cooperation in public (Figure 1.22.F; Chapter 3). The long-run loss in health as well as in economic policy. Cooperation output growth would be compounded if the across governments, and between governments, current recession triggers financial crises. For these non-governmental organizations, and the private reasons, once the immediate health emergency sector is necessary to help build domestic capacity abates, setting the stage for a robust recovery will to detect and respond to health crises, as well as require policies that deal with the lingering effects develop and disseminate global public goods such of the pandemic. as vaccines. Global coordination is vital for transferring health supplies and expertise where The immediate need is to implement a they are most needed in the near term, and to comprehensive set of policies to alleviate solvency develop a coordinated exit strategy from strains, and, where necessary, prevent bankruptcies restrictions on the free movement of people in the of firms that will be viable in the longer run medium term. Moreover, the unprecedented without infringing on the integrity of private common economic shock adds to the growing ownership. Where possible, support can be evidence of the gains from coordinating monetary employed to invest in digital infrastructure to and fiscal actions across countries (Bodenstein, ensure uninterrupted provision of critical services Corsetti, and Guerrieri 2020; Triggs 2018). In late to a broad set of households, including those in March, the G7 pledged to “do whatever is the informal sector, while facilitating wider necessary to restore confidence and economic adoption of these technologies. growth and to protect jobs, businesses, and the In the medium term, a renewed emphasis on resilience of the financial system” (U.S. structural reforms and inclusive and Department of the Treasury 2020). environmentally sustainable post-disaster Many fiscally constrained EMDEs will benefit investments, as well as the development of sound from the coordinated support of G20 countries fiscal policy frameworks, institutions, and business and multilateral organizations. International environments, can help establish a robust and financial institutions can adopt a two-phase resilient recovery (Hallegatte, Rentschler and approach to their policy response. In the first Walsh 2018). Structural reforms need to be phase, rapid policy support can be deployed to carefully calibrated to unique country help provide the fiscal resources necessary to circumstances, as productivity gains will heavily protect the most vulnerable, keeping firms and depend—among other factors—on their timing, jobs in place. For example, bilateral creditors mix and sustainability. Such reforms include might suspend debt payments from low-income policies to promote investment in physical and countries that request forbearance. In the second human capital, including green infrastructure; phase, policy should focus on ensuring a strong reallocation toward more productive sectors; and and sustainable economic recovery, seizing the greater rates of technology adoption (World Bank opportunity to increase investment in 2020p). Reforms to reduce excessive regulations infrastructure, human capital, and growth- and litigiousness could also be pursued. In the case enhancing institutions—each of which has an of oil exporters, persistently lower world oil prices important public health dimension. reinforce the need for economic diversification, subject to market forces. This would increase long Recently, many countries have responded to -term growth and enhance resilience to external increasing domestic demand for food and medical G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 1 57 equipment with export restrictions. At the obstruct supply chains for essential items. macroeconomic level, these policies, if applied Facilitating the flow of remittances is also over long periods, are likely to increase price important. Good outcomes are more likely when volatility and dampen growth (Barattieri, countries work together to support increased Cacciatore and Ghironi 2019; Laborde, Lakatos, production, and cooperate to ensure that resources and Martin 2019). Authorities need to avoid the flow to where they are most needed. More temptation of damaging isolationist or tit-for-tat broadly, upholding a stable rules-based protectionist policies. Critically, governments need international trading system will be critical to to avoid restricting exports of necessary food and launching a strong and durable global economic medical products. In view of closely integrated recovery (IMF 2020b). trade in intermediate inputs, such measures can TABLE 1.2 Emerging market and developing economies1 Commodity exporters2 Commodity importers3 Albania* Lao PDR Afghanistan Pakistan Algeria* Liberia Antigua and Barbuda Palau Angola* Madagascar Bahamas, The Panama Argentina Malawi Bangladesh Philippines Armenia Malaysia* Barbados Poland Azerbaijan* Mali Belarus Romania Bahrain* Mauritania Bhutan Samoa Belize Mongolia Bosnia and Herzegovina Serbia Benin Morocco Bulgaria Seychelles Bolivia* Mozambique Cabo Verde Solomon Islands Botswana Myanmar* Cambodia Sri Lanka Brazil Namibia China St. Kitts and Nevis Burkina Faso Nicaragua Comoros St. Lucia Burundi Niger Croatia St. Vincent and the Grenadines Cameroon* Nigeria* Djibouti Thailand Chad* Oman* Dominica Tonga Chile Papua New Guinea Dominican Republic Tunisia Colombia* Paraguay Egypt Turkey Congo, Dem. Rep. Peru El Salvador Tuvalu Congo, Rep.* Qatar* Eritrea Vanuatu Costa Rica Russia* Eswatini Vietnam Côte d’Ivoire Rwanda Fiji Ecuador* Saudi Arabia* Georgia Equatorial Guinea* Senegal Grenada Ethiopia Sierra Leone Haiti Gabon* South Africa Hungary Gambia, The Sudan* India Ghana* Suriname Jamaica Guatemala Tajikistan Jordan Guinea Tanzania Kiribati Guinea-Bissau Timor-Leste* Lebanon Guyana Togo Lesotho Honduras Turkmenistan* Maldives Indonesia* Uganda Marshall Islands Iran* Ukraine Mauritius Iraq* United Arab Emirates* Mexico Kazakhstan* Uruguay Micronesia, Fed. Sts. Kenya Uzbekistan Moldova, Rep. Kosovo West Bank and Gaza Montenegro Kuwait* Zambia Nepal Kyrgyz Republic Zimbabwe North Macedonia * Energy exporters. 1. Emerging market and developing economies (EMDEs) include all those that are not classified as advanced economies and for which a forecast is published for this report. Dependent territories are excluded. Advanced economies include Australia; Austria; Belgium; Canada; Cyprus; the Czech Republic; Denmark; Estonia; Finland; France; Germany; Greece; Hong Kong SAR, China; Iceland; Ireland; Israel; Italy; Japan; the Republic of Korea; Latvia; Lithuania; Luxembourg; Malta; Netherlands; New Zealand; Norway; Portugal; Singapore; the Slovak Republic; Slovenia; Spain; Sweden; Switzerland; the United Kingdom; and the United States. 2. An economy is defined as commodity exporter when, on average in 2012-14, either (i) total commodities exports accounted for 30 percent or more of total goods exports or (ii) exports of any single commodity accounted for 20 percent or more of total goods exports. Economies for which these thresholds were met as a result of re-exports were excluded. When data were not available, judgment was used. This taxonomy results in the classification of some well-diversified economies as importers, even if they are exporters of certain commodities (e.g., Mexico). 3. 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Although subject to significant uncertainty, regional growth is expected to rebound to 6.6 percent in 2021 as the pandemic subsides, global import demand recovers, and capital flows to the region normalize. However, the balance of risks to the outlook is firmly tilted to the downside. Key risks include a longer-than-expected duration of the pandemic, a prolonged period of heightened financial stress, and a sharper- and longer-than-expected contraction in global trade compounded by re- escalating trade tensions. Recent developments declined by 14 percent y/y. Activity started to recover in early March as the domestic lockdown COVID-19 has inflicted a high human toll was relaxed. As of April, industrial production has worldwide and triggered a severe regional and returned to growth and vehicles sales posted the global economic downturn (Figure 2.1.1). It has first increase since June 2018. However, affected the regional economy through both companies are facing funding shortages and domestic and external channels. The necessary but plummeting external demand. The recovery in economically costly lockdowns, which were first services sector is lagging reflecting the lingering imposed in China, have become widespread and impacts of the outbreak. have led to a sharp contraction of economic In the rest of the region, economic conditions activity and an abrupt tightening of global deteriorated in March and remained stressed until financing conditions. Regional commodity mid-2020Q2 reflecting national lockdowns and exporters were also hit by a sharp decline in negative spillovers from the rest of the world. An commodity prices (Indonesia, Malaysia, abrupt tightening of global financing conditions in Mongolia, Lao People’s Democratic Republic, early March triggered sudden capital outflows Papua New Guinea, Solomon Islands, Timor- from the region; a spike in regional interest rate Leste). spreads; and a sharp adjustment of local currencies In China, where highly restrictive measures led to and asset prices (World Bank 2020b). The an almost complete halt in activity in some sectors increase in borrowing costs in EAP has been and regions in February, output is estimated to generally less pronounced than in other emerging have contracted by 34 percent q/q, saar in the first market and developing regions reflecting robust quarter—the first contraction since 1976 (Figure monetary, prudential, and fiscal policy frameworks 2.1.2). Industrial profits fell sharply by 37 percent in major regional economies (Special Focus). y/y in 2020Q1, fiscal revenues of the consolidated Factory closures and the disruption of the public finance and government fund budgets production of intermediate inputs have had a negative impact on supply chains in Cambodia, Malaysia, Myanmar, and Thailand. Domestic Note: This section was prepared by Ekaterine Vashakmadze. restrictions and external spillovers have resulted in Research assistance was provided by Juncheng Zhou. a dramatic plunge in consumption, investment, 70 CHAPTER 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 2.1.1 EAP: Recent developments production, and trade flows, leading to the In China—the initial epicenter of COVID-19—GDP contracted in 2020Q1. In sharpest fall in activity since the Asian financial the rest of the region, economic conditions deteriorated in March crisis for most countries. reflecting lockdowns and external spillovers. The region has suffered sharp spikes in interest rate spreads and large capital outflows. All major regional economies have implemented sizable macroeconomic policy support The outbreak appears to have largely subsided in measures to mitigate the impact of the outbreak. Activity in the region China, Malaysia, and Vietnam but has not yet excluding China bottomed out in mid-2020 as domestic lockdowns eased. peaked in some regional economies (Indonesia, the Philippines). China and Vietnam have relaxed A. GDP growth B. Manufacturing PMI, China and EAP excl. China the national lockdowns but kept selective restrictions in place, to prevent a second wave of outbreaks. Malaysia has begun gradual easing of the lockdown by allowing more economic sectors to operate. All major regional economies have implemented large macroeconomic policy support to mitigate the economic impact of the outbreak. In China, the PBOC has provided substantial liquidity C. EMBI bond spreads, EAP excl. D. Monetary policy support measures China support, cut policy rates, and lowered reserve requirements to stem market sell-offs and support businesses. Other regional economies have also cut monetary policy rates, provided liquidity and credit facilities, and embarked on various asset purchase programs (Indonesia, Malaysia, the Philippines, Thailand). Key fiscal policy measures in China included emergency health spending, tax breaks, direct E. Economic policy support F. Mobility trends transfers to vulnerable households, and deferrals and special local government bond issuances to boost investment, totaling 5.4 percent of GDP. Malaysia and Thailand have both implemented extraordinary economic support packages equivalent to around 17 and 13 percent of GDP respectively, which included direct fiscal stimulus packages around 6 percent of GDP in both countries focused on public welfare and health Source: Apple Maps; Haver Analytics; International Monetary Fund. care provision, loan guarantees, and other business A. Quarter-on-quarter annualized change of real GDP in 2015 prices. EAP excl. China includes Indonesia, Malaysia, Philippine, Thailand, and Vietnam. Blue and red horizontal lines indicate support initiatives. Indonesia and the Philippines average GDP growth in China and in the region excl. China in 2000-19. Orange lines denote minimum-maximum range of the sample. have announced sizable fiscal stimulus packages B. Reading below 50 indicate contraction in economic activity. Horizontal line indicates expansionary threshold. EAP excl. China is a weighted average of Indonesia, Malaysia, Myanmar, Thailand, ranging around 3-5 percent of GDP. Philippines, and Vietnam. Last observation is May 2020. C. Taper T. refers to taper tantrum episode from 5/23/2013 to 1/24/2014. China SM refers to stock market crash episode from 6/12/2015 to 2/12/2016. Trade Tension refer to a period of heightened tension between China and the U.S. from 3/22/2018 to 10/30/2019. COVID-19 covers a period from Outlook 2/3/2020 to 05/15/2020. EAP excl. China sample includes Indonesia, Malaysia, Philippine, and Vietnam. Orange lines denote minimum-maximum range of the sample. Red diamonds denote EMDE averages. EMDE average is based on J.P. Morgan Emerging Market Bond Index (EMBI). Regional GDP growth in 2020 is projected to fall D. Red bars denote cumulative policy rate cuts since the outbreak. Green lines denote cumulative cuts in reserve requirement ratio. Orange diamonds denote recently announced central bank asset to 0.5 percent—down from 5.9 percent in 2019, purchases expressed relative to respective 2019 nominal GDPs. Last observation is June 02, 2020. E. Blue bars denote estimated direct fiscal support packages announced by fiscal authorities 5.2 percentage points below previous forecasts, between late-January 2020 and late-May. Red bars denote other economic support packages announced by fiscal authorities since the outbreaks. Both are expressed as share of nominal GDP in and the lowest rate since 1967 (Figure 2.1.3; 2019. Last observation is June 02, 2020. Table 2.1.1). Regional growth is expected to F. A relative volume of direction requests compared to a baseline volume on January 13th, 2020. Last observation is May 31, 2020. gradually recover during the second half of 2020 Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 EAST ASIA AND PACIFIC 71 and return to around trend by late 2021. Growth FIGURE 2.1.2 Recent developments, China in China is projected to slow to 1 percent in Following a collapse in 2020Q1, China’s output has bottomed out. Various 2020—4.9 percentage point below January indicators, including domestic flights, have rebounded, but the outlook remains uncertain amid contracting global activity. Exports contracted in forecast and the lowest rate since 1976—reflecting 2020Q1, because of factory closures in China followed by a plunge in the significant disruptions caused by COVID-19, global demand. Bond spreads have widened but less than in other and then rebound above its trend pace, to 6.9 emerging market and developing economies (EMDEs). The exchange rate has remained broadly stable in contrast to that in other EMDEs. Total debt percent in 2021, as lockdowns are lifted around is estimated to have increased by about 17 percentage points in 2020Q1 the world. reflecting fiscal and monetary policy support amid economic contraction. Growth in EAP excluding China is projected to A. GDP, industrial production, retail B. Domestic flights sales contract by 1.2 percent in 2020—the first contraction since the 1998 Asian financial crisis— and then rebound to 5.4 percent in 2021 as the effects of the virus dissipate. Among the major economies, the largest downward revisions for 2020 are in Malaysia, the Philippines, and Thailand (7.6, 8.0, and 7.7 percentage point below January forecast respectively; Table 2.1.2). This reflects the significant impact of domestic lockdown measures, as well as the impact from C. Trade flows D. Exchange rate reduced tourism, disruption of trade and manufacturing sector, the spillovers from financial markets, and lower commodity prices in Malaysia (World Bank 2016, World Bank 2020c). Growth forecast downgrades are also sizable in some smaller export and tourism driven economies and in Pacific Islands with the limited policy space to mitigate the impact of the outbreak (Cambodia, Fiji, Lao PDR, Palau, Samoa, E. Bond spreads F. GDP growth and total debt Solomon Islands, Timor-Leste, Tonga, and Vanuatu). The downgrades reflect high exposure of these countries to the rest of the world through tourism (Fiji, Palau, Samoa, Vanuatu) and remittances (Samoa and Tonga), but also commodity exports (Fiji, Lao PDR, Solomon Islands), as well as their limited policy space, and the devastating impact of the cyclone Harold in April 2020 (Fiji, Solomon Islands, Tonga, and Vanuatu). Source: Cirium; Haver Analytics; International Monetary Fund; National Bureau of Statistics of China. A. Quarter-on-quarter annualized change of real GDP in 2015 prices. Year-on-year change of total real industrial value added (2005=100) and seasonally adjusted nominal retail sales. Last observation is 2020Q1 for GDP, April 2020 for industrial production and retail sales. Although all countries in the region have B. Data is based on Cirium coronavirus aviation impact dataset. Last observation is May 28, 2020. experienced a sharp reduction in visitors as a result C. Values of export and import goods. 3-month moving average. Last observation is April 2020. D.E. Taper T. refers to taper tantrum episode from 5/23/2013 to 1/24/2014. China SM refers to stock of travel restrictions and risk aversion, the Pacific market crash episode from 6/12/2015 to 2/12/2016. Trade Tension refers to a period of heightened tensions between China and the US from 3/22/2018 to 10/30/2019. COVID-19 covers a period from Islands—especially Fiji, Palau, Samoa, and 2/3/2020 to 05/15/2020. Vanuatu—are particularly dependent on tourism D. Orange diamonds denote the EMDE average exchange rate calculated based on J.P. Morgan Emerging Market Currency Index. and likely to see a massive decline in national E. Orange diamonds denote the EMDE average bond spreads. EMDE average bond spread is based on J.P. Morgan Emerging Market Bond Index (EMBI). income following the pandemic. These countries F. Total debt is defined as a sum of domestic and external debt. Includes household, non-financial corporate, and public sector debt expressed as share of four-month average quarterly seasonally are also among the most vulnerable given the adjusted GDP. A spike in total credit to GDP in 2020Q1 also reflects sharp contraction of GDP in limited policy space and instruments as well as 2020Q1. External debt for 202Q1 is an estimate. Last observation is 2020Q1. Click here to download data and charts. 72 CHAPTER 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 2.1.3 EAP: Outlook and risks comparatively underdeveloped health infrastruc- Regional growth is projected to slow to 0.5 percent in 2020—the lowest ture. rates since 1967. Growth in China this year is projected to slow to the lowest rate since 1976, and performance in the rest of the region is The pandemic will likely further slow potential forecast to be the worst since the East Asian financial crisis of 1998. The deterioration in regional activity has been broad-based reflecting both growth in the region by weakening investment domestic and external channels. the Pacific Islands are particularly and the supply chains that have been an important dependent on tourism and likely to see a massive decline in national income following the pandemic. Regional economies are vulnerable to conduit for productivity gains over the past decade tighter global financing conditions and financial shocks in different ways, (World Bank 2020a, 2020d). The negative impact including through elevated domestic debt, external debt, sizable fiscal is expected to be broad-based and will add to the deficits, or heavy reliance on volatile capital flows. long-term slowdown from deteriorating demo- A. GDP growth B. GDP growth graphic trends and falling growth in total factor productivity (Chapter 3). The regional outlook is predicated on major countries in the region avoiding a second wave of outbreaks. The outlook assumes that a severe contraction in 2020Q1 in China and in 2020Q2 in the rest of the region will be followed by a gradual and sustained recovery. The outlook is also predicated on the assumption that sizable C. Exports of goods, exports of D. Growth forecasts in 2020, baseline fiscal and monetary policy support measures services, inflows of remittances and downside projections implemented by major economies are successful in averting a prolonged recession and financial crises. By the second half of 2020, these are assumed to result in a recovery in global import demand, a normalization of global financial conditions, a resumption of capital inflows to the region, and no major re-escalation in trade tensions between China and the United States. E. Total debt F. Foreign holdings of government The regional outlook is subject to significant bonds uncertainty. The full duration and spread of the pandemic is still unknown, as is the effectiveness of the policies implemented in response. The erosion of consumer and business confidence may be longer-lasting. In addition, the spillover impacts of the outbreak through global trade, financial markets, confidence, and other second round effects continue to evolve. The containment measures in major economies may last longer than Source: International Monetary Fund; Institute of International Finance; World Bank. A. Aggregate growth rates are calculated using GDP weights at 2010 prices and market exchange three months assumed under the baseline scenario. rates. Data in shaded areas are forecasts. EAP downside shows simple average of regional forecast. Global average shows weighted average forecast. The recovery process in many tourism, export- B. EAP excl. China = Cambodia, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, Philippines, Thailand, and Vietnam. Pacific Island excl. PNG includes Fiji, Kiribati, Marshall Islands, Micronesia, oriented, remittances- and commodity-dependent Palau, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, and Vanuatu. 1990-2019 average for EAP excl. China excludes Myanmar and 1990-2019 for Pacific Island excl. PNG excludes Marshall EAP economies will be impeded by the slowdown Islands, Micronesia, Palau, Timor-Leste, and Tuvalu. Aggregate growth rates are calculated using in their main trading patterns, source countries, GDP weights at 2010 prices and market exchange rates. Data in shaded areas are forecasts. C. Remittances received represent the largest part of primary and secondary income. Tourism and and low commodity prices. The regional outlook transportation represent the largest part of services exports. Data on personal remittances come from the IMF’s Balance of Payment Statistics database. Missing data filled by World Bank staff estimates. will also significantly deteriorate if global trade D. Forecasts, including those for the Pacific Island economies, are not strictly comparable because of the difference in accounting financial year periods. EMDE averages show weighted average forecast. tensions re-escalate. E. Total debt is defined as a sum of domestic and external debt. Includes government, corporate and household debt. Last observation is 2018. F. Blue bars denote foreign holdings of government bonds in local currency. Last observation is 2018. Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 EAST ASIA AND PACIFIC 73 Risks a strong track record of growth, greater exchange rate flexibility, and more robust monetary, The balance of risks to the outlook is firmly tilted prudential, and fiscal policy frameworks. to the downside. The main risks include the However, vulnerabilities among some EAP possibility that the pandemic lasts longer and has countries could amplify the impact of repeated more severe effects than assumed (Chapter 1). A sudden stops in capital flows or a rise in borrowing second wave of the outbreaks in countries with costs (Kose, Nagle, Ohnsorge, and Sugawara subsiding active cases remains a real possibility. A 2019). These include elevated debt (China, Lao sharp rise in the number of COVID-19 patients PDR, Malaysia, Mongolia, Vietnam); sizable fiscal requiring hospitalization could renew pressure on deficits (Lao PDR, Vietnam); and heavy reliance the most robust health care systems in the region on volatile capital flows (Cambodia, Indonesia); (China, Malaysia, and Thailand) and overwhelm considerable foreign holdings of domestic debt health care systems in more vulnerable countries (Indonesia, Malaysia, Thailand) (Park and Shin (Lao PDR and the Pacific Islands). Moreover, it 2015; Kim, Le, Ohnsorge, and Seshadri 2014). remains to be seen whether the policy accommodation being provided will be sufficient A further risk is that the repeated disruptions to to prevent a more severe deterioration in global trade and the supply of intermediate goods confidence, investment, and trade. causes a retreat from global and regional value chains (Special Focus). Such a retreat could be In addition, despite prompt and massive liquidity further encouraged by tensions surrounding the provision, policy rate cuts to their effective lower Phase One agreement between China and the bound, and unconventional monetary policies by United States. Tensions may also arise from central banks, global financial market stress may disagreements over the origins of, and policy persist for several months and cause further capital responses to, the pandemic and may spill over into outflows from EAP. Tighter financing conditions restrictive trade relations (World Bank 2020e). would weigh heavily on investment and consumption and further reduce regional Should these risks materialize, the regional growth. Eventually, this could exacerbate existing economy could contract by 1.9 percent in 2020, balance sheet weaknesses in highly leveraged and growth will remain below trend in 2021 banking, corporate, and household sectors, leading (Chapter 1). On the upside, a gradual to defaults and financial crises (World Bank normalization of global trade relations remains a 2020b). possibility, notwithstanding new challenges, and pandemic containment and economic policy In some dimensions, major EAP economies appear support measures in major regional economies to be better equipped to cope with this crisis than could be more effective than expected, leading to a in the past (Kose and Ohnsorge 2019). They have sustained recovery of regional growth. 74 CHAPTER 2.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 TABLE 2.1.1 East Asia and Pacific forecast summary Percentage point differences from January (Real GDP growth at market prices in percent, unless indicated otherwise) 2020 projections 2017 2018 2019e 2020f 2021f 2020f 2021f EMDE EAP, GDP1 6.5 6.3 5.9 0.5 6.6 -5.2 1.0 GDP per capita (U.S. dollars) 5.8 5.6 5.2 -0.1 6.0 -5.2 1.0 (Average including countries with full national accounts and balance of payments data only)2 EMDE EAP, GDP2 6.5 6.3 5.9 0.5 6.6 -5.2 1.0 PPP GDP 6.4 6.3 5.8 0.4 6.5 -5.3 0.9 Private consumption 6.1 8.4 6.5 0.8 8.8 -6.1 2.2 Public consumption 8.9 8.8 7.8 11.2 7.4 3.6 -0.1 Fixed investment 4.7 5.1 4.3 -0.2 4.1 -4.8 -0.6 Exports, GNFS 3 9.4 4.9 1.9 -10.3 4.2 -11.6 2.2 Imports, GNFS3 8.3 8.4 0.3 -5.7 5.2 -7.7 2.7 Net exports, contribution to growth 0.4 -0.9 0.5 -1.3 -0.3 -1.1 -0.2 Memo items: GDP East Asia excluding China 5.4 5.3 4.8 -1.2 5.4 -6.1 0.4 China 6.8 6.6 6.1 1.0 6.9 -4.9 1.1 Indonesia 5.1 5.2 5.0 0.0 4.8 -5.1 -0.4 Thailand 4.1 4.2 2.4 -5.0 4.1 -7.7 1.3 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. 1. GDP and expenditure components are measured in 2010 prices and market exchange rates. Excludes Democratic People’s Republic of Korea and dependent territories. 2. Subregion aggregate excludes Democratic People’s Republic of Korea, dependent territories, Fiji, Kiribati, the Marshall Islands, the Federated States of Micronesia, Myanmar, Nauru, Palau, Papua New Guinea, Samoa, Timor-Leste, Tonga, and Tuvalu, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). Click here to download data. TABLE 2.1.2 East Asia and Pacific country forecasts1 Percentage point differences from January (Real GDP growth at market prices in percent, unless indicated otherwise) 2020 projections 2017 2018 2019e 2020f 2021f 2020f 2021f Cambodia 7.0 7.5 7.1 -1.0 6.0 -7.8 -0.8 China 6.8 6.6 6.1 1.0 6.9 -4.9 1.1 Fiji 5.4 3.5 1.0 -4.3 1.9 -6.0 -1.0 Indonesia 5.1 5.2 5.0 0.0 4.8 -5.1 -0.4 Lao PDR 6.9 6.3 4.7 1.0 4.6 -4.8 -1.1 Malaysia 5.7 4.7 4.3 -3.1 6.9 -7.6 2.4 Mongolia 5.3 6.9 4.8 -0.5 4.9 -6.0 -0.3 Myanmar 6.2 6.8 6.3 1.5 6.0 -5.2 -0.8 Papua New Guinea 3.5 -0.8 6.0 -1.3 3.4 -4.2 0.5 Philippines 6.9 6.3 6.0 -1.9 6.2 -8.0 0.0 Solomon Islands 3.7 3.9 2.7 -6.7 -0.3 -9.5 -3.1 Thailand 4.1 4.2 2.4 -5.0 4.1 -7.7 1.3 Timor-Leste -3.8 -0.8 3.4 -4.8 3.8 -9.4 -1.1 Vietnam 6.8 7.1 7.0 2.8 6.8 -3.7 0.3 Source: World Bank. Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. 1. GDP and expenditure components are measured in 2010 prices and market exchange rates. Click here to download data. Activity in Europe and Central Asia (ECA) is projected to contract by 4.7 percent in 2020, a recession nearly as deep as the one the region experienced during the global financial crisis. The COVID-19 pandemic and the social distancing measures to stem it are weighing heavily on domestic demand across the region. These effects are compounded by the collapse of commodity prices, tourism, remittances, and exports, as well as supply chain disruptions and financial market turmoil. Growth is forecast to rebound in 2021, to 3.6 percent, as global commodity prices gradually recover, trade strengthens, and domestic demand improves. However, the risks to this outlook are strongly to the downside, including a resurgence of COVID-19 infections, a more prolonged than expected period of adverse financing conditions and investment sentiment, and an unexpectedly strong amplification of the economic downturn through a sharper drop in remittances. A severe drought that is affecting large swaths of the region could also worsen the outlook. Recent developments foreign-currency-denominated debt or where nonresident investors account for a sizable share of The severe impact of the COVID-19 pandemic the local bond market. Current account pressures has been felt across the Europe and Central Asia have been exacerbated by the collapse in exports (ECA) region through the collapse in global amid supply-chain disruptions and falling external commodity prices, disruption to global and demand, despite the sizable fall in imports. regional supply chains, and the effect of Faltering domestic demand has reflected a heightened global risk aversion on financial downturn in services activity and investment, as markets. Since March, many countries have closed the pandemic and associated lockdowns curb schools and international borders, issued stay-at- consumption and dampen investor sentiment. home orders, and restricted travel from heavily hit Roughly two thirds of the region’s central banks areas, all of which are weighing on domestic have responded to deteriorating growth prospects activity (Figure 2.2.1.A). The widening of this year by providing further monetary support. domestic outbreaks has steepened the decline in Monetary authorities in several countries have domestic demand, exacerbated supply disruptions, intervened in foreign exchange markets to stabilize and halted activity (Figure 2.2.1.B; World Bank their currencies and mitigate volatility 2020f). (Kazakhstan), and in some cases using sovereign Financial markets have been roiled by the wealth funds to do so (Azerbaijan, Russian pandemic, with economies in ECA suffering from Federation). However, recent currency substantial flight-to-safety outflows and a rise in depreciation could put further upward pressure on bond spreads. Large capital outflows have inflation and affect the scope for additional policy reignited currency depreciation and triggered rate cuts, especially for countries with inflation reserve losses (Figure 2.2.1.C). Weaker currencies near or above target ranges (Figure 2.2.1.D). have contributed to higher borrowing costs, Although fiscal space is limited in many countries, particularly in economies with high levels of policymakers have used existing buffers or reprioritized spending to bolster health care Note: This section was prepared by Collette Mari Wheeler. systems; strengthen safety nets; support the private Research assistance was provided by Vasiliki Papagianni. sector; and counter financial market disruptions. 76 CHAPTER 2.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 2.2.1 ECA: Recent developments Fiscal support packages have been announced in Europe and Central Asia (ECA) has been hard hit by the COVID-19 nearly all of the economies in ECA, and a number pandemic, with a severe decline in activity indicators and a material of countries have requested aid from official deterioration in financing conditions. Sharp depreciations in the region’s sources (Figure 2.2.1.E). Although funding has largest economies could limit the scope for further policy rate cuts, although low energy prices are helping to offset these pressures in also been allocated to boost the capacity and commodity importers. Numerous economies have deployed economic responsiveness of the health care system, some stimulus packages to confront the immediate health crisis and to limit the negative impact on growth. countries entered the crisis ill-prepared to cope with widespread infections given the limited A. Stringency measures in ECA, 2020 B. Change in ECA indicators, 2020 capacity of health care systems and health care spending (Figure 2.2.1.F). Outlook Regional economies are expected to contract by 4.7 percent in 2020, with recessions in nearly all ECA economies (Figure 2.2.2.A; Tables 2.2.1 and 2.2.2). The outlook assumes that restrictive C. ECA portfolio outflows in 2020 D. ECA bond spreads and currency measures to slow the spread of the virus are depreciation in 2020 gradually lifted by the start of the second half of 2020. Growth in ECA is projected to recover to 3.6 percent in 2021, as the economic effects of the pandemic gradually wane and the recovery in trade and investment gathers momentum. The impact on growth, however, remains highly uncertain and could be more severe if the pandemic or the associated collapse in activity E. Announced stimulus measures in F. Health expenditure as a share of worsens. National lockdowns, if extended, could 2020 GDP, 2017 have a substantial impact on activity (Demirgüç- Kunt, Lokshin, and Torre 2020). Additionally, growth in ECA is vulnerable to global spillovers due to its openness to trade and financial flows, including remittances, but the magnitude and source of spillovers vary across countries within the region. Likely to be hardest hit are economies with strong trade linkages to the Euro Area or Russia, including global value chains (GVCs); Source: Air Quality Open Data Platform; Airportia; CPB Netherlands Bureau for Economic Policy Analysis; Google COVID-19 Community Mobility Reports; Haver Analytics; Institute of International those heavily dependent on tourism; and those Finance; International Monetary Fund; J.P. Morgan; Oxford University; World Bank. Note: ECA = Europe and Central Asia, CA = Central Asia, CE = Central Europe, EE = Eastern highly reliant on energy and metals exports Europe, SCC = South Caucasus, WBK = Western Balkans. (Figure 2.2.2.B). A. Last observation is May 29, 2020. B. “Goods trade volumes” is the 3-month moving average (seasonally adjusted at an annualized rate) for goods trade volumes, where trade is measured using the average of export and import volumes; Tourism activity has been severely affected by the last observation is March 2020. “Air pollution” is the change in NO2 emissions over January 1 to May 28 in 2019 and 2020. “Flight cancelations” shows the cancelations relative to total planned sweeping measures to stem the spread of COVID- flights based on comparing currently operating flights in 2020 with flights that were operating 52 weeks ago in 2019 as of May 29, 2020. “Retail and recreation mobility” is the percent change for May 19, with much of the summer holiday season 21, 2020 from baseline, which is the median value for the corresponding day of the week during the 5 -week period January 3-February 6, 2020, based on data from Google. likely to be lost despite the lifting of restrictions, as C. The dates for the start of each episode are as follows: COVID-19, January 24, 2020; Global financial crisis, September 5, 2008. Sample for portfolio flows includes Hungary, Poland, Turkey, and travelers remain risk averse and consumers have Ukraine due to data availability. Last observation is May 29, 2020. less disposable income amid widespread job losses. D. Bond spreads are from the J.P. Morgan Emerging Market Bond Index (EMBI). Sample includes up to 9 ECA economies, due to data availability. Last observation is May 29, 2020. Initial estimates place the global decline in E. Announced measures are as a share of 2019 nominal GDP and are derived from the IMF Policy Responses to COVID-19 and are subject to change. Data are as of May 28, 2020. international tourist arrivals between 60 and 80 F. Sample includes 18 ECA economies. percent in 2020—much higher than the global Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 E URO PE AND CE NTRAL AS IA 77 decline of 4 percent seen in 2009—while nearly all FIGURE 2.2.2 ECA: Outlook and risks countries have imposed travel restrictions Regional growth is expected to sharply contract in 2020, to -4.7 percent, (UNWTO 2020). Tourist arrivals have collapsed amid the pandemic and its associated disruptions to services activity and in ECA, but the impacts may be felt most strongly supply chains. The impact is expected to be most severe in economies that depend heavily on tourism and commodity exports, capital inflows, and in in countries such as Albania, Croatia, Georgia, those deeply integrated in global value chains. The risk of a full-fledged Montenegro, and Turkey, where tourism accounts financial crisis could dent foreign direct investment and remittance inflows, the latter of which will be dampened by rising unemployment in host for a sizable share of GDP (Figure 2.2.2.C). Some economies such as the Euro Area. The downturn in ECA is likely to have an of these countries may experience a smaller especially severe impact on informal and temporary workers. rebound in 2021 relative to the rest of the region, A. GDP growth in ECA, 2020-21 B. Average size of forecast as tourism is generally prone to slow recoveries downgrade in ECA, 2020 (Mann 2020). For energy exporters in the region—including Azerbaijan, Kazakhstan, and Russia, which together account for over 40 percent of the region’s GDP—continued low oil prices expected for 2020, combined with the agreed OPEC+ production cuts, are expected to weigh on growth. Fiscal positions in these economies will come C. Share of tourism in GDP in 2019 D. Global value chain participation under strain with oil prices now far below fiscal and tourist arrivals in 2020 break-even prices (Chapter 1; Chapter 4; Special Focus). The effect may be compounded for other ECA countries that export both energy and other commodities such as iron ore (Russia), as well as those that import oil but export refined oil products (Belarus, Bulgaria). However, for countries such as the Kyrgyz Republic and Uzbekistan, an increase in gold prices may help offset price declines for other metals. E. Net foreign direct investment F. Social protection coverage and inflows in ECA, 2018 share of temporary workers, by ECA Economic activity in Russia is expected to contract subregion by 6 percent in 2020, reflecting a sharp rise in domestic cases of COVID-19, as well as OPEC+ production cuts and the collapse in oil prices (World Bank 2020g). The government has announced support measures to households and firms in order to buoy consumption and protect jobs, most of which are expected to be funded by reallocations within the existing budget Source: Haver Analytics; International Labour Organization; Organisation for Economic Co-operation framework. The shortfall in government revenues and Development; World Bank; World Travel and Tourism Council. Note: EU=European Union, CA = Central Asia, CE = Central Europe, EE = Eastern Europe, SCC = from low oil prices is expected to be partly South Caucasus, WBK = Western Balkans, ALB=Albania, ARM= Armenia, GEO=Georgia, HRV=Croatia, MNE=Montenegro, and TUR=Turkey. compensated by transfers from the National A. Aggregate growth rates are calculated using 2010 constant U.S. dollar GDP weights. Yellow Wealth Fund, which was roughly 9 percent of diamonds correspond to the downside scenario. B. Figure shows the simple average of forecast downgrades expected in 2020. Orange vertical lines GDP at the start of 2020. indicate the minimum-maximum range. Sample includes 24 ECA EMDEs, of which 6 rely on tourism and 4 have high global value chain (GVC) participation. “Tourist dependent” indicates tourism exports as percent of GDP in the top quartile. “High GVC participation” indicates above European Union Turkey’s economy is expected to shrink by 3.8 average due to data availability. C. GDP generated by industries that deal directly with tourists; refer to the World Travel and Tourism percent in 2020, reflecting a continued fall in Council for further detail. Last observation for tourist arrivals data is April 2020, or March 2020 where unavailable, and includes 10 ECA economies. investment as confidence plummets to record D. Data show the foreign value-added share of exports, which is the value added of inputs that were lows, shrinking exports amid weak external imported in order to produce intermediate or final goods/services to be exported. F. Figure shows simple averages. Social protection coverage measures the share of unemployed demand, and the disruption to activity due to workers receiving unemployment benefits as measured by the ILO for the most recent year available. Share of temporary workers based on most recent survey as measured in the World Bank’s restrictive measures (World Bank 2020h). In Enterprise Surveys database. Sample includes 23 economies. Click here to download data and charts. 78 CHAPTER 2.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 response, an economic support package equivalent The outlook for Eastern Europe has substantially to roughly 9 percent of GDP was announced in weakened as a result of the COVID-19 pandemic, March, including support to low-income with GDP expected to contract by 3.6 percent households and pensioners and tax breaks and (World Bank 2020j). Activity in Ukraine is financial support for firms. The economy is projected to shrink in 2020, by 3.5 percent, but expected to return to growth in 2021, on the back the depth of the contraction will depend on the of gradual improvement in domestic demand. duration of the health crisis, progress on major pending reforms, and the ability to mobilize Central Europe is forecast to contract in 2020, by adequate financing to meet sizable repayment 5 percent, as large domestic outbreaks weigh on needs (World Bank 2019a). private consumption and investment. Widespread disruptions to global value chains (GVCs) are In Central Asia, growth is forecast to sharply slow expected to limit access to capital and intermediate in 2020, to -1.7 percent, as the subregion grapples goods (Special Focus). The impact from GVC with negative spillovers from the Euro Area and disruptions is expected to be larger for Central China through trade, commodity, and remittance Europe than for the rest of ECA, given that channels. Activity in Kazakhstan will likely be manufacturing accounts for nearly a fifth of gross dampened by the waning effect of earlier fiscal value added, and 20 to 40 percent of the value stimulus, as well as weak or contracting output in added of exports are derived from foreign content key trading partners (China, Russia; World Bank (Figure 2.2.2.D). 2019b). In the Western Balkans, activity is expected to shrink by 3.2 percent in 2020, but to rebound by Risks 4.6 percent in 2021, assuming that consumer and business confidence are restored as the impact of Risks to the outlook are strongly to the downside. COVID-19 fades, and that political instability An intensification of the spread of infections remains in check (World Bank 2020i). Rising across ECA economies would worsen the outlook, fiscal liabilities in the subregion have reduced while associated restrictive measures could weigh space for fiscal support and weakened the business on private consumption and investment more climate. Additionally, the recent earthquake in than expected. An even harsher recession in the Albania took a heavy toll on human life and Euro Area, perhaps from a worsening of the physical infrastructure, and, along with the pandemic or more prolonged restrictive measures, COVID-19 outbreak, is expected to weigh on could amplify the negative spillovers in economies tourism. The budget will be further stretched to with tightly linked trade ties to these economies, counter the damaging economic effects of the including through global value chains, as well as COVID-19 outbreak, with a recently announced through commodity, financial, and remittance support package that includes an increase in channels. The pandemic also poses medium-term unemployment benefits and transfers. risks, particularly if global value chain linkages are lost or if extended school closures have a Growth in the South Caucasus is projected to significant impact on learning, dropout rates, and decelerate to -3.1 percent this year as the human capital development (Chapter 3; Shmis et subregion faces growth headwinds from the al. 2020; World Bank 2020k). Regional weather COVID-19 pandemic and, subsequently, low patterns, including the drought that is affecting commodity prices. Activity is projected to pick up economies in Eastern Europe and the Western to 3 percent in 2021, as the impact of shocks Balkans, also pose a downside risk to the forecasts. related to the COVID-19 pandemic dissipates and tourism recovers alongside improving consumer A further tightening in global financing conditions and business confidence in Armenia and Georgia. could increase debt-servicing costs substantially, Activity is expected to firm in Azerbaijan in 2021 a particular risk in countries with already-high as oil prices stabilize, but the overall recovery will debt levels or large external financing needs be muted by lingering structural rigidities. (Albania; Croatia; Montenegro). Significantly G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 E URO PE AND CE NTRAL AS IA 79 tighter financing conditions may also generate A prolonged deterioration in global investment pressure on corporate balance sheets, raising sentiment could have material implications for rollover risks and triggering widespread defaults ECA (Chapter 1; World Bank 2016). Depending and the realization of contingent liabilities (World on the duration of the pandemic, foreign direct Bank 2020f, 2020i). A prolonged downturn in the investment (FDI) flows could fall substantially in region could affect domestic financial sectors by 2020, which would most affect the Western increasing nonperforming loans and weakening Balkans and South Caucasus (Figure 2.2.2.E; earnings and profitability. This will likely UNCTAD 2020; World Bank 2020i). Investment constrain banks’ ability to lend and support real prospects, which were already weakening at the activity, and increase the risk of financial start of the year, will likely erode further in instability (Anginer, Demirgüç-Kunt, and Mare response to the slowdown in capital expenditures. 2020). The impact would be more severe for small The most vulnerable economies are likely to be and medium-sized enterprises, which already face those suffering from large domestic outbreaks or limited access to credit in many countries. supply chain disruptions, as well as those with a TABLE 2.2.1 Europe and Central Asia forecast summary Percentage point differences from January 2020 (Real GDP growth at market prices in percent, unless indicated otherwise) projections 2017 2018 2019e 2020f 2021f 2020f 2021f EMDE ECA, GDP1 4.1 3.3 2.2 -4.7 3.6 -7.3 0.7 GDP per capita (U.S. dollars) 3.6 2.9 1.8 -5.0 3.4 -7.3 0.7 EMDE ECA, GDP excl. Turkey 3.1 3.5 2.7 -5.0 3.2 -7.5 0.6 (Average including countries with full national accounts and balance of payments data only)2 EMDE ECA, GDP2 4.2 3.3 2.1 -4.9 3.7 -7.4 0.9 PPP GDP 4.1 3.3 2.2 -4.8 3.7 -7.4 0.8 Private consumption 5.2 3.1 1.9 -3.7 2.9 -6.3 0.4 Public consumption 3.4 2.9 3.0 5.2 2.0 3.5 0.2 Fixed investment 6.7 2.3 0.5 -8.5 6.7 -12.9 2.5 Exports, GNFS3 7.5 5.8 2.4 -11.8 4.0 -14.1 0.6 Imports, GNFS3 11.6 3.3 2.0 -10.7 4.7 -14.8 -0.2 Net exports, contribution to growth -0.8 1.0 0.3 -0.9 0.0 -0.4 0.3 Memo items: GDP Commodity exporters4 2.2 2.9 2.0 -5.1 2.9 -7.2 0.6 Commodity importers5 6.1 3.8 2.5 -4.3 4.3 -7.4 0.8 Central Europe6 5.1 4.8 4.1 -5.0 3.8 -8.4 0.7 Western Balkans7 2.7 4.0 3.5 -3.2 4.6 -6.8 0.8 Eastern Europe8 2.6 3.3 2.6 -3.6 2.4 -6.5 -0.7 South Caucasus9 2.1 2.7 3.6 -3.1 3.0 -6.2 -0.1 Central Asia10 4.6 4.7 5.1 -1.7 3.7 -6.1 -0.9 Russia 1.8 2.5 1.3 -6.0 2.7 -7.6 0.9 Turkey 7.5 2.8 0.9 -3.8 5.0 -6.8 1.0 Poland 4.9 5.3 4.1 -4.2 2.8 -7.8 -0.5 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. 1. GDP and expenditure components are measured in 2010 prices and market exchange rates. 2. Aggregates presented here exclude Azerbaijan, Bosnia and Herzegovina, Kazakhstan, Kosovo, Montenegro, Serbia, Tajikistan, and Turkmenistan, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). 4. Includes Albania, Armenia, Azerbaijan, Kazakhstan, the Kyrgyz Republic, Kosovo, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. 5. Includes Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Hungary, Moldova, Montenegro, North Macedonia, Poland, Romania, Serbia, and Turkey. 6. Includes Bulgaria, Croatia, Hungary, Poland, and Romania. 7. Includes Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia. 8. Includes Belarus, Moldova, and Ukraine. 9. Includes Armenia, Azerbaijan, and Georgia. 10. Includes Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. Click here to download data. 80 CHAPTER 2.2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 heavy presence of travel and transport industries measures to slow the spread of the virus generate and capital-intensive sectors, such as energy and job losses in host countries and leave migrant and high-value manufacturing industries. Many temporary workers idled or furloughed (Figure multinational enterprises have issued profit 2.2.2.F; World Bank 2020l; Jolevski and Muzi warnings. This is expected to dampen reinvested 2020). At nearly 10 percent of GDP, remittances earnings—an important source of FDI for ECA to ECA represent an important source of income, economies. The impact could also weigh on the particularly in Central Asia and Eastern Europe, labor market, particularly in Central Europe where where they can be as high as 30 percent of GDP. foreign-owned firms can account for a quarter of Remittances are likely to come under further jobs in the private sector (OECD 2017). pressure due to increased difficulty in accessing money transfer facilities, as several operators in A sharper fall in remittances could amplify the this sector have been temporarily shut down regional economic downturn. Remittance inflows during the pandemic. to ECA are likely to decline steeply in 2020, as TABLE 2.2.2 Europe and Central Asia country forecasts1 Percentage point differences from January 2020 (Real GDP growth at market prices in percent, unless indicated otherwise) projections 2017 2018 2019e 2020f 2021f 2020f 2021f Albania 3.8 4.1 2.2 -5.0 8.8 -8.4 5.2 Armenia 7.5 5.2 7.6 -2.8 4.9 -7.9 -0.3 Azerbaijan 0.2 1.5 2.2 -2.6 2.2 -4.9 0.1 Belarus 2.5 3.1 1.2 -4.0 1.0 -4.9 0.5 Bosnia and Herzegovina 2 3.2 3.7 2.6 -3.2 3.4 -6.6 -0.5 Bulgaria 3.5 3.1 3.4 -6.2 4.3 -9.2 1.2 Croatia 3.1 2.7 2.9 -9.3 5.4 -11.9 3.0 Georgia 4.8 4.8 5.1 -4.8 4.0 -9.1 -0.5 Hungary 4.3 5.1 4.9 -5.0 4.5 -8.0 1.9 Kazakhstan 4.1 4.1 4.5 -3.0 2.5 -6.7 -1.4 Kosovo 4.2 3.8 4.2 -4.5 5.2 -8.7 1.1 Kyrgyz Republic 4.7 3.8 4.5 -4.0 5.6 -8.0 1.6 Moldova 4.7 4.3 3.6 -3.1 4.0 -6.7 0.2 Montenegro 4.7 5.1 3.6 -5.6 4.8 -8.7 2.0 North Macedonia 1.1 2.7 3.6 -2.1 3.9 -5.3 0.6 Poland 4.9 5.3 4.1 -4.2 2.8 -7.8 -0.5 Romania 7.1 4.4 4.1 -5.7 5.4 -9.1 2.3 Russia 1.8 2.5 1.3 -6.0 2.7 -7.6 0.9 Serbia 2.0 4.4 4.2 -2.5 4.0 -6.4 0.0 Tajikistan 7.6 7.3 7.5 -2.0 3.7 -7.5 -1.3 Turkey 7.5 2.8 0.9 -3.8 5.0 -6.8 1.0 Turkmenistan 6.5 6.2 6.3 0.0 4.0 -5.2 -1.5 Ukraine 2.5 3.3 3.2 -3.5 3.0 -7.2 -1.2 Uzbekistan 4.5 5.4 5.6 1.5 6.6 -4.2 0.6 Source: World Bank. Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. 1. GDP and expenditure components are measured in 2010 prices and market exchange rates, unless indicated otherwise. 2. GDP growth rate at constant prices is based on production approach. Click here to download data. COVID-19 has sharply worsened economic conditions in Latin America and the Caribbean (LAC). The regional economy is projected to contract by 7.2 percent in 2020, a much steeper decline than during the global financial crisis, reflecting the impact of the measures necessary to slow the spread of the pandemic, significant deterioration in financing conditions and commodity prices, and spillovers from a global recession. As mitigation measures are scaled back and financing, commodity price, and external demand conditions become more supportive, regional growth is projected to recover to 2.8 percent in 2021. However, the near-term outlook is subject to significant downside risks. These include a resurgence of last year’s wave of social unrest, increasingly adverse market reactions to rising public debt, weaker-than-expected commodity prices, and persistent pandemic-related uncertainty slowing the recovery of the services sector. Recent developments Mexico and Brazil and caused a sharp drop in exports from commodity-producing economies Economic conditions in Latin America and the such as Chile and Peru. The severe contraction in Caribbean (LAC) have worsened dramatically as the United States in the second quarter has the effects of the COVID-19 pandemic ripple affected Central America through trade and through the region. LAC initially accounted for a remittance channels. Tourism, on which small share of global COVID-19 cases, but numerous Caribbean countries and Mexico rely outbreaks in the region have recently spread heavily, plummeted in the first half of the year. rapidly (Figure 2.3.1.A). Moreover, cases may be significantly underreported in some countries. The Amid intensified global risk aversion, LAC has authorities across the region have implemented a experienced a sudden reversal of capital flows range of mitigation measures to slow the spread. more severe than during the global financial crisis Nearly all countries have closed schools and (Figure 2.3.1.D). In many countries, equity partially or completely shut their borders. market valuations have plunged and currencies Numerous countries have imposed nationwide have depreciated sharply. Risk premia in sovereign mandatory business closures and large-scale bond markets have risen across the region, with mobility restrictions for multiple weeks. Emissions investors differentiating according to credit risk data and sentiment indicators suggest that the (Figure 2.3.1.E). economic impacts of these measures have been sudden and severe (Figures 2.3.1.B, 2.3.1.C). A range of policy measures have been implemented to counter deteriorating economic The sharp fall in global commodity prices is a and financing conditions. The monetary policy headwind for much of the region, and particularly response has been multipronged, including for oil and gas producers given the plunge in liquidity provision; temporary loosening of reserve global energy prices. The abrupt slowdown in the requirements for banks; policy interest rate cuts; U.S. and China disrupted supply chains for establishment of temporary swap lines with the U.S. Federal Reserve to provide U.S. dollar liquidity (Brazil and Mexico); and foreign ex- change market intervention. Chile and Colombia Note: This section was prepared by Dana Vorisek. Research assistance was provided by Heqing Zhao. have launched asset purchasing programs modeled 82 CHAPTER 2.3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 2.3.1 LAC: Recent developments on quantitative easing in advanced economies, the As the COVID-19 pandemic began to impact Latin America and the first in the region. Caribbean (LAC), stringent, multipronged mitigation policies were implemented. Emissions and sentiment data suggest that the economic Fiscal stimulus plans have been announced in impacts of the pandemic have been sudden and severe. Financial conditions in the region have tightened substantially amid flight-to-safety numerous countries (e.g., Chile, Colombia, Costa sentiment among investors. Policymakers have responded to the abrupt Rica, Panama, Peru, Uruguay, and across the shift in the economic environment with a range of monetary and fiscal Caribbean), including some where public finances support. are already strained (Argentina, Brazil, El A. COVID-19 cases in LAC B. Nitrogen dioxide emissions Salvador; Figure 2.3.1.F). These packages include social assistance measures, support for small businesses, and additional health sector spending. In some countries, tax deadlines have been delayed and loan and utility payments temporarily suspended. Outlook The multiple domestic and external shocks C. Business confidence D. Cumulative portfolio outflows from LAC stemming from the pandemic will have a severe impact on regional growth in 2020. Activity is projected to contract by 7.2 percent, much more steeply than during the global financial crisis or the 1980s Latin American debt crisis (Figure 2.3.2.A; Tables 2.3.1.A and 2.3.1.B). The outlook is exceptionally uncertain, however, and highly dependent on the magnitude and duration of the pandemic. E. LAC sovereign bond spreads F. Announced fiscal support The baseline forecast assumes that domestic measures mitigation measures will be relaxed by the beginning of the second half of the year, ushering in a recovery in activity, and that commodity prices will firm as global demand stabilizes. A normalization of domestic and global conditions is envisaged to allow growth to recover to a moderate 2.8 percent in 2021. The baseline outlook is for a contraction in 2020 in all except one economy in the region, a notably worse Source: Air Quality Open Data Platform; Haver Analytics; Institute of International Finance; Interna- tional Monetary Fund; Johns Hopkins University Coronavirus Resource Center; national sources; outcome than for the broader group of EMDEs Standard and Poor’s; World Bank. (Figure 2.3.2.B). A. Lines show 14-day moving averages. Last observation is May 29, 2020. B. Data reflects conditions in Buenos Aires, Bogotá, and Mexico City. Last observation is May 29, 2020. C. For Mexico, business confidence pertains to the manufacturing sector. Last observation is May Regional domestic demand is projected to slow 2020 for Brazil and April 2020 for Mexico and Chile. dramatically in 2020, despite increased D. LAC capital flows are proxied by the sum of equity flows for Brazil and debt flows for Mexico. COVID-19 line shows cumulative capital outflows beginning the week of January 24, 2020 and government spending, as shuttered businesses ending the week of May 22, 2020; global financial crisis line shows outflows beginning the week of September 5, 2008. result in lower wages and private consumption. E. Lines show medians of the two country groups. Sample includes 7 investment-grade economies and 10 non-investment-grade economies. Last observation is May 29, 2020. Fixed investment will be particularly hard hit by F. Measures are the total amount announced, including discretionary spending, loan guarantees, and tighter financing conditions and deep uncertainty other credit measures. Data are as of May 29, 2020 and are subject to change. Click here to download charts and data. about the trajectory of the COVID-19 pandemic. Exports will be sharply curtailed with the global economy in recession. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 LATIN AME RIC A AN D THE C ARIBBE AN 83 In Brazil, the economy is projected to contract by FIGURE 2.3.2 LAC: Outlook and risks 8.0 percent in 2020, owing to mitigation meas- Activity in Latin America and the Caribbean (LAC) is expected to contract ures, plunging investment, and soft global in 2020 by far more than it did during either the global financial crisis or the commodity prices. An expected recovery to 2.2 1980s Latin American debt crisis. Downside risks to the outlook are substantial and include a resurgence of social unrest, adverse market percent growth in 2021 is based on the reactions to a rise in already high debt levels, a recovery in commodity assumption of a steady fading of the factors that prices less robust than expected, and medium-term adverse impacts of the COVID-19 pandemic on services sectors through prolonged uncertainty weighed on activity in 2020, as well as a restarting and changes in consumer behavior. of the tax and business environment reform agenda that had been put on hold in order to A. Growth B. Share of economies contracting prioritize the COVID-19 response. during global recessions Mexico’s economy will be hit hard from multiple angles in 2020, including slumping exports, significantly tighter financing conditions, a sharp drop in oil prices, a halt in tourism, and mobility restrictions imposed to slow the spread of the pandemic. The fiscal support announced thus far has been limited. The economy is expected to contract by 7.5 percent in 2020 but to rebound to C. Inequality D. Government debt 3 percent in 2021, supported by a recovery in private consumption and a normalization of exports—but still weighed down by modest fixed investment, which has been a drag on growth in recent years. In Argentina, stringent COVID-19 mitigation measures, together with lower export demand and the impacts of uncertainty related to ongoing debt negotiations, will contribute to a projected GDP contraction of 7.3 percent in 2020. A recovery to E. Commodity prices F. Tourism 2.1 percent growth in 2021 hinges on a bounce- back in domestic demand (consumption and investment), which would result from the restoration of confidence following the successful completion of debt negotiations. Colombia, together with Ecuador and Bolivia, are highly exposed to the plunge in oil and gas prices (Chapter 4). However, Colombia, with more Source: Equalchances.org; World Bank; World Tourism Organization. robust economic momentum in the leadup to the A. Grey bars coincide with the year of strongest contraction during the Latin American debt crisis and pandemic and much more policy space, is the global financial crisis, respectively. Last observation is 2021. B. Horizontal line shows 50 percent. projected to contract by 4.9 percent in 2020, C. Inequality of opportunity is the Gini coefficient of the distribution of predicted equivalized household disposable income based on parental education, parental occupation, and origin. All while Ecuador’s economy is envisaged to contract observations are for latest available year. Sample contains 46 economies. by 7.4 percent and Bolivia’s by 5.9 percent. D. 2016-18 observations are a simple average. E. Crude oil prices are the average of Brent, Dubai, and WTI. Natural gas prices are for U.S. natural gas. 2014 bars show change from June to September 2014. 2020 bars show change from January to April 2020. In Chile and Peru, weak export demand in the F. Bars show 2014-18 average. context of a global recession, falling copper prices, Click here to download charts and data. and domestic measures to contain the spread of COVID-19 (particularly stringent in Peru) will result in deeply negative growth in both countries—of 4.3 and 12.0 percent, respectively— 84 CHAPTER 2.3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 despite plans for significant fiscal stimulus. In the and are particularly vulnerable to growing food short term, growth in Chile is also expected to be security risks. The region’s recent progress on adversely impacted by high uncertainty related to reducing poverty and inequality could be lost the constitutional reform process that began after (Cord, Genoni, and Rodríguez-Castelán 2015). social unrest in 2019. Although income inequality has fallen in LAC, it remains very high relative to the rest of the world, Central America’s economy is projected to shrink as does inequality of opportunity (Figure 2.3.2.C). by 3.6 percent in 2020, constrained by stringent The income shocks related to COVID-19, or COVID-19 mitigation measures in most countries reactions to the authorities’ management of the during the first half of the year, together with a pandemic, could reignite the wave of social unrest sharp fall in remittances, a halt in tourism, and that LAC experienced last year and weigh on lower agricultural prices relative to 2019. confidence and economic conditions. Growth in the Caribbean is projected to Fiscal balances will deteriorate in 2020 through a experience a 1.8 percent contraction in 2020, or a combination of lower government revenue from 3.1 percent contraction if excluding Guyana, commodities and taxes, greater spending needs, where the offshore oil sector is being developed and higher borrowing costs, pushing debt levels rapidly, albeit somewhat more slowly than higher (Figure 2.3.2.D). This is occurring at a previously envisaged. Falling tourism activity and particularly precarious time for Argentina, which remittance inflows will be a severe drag on growth is seeking to restructure its foreign-currency- in a large swath of economies in the subregion. denominated government debt, and for Ecuador, which was already struggling to make interest Risks payments on its debt before the pandemic began. Rising government debt levels heighten Risks to the growth outlook for LAC are firmly to vulnerability to financial sector stress and could the downside, many of them stemming from the result in debt servicing challenges as interest rates COVID-19 pandemic. A continued acceleration rise in the context of recovering activity. Many of COVID-19 cases in the second half of the year economies in the region entered the pandemic would further stress domestic health systems, with with worse fiscal indicators than they had prior to the risk of high fatality rates in countries with low the global financial crisis (Chapter 1; World Bank capacity to manage a large outbreak. It is also 2020m). possible that outbreaks in large regional economies Corporate debt in the region is broadly at more will generate intra-regional economic spillovers in manageable levels than government debt addition to those from advanced economies—for (notwithstanding pockets of significant Central America through trade and remittance vulnerabilities, such as Pemex in Mexico), and channels with Mexico; for Argentina and Paraguay banking sectors are broadly sound. However, this through trade channels with Brazil; and for Brazil, situation could deteriorate in the near term if Bolivia, Paraguay, and Uruguay through trade and financing conditions remain tight and a protracted remittance channels with Argentina. Moreover, a period of pandemic-related business interruptions renewed wave of COVID-19 outbreaks in major weakens cashflows materially and leaves companies global economies could prolong the negative unable to service their debt. Small and medium global spillovers the region has experienced in enterprises, which represent the vast majority of recent months. companies in the region, already faced worse Although social assistance measures are expected financing conditions than large companies prior to to partially soften the economic impacts of the the pandemic (OECD 2020). pandemic, widespread informality in the region In the baseline outlook, oil prices are expected to will limit their reach (World Bank 2019c). recover in 2021 as the shock of pandemic to the Moreover, the poorest members of society have global economy fades. However, the path of oil little capacity to manage negative income shocks G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 LATIN AME RIC A AN D THE C ARIBBE AN 85 prices is also contingent on policy decisions by particularly elevated risks for countries where these OPEC+ countries. Unexpected policy develop- sectors represent a large share of the economy ments could postpone a recovery in oil prices, with (Figure 2.3.2.F). Prolonged school closures during growth implications for some countries (Figure the pandemic could have adverse effects on human 2.3.2.E). capital accumulation and potential growth (Chapter 3; Wang et al. 2020). Downside risks also emanate from long-lasting pandemic impacts, such as the possibility that Finally, LAC faces persistent risks related to consumer demand does not recover fully after the natural disasters and weather-related events, pandemic fades (Chapter 3; Smith et al. 2014). including the upcoming hurricane season in the Demand for tourism, personal services, and Caribbean. A major natural disaster on the heels of entertainment, for instance, may be slow to the COVID-19 pandemic would be economically recover if pandemic-related fears or concerns of a devastating for some countries in the region. second wave of the outbreak persist, with TABLE 2.3.1 Latin America and the Caribbean forecast summary Percentage point differences from January 2020 (Real GDP growth at market prices in percent, unless indicated otherwise) projections 2017 2018 2019e 2020f 2021f 2020f 2021f EMDE LAC, GDP1 1.9 1.7 0.8 -7.2 2.8 -9.0 0.4 GDP per capita (U.S. dollars) 0.7 0.6 -0.3 -8.1 1.9 -8.9 0.4 (Average including countries with full national accounts and balance of payments data only) 2 EMDE LAC, GDP2 1.9 1.7 0.8 -7.2 2.8 -9.0 0.4 PPP GDP 2.0 1.7 0.8 -7.1 2.9 -8.9 0.4 Private consumption 2.7 2.0 1.1 -8.3 2.9 -10.4 0.2 Public consumption 0.7 1.3 -0.1 1.8 0.1 0.9 -0.9 Fixed investment -0.2 2.2 -1.0 -11.1 4.7 -13.7 0.7 Exports, GNFS3 3.8 4.2 0.6 -12.5 6.4 -15.3 3.3 Imports, GNFS3 6.3 5.1 -0.9 -13.2 5.9 -16.5 2.1 Net exports, contribution to growth -0.5 -0.2 0.3 0.2 0.1 0.3 0.3 Memo items: GDP South America4 1.6 1.3 1.0 -7.4 2.7 -9.3 0.1 Central America5 4.0 2.7 2.4 -3.6 3.6 -6.6 0.3 Caribbean6 3.2 5.0 3.6 -1.8 3.3 -7.4 -0.6 Brazil 1.3 1.3 1.1 -8.0 2.2 -10.0 -0.3 Mexico 2.1 2.2 -0.3 -7.5 3.0 -8.7 1.2 Argentina 2.7 -2.5 -2.2 -7.3 2.1 -6.0 0.7 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. Due to the lack of reliable data of adequate quality, the World Bank is currently not publishing economic output, income, or growth data for Venezuela, and Venezuela is excluded from cross-country macroeconomic aggregates. 2. Aggregate includes all countries in Table 2.3.2 except Dominica, Grenada, Guyana, Haiti, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Suriname. 3. Exports and imports of goods and non-factor services (GNFS). 4. Includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, and Uruguay. 5. Includes Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama. 6. Includes Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Suriname. Click here to download data. 86 CHAPTER 2.3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 TABLE 2.3.2 Latin America and the Caribbean country forecasts1 Percentage point differences from January 2020 (Real GDP growth at market prices in percent, unless indicated otherwise) projections 2017 2018 2019e 2020f 2021f 2020f 2021f Argentina 2.7 -2.5 -2.2 -7.3 2.1 -6.0 0.7 Belize 1.9 2.1 0.3 -13.5 6.7 -15.6 4.9 Bolivia 4.2 4.2 2.7 -5.9 2.2 -8.9 -1.0 Brazil 1.3 1.3 1.1 -8.0 2.2 -10.0 -0.3 Chile 1.2 3.9 1.1 -4.3 3.1 -6.8 0.1 Colombia 1.4 2.5 3.3 -4.9 3.6 -8.5 -0.3 Costa Rica 3.9 2.7 2.1 -3.3 3.0 -5.8 0.0 Dominica2 -9.5 0.5 9.6 -4.0 4.0 -8.9 -0.1 Dominican Republic 4.7 7.0 5.1 -0.8 2.5 -5.8 -2.5 Ecuador 2.4 1.3 0.1 -7.4 4.1 -7.6 3.3 El Salvador 2.3 2.4 2.4 -5.4 3.8 -7.9 1.3 Grenada 4.4 4.2 3.1 -9.6 6.5 -12.5 3.6 Guatemala 3.0 3.1 3.6 -3.0 4.1 -6.0 0.9 Guyana 2.1 4.1 4.7 51.1 8.1 -35.6 -2.4 Haiti3 1.2 1.5 -0.9 -3.5 1.0 -2.1 1.5 Honduras 4.8 3.7 2.7 -5.8 3.7 -9.3 0.2 Jamaica 1.0 1.9 0.7 -6.2 2.7 -7.3 1.5 Mexico 2.1 2.2 -0.3 -7.5 3.0 -8.7 1.2 Nicaragua 4.6 -4.0 -3.9 -6.3 0.7 -5.8 0.1 Panama 5.6 3.7 3.0 -2.0 4.2 -6.2 -0.4 Paraguay 5.0 3.4 0.0 -2.8 4.2 -5.9 0.3 Peru 2.5 4.0 2.2 -12.0 7.0 -15.2 3.5 St. Lucia 2.2 1.4 1.4 -8.8 8.3 -12.0 5.3 St. Vincent and the Grenadines 1.0 2.0 0.4 -5.5 4.0 -7.8 1.7 Suriname 1.8 2.6 2.3 -5.0 3.0 -7.5 0.9 Uruguay 2.6 1.6 0.2 -3.7 4.6 -6.2 1.1 Source: World Bank. Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. 1. GDP and expenditure components are measured in 2010 prices and market exchange rates. 2. Percentage point differences are relative to the World Bank’s October 2019 forecast. The January 2020 Global Economic Prospects did not include a forecast for Dominica. 3. GDP is based on fiscal year, which runs from October to September of next year. Click here to download data. Economic activity the Middle East and North Africa is expected to contract by more than 4 percent in 2020, as consumption, exports, and services activity such as tourism are severely disrupted by the COVID-19 pandemic, and in oil exporters, export and fiscal revenues sharply fall with the plunge in oil prices. Fiscal and monetary policy support in response to the pandemic has been swift in large regional economies. Regional growth is expected to resume in 2021 as the impact of the pandemic subsides and investment improves. Risks to the outlook are heavily tilted to the downside and include much more widespread regional COVID-19 outbreaks, prolonged weakness in oil prices and global activity, and intensification of regional conflicts. Recent developments restrictions, and schools and government offices closures. Recent relaxations to mitigation measures Economic conditions in the Middle East and have been gradual. Large economic stimulus North Africa (MENA) have worsened packages have been announced in several major substantially as a result of the COVID-19 regional economies, including those in the Gulf pandemic (Figure 2.4.1.A).1 The outbreak has Cooperation Council (GCC). These packages been the largest and had an earlier onset in the have included measures on health spending, social Islamic Republic of Iran, but other countries are assistance, and small business support. Egypt’s also experiencing rapid increases in infections. The central bank has cut policy rates by 300 basis pandemic and the measures taken to stem the points in response to COVID-19 concerns, while pandemic have steeply weakened activity, while central banks with pegs to the U.S. dollar (e.g., increased investor risk aversion has tightened GCC) cut rates in tandem with emergency cuts by financial conditions. The sharp fall in global oil the U.S. Federal Reserve. and export demand is curtailing exports in the Activity among oil-exporting economies has region’s oil exporters, with adverse spillovers to decelerated across the board. Non-oil activity non-oil sectors (Figure 2.4.1.B). In addition, the sharply slowed in large oil exporters (e.g., Saudi region continues to suffer from challenges related Arabia, United Arab Emirates) after the pandemic to longstanding security strains and refugees, as hit the region (Figure 2.4.1.C). The collapse in well as large structural impediments to growth. global demand due to the pandemic resulted in a Widespread policy measures were implemented to steep fall in oil prices (Chapter 4). In an attempt help limit the spread of infection—these include to mitigate this, a new OPEC+ production cut large public events cancellations, air travel agreement was renegotiated after a temporary collapse in March (Figure 2.4.1.D). Investment is also hindered by high uncertainty associated with Note: This section was prepared by Lei Sandy Ye. Research pandemic-related disruptions. assistance was provided by Heqing Zhao. 1 The World Bank’s Middle East and North Africa aggregate Among oil importers, activity is decelerating in includes 16 economies. Bahrain, Kuwait, Oman, Qatar, Saudi both large and small economies for reasons related Arabia, and the United Arab Emirates comprise the Gulf Cooperation Council (GCC); all are oil exporters. Other oil exporters and unrelated to COVID-19. Tourism prospects in the region are Algeria, Iran, and Iraq. Oil importers in the region in these economies faded as domestic and are Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank and Gaza. Libya, the Syrian Arab Republic, and Yemen are international pandemic restrictions hold back excluded from regional growth aggregates due to data limitations. arrivals and hotel occupancy. Exports have fallen 88 CHAPTER 2.4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 2.4.1 MENA: Recent developments sharply amid anemic external demand, including Regional output is expected to contract by more than 4 percent in 2020 in from the Euro Area (a major export partner). the face of the COVID-19 pandemic and the plunge in oil prices associated Domestic policy uncertainty is further weighing with collapsing global demand. Non-oil activity is decelerating in large heavily on investment activity among smaller oil GCC economies as pandemic concerns amplify. A new OPEC+ production cut agreement was negotiated to continue recently after earlier uncertainty. importers. Egypt, the largest oil importer, has further cut policy rates in response to COVID-19 concerns amid moderating inflation. The spillovers of the recent Inflation has continued to moderate in MENA. In global financial turbulence have also reached MENA. Egypt, inflation has generally declined over the A. Growth B. Global oil demand expectations past year, partly owing to the stability of the exchange rate. In the GCC, inflation has averaged less than 1 percent and it has also been broadly contained in smaller non-GCC economies. Iran’s inflation has been falling on a year-by-year basis, although it still remains elevated at about 20 percent. Moderating inflation has allowed monetary policy space for large economies like Egypt to aggressively cut policy rates in response to the pandemic (Figure 2.4.1.E). C. Composite PMI D. Oil production The financial sector in MENA has been shaken in recent months by the broad-based erosion of investor sentiment toward EMDEs under the pandemic, leading to sharp falls in equity market indexes and capital outflows in large economies (Figure 2.4.1.F). In response to COVID-19, authorities have introduced financial stability and corporate sector support measures, including zero- interest collateralized banking sector loans in the UAE and measures to support lending to small E. Egypt F. GCC equity markets and medium-sized enterprises in Saudi Arabia. Outlook As a consequence of the pandemic and oil market developments, GDP in the region is forecast to contract sharply by 4.2 percent in 2020, although there is substantial uncertainty around this projection (Table 2.4.1). The forecasts have been Sources: International Energy Agency, Haver Analytics, World Bank. A. Weighted average growth rate of real GDP. “downside” refers to downside regional growth scenar- further downward revised from those in January io in 2020 and 2021. and April and reflect continued deterioration of B. Denotes IEA forecasts for global oil demand. X-axis denotes the forecasted quarter. Legend denotes month-year in which forecast is published. the outlook in the global economy recently C. H1 and H2 denote monthly period averages of the first and second half of 2019. D. Crude oil production. GCC includes 6 economies. (Arezki et al. 2020; Chapter 1). Oil exporters E. Policy rate refers to overnight deposit rate. Inflation refers to year-on-year consumer price inflation. suffer from the plunge in oil prices and ongoing Reserves denote gross official reserves. Equity index denotes the EGY 100 index. Reserves are based on quarterly data. domestic outbreaks of the pandemic (Figure F. MSCI emerging market share price indexes. Click here to download data and charts. 2.4.2.A). Oil importers suffer spillovers from weakness in advanced economies and major EMDEs, pandemic-related disruptions, and falling tourism. Moderating inflation in much of the region has provided room for monetary authorities in some economies to loosen policy rates to G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 MID D LE E AS T AN D NO RTH AFRIC A 89 mitigate the impact of the pandemic on the real FIGURE 2.4.2 MENA: Outlook and risks economy (Figure 2.4.2.B). The baseline outlook The outlook in large MENA economies is weighed heavily by the pandem- for the region rests upon the assumptions that the ic, although moderate inflation in parts of the region allows some space for pandemic subsides somewhat later in the year, and additional monetary easing. Oil importers are reliant on tourism activity and are vulnerable to further decline in tourist arrivals and global disruptions. that geopolitical tensions do not escalate further. The capacity for an effective response by health systems varies widely, making some large economies unprepared for an intensification of infection Among oil exporters, output in 2020 is expected rates. Conflict-related risks in fragile economies have not subsided. to continue to contract from the previous year, as A. COVID-19 cases: 2020 B. Policy rates low oil prices also reduce non-oil activity via income effects. Iran’s GDP—which had already fallen in each of the previous two years—is expected to shrink again in 2020, by 5.3 percent, partly reflecting the effects of the large-scale COVID-19 outbreak on domestic consumption and the services sectors (e.g., tourism) (Table 2.4.2). In many oil exporters, growth will be significantly constrained by renewed policy cuts in oil production. In Saudi Arabia and other GCC C. Tourism D. Firm reliance on foreign input economies, low oil prices, elevated uncertainty suppliers associated with potential further spikes of COVID -19, and household level impacts of initial fiscal adjustments (e.g., VAT increase, payroll restraint) are expected to weigh heavily on non-oil activity. The economies of Algeria and Iraq continue to grapple with the consequences of low oil prices and structural vulnerabilities. Growth in oil exporters is expected to rebound in 2021, as the pandemic subsides and investment recovers, including large infrastructure investment in the E. Health security index F. Violence in fragile zones GCC. Longer-term diversification programs, the recent relaxation of foreign investment restrictions, and improved regulatory environments should also support the rebound, including a recovery from adverse global spillovers and low confidence. Among oil importers, output is expected to contract by 0.8 percent in 2020, reflecting a broad-based deceleration (and in many cases Sources: The Armed Conflict Location and Event Data Project, Global Health Security Index, Haver Analytics, World Bank, World Travel and Tourism Council. contraction) in both large and small economies. A. Based on weekly data. Latest observation is week 4 of May 2020. B. GCC denotes unweighted average rates of 6 GCC economies. Period averages. Tourism, which had previously been improving C. Unweighted averages. Based on 2019 data. and supported by government promotion D. Based on latest available year of data for each non-GCC economy. Data are based on survey responses for firms in the World Bank Enterprise Surveys. “Share of foreign-sourced inputs” denotes initiatives, is expected to suffer substantially. Oil firms’ average share of inputs from foreign sources. E. Based on 2019 edition of Global Health Security Index (best=100). The index assesses countries’ importers are reliant on tourism revenues, and health capability and security in six categories: prevention, detection, response, health system, compliance, and risk. Unweighted averages. “Fragile zone” include Iraq, Syria, Libya, and Yemen. arrivals from the Euro Area and other key source “AE” denotes advanced economies areas are expected to fall (Figure 2.4.2.C). F. “Fragile zone” includes Iraq, Libya, Syria, and Yemen. Y-axis denotes total number of incidents of conflicts of each type that are reported in the dataset. Investment and exports are expected to contract Click here to download data and charts. amid weak global and domestic confidence and high policy uncertainty. Generally supportive activity in Egypt before late FY2020 (ending in 90 CHAPTER 2.4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 June) has been disrupted by the pandemic, while health and oil shocks are likely to be amplified by other smaller oil importers grapple with additional structural impediments (e.g., low diversification) shocks to growth (e.g., balance of payments in and weigh on job creation and long-term growth Lebanon). Firms in smaller oil importers are also prospects in the region (Arezki et al. 2020; Baduel, expected to suffer from anemic demand and global Geginat, Pierre 2019; Jaller, Sophia, Martin disruptions, given some reliance on foreign- 2020). These shocks also increase the difficulty of sourced inputs (Figure 2.4.2.D). Weak financial implementing long-term growth strategies in the system balance sheets and high public debt have region, including those that foster energy further compounded the financial stability, sustainability (World Bank 2019d). growth, and humanitarian challenges faced by the smaller oil importers. Lower oil prices could Negative spillovers from major trading partners provide some relief to oil importers’ current are already significant and could intensify. accounts, but high volatility in oil prices is The Euro Area is an important export destination weighing on investment and confidence, limiting for economies in the Maghreb region, and China their benefits. is an important source of trade and investment for some large oil exporters. Larger-than-expected Medium-term growth prospects for the MENA growth spillovers from outside the region could region are contingent upon no amplification of further set back MENA growth prospects via even regional conflicts or their spillovers. Continued lower oil demand, weaker foreign direct structural programs in many economies (e.g., investment, and weaker intraregional remittance Egypt’s private sector development, GCC’s flows (for which oil importers are reliant on the diversification programs; Youssef et al. 2019) are GCC). expected to encourage growth-enhancing structural reforms (e.g., stronger fiscal manage- The recent sharp decline in oil prices and the ment framework, water access), and reforms in the continued high uncertainty about their future path financial sector are expected to continue to also pose an important risk to MENA’s short-term strengthen the investment climate in the region. outlook. If this uncertainty lingers, business and But success is contingent upon a sustained consumer confidence would be dampened further, commitment to reforms, including by newly undermining efforts by oil importers to reform formed governments (Mansour et al. 2020). their energy subsidies and enact fiscal adjustment programs. Persistently low oil prices would also Risks further erode MENA’s already weak fiscal space and heavily constrain investment activity in the Risks to the outlook are heavily tilted to the region, as oil prices and public investment often downside. Thus far, Iran has experienced the comove closely in MENA (Albino-War, et al. largest number of reported COVID-19 cases in 2014). the region. Similar outbreaks in other economies could impose broad-based damage to their In addition to the effects of the pandemic, manufacturing and services sectors. Moreover, conflict-related risks in MENA remain high widespread infections could exact a humanitarian (Figure 2.4.2.F). Conflicts in Syria and Libya have toll, especially among the fragile economies (e.g., been complicated by military actions of external Syria) where forced displacement and insecurity parties. The impact of conflict on Libya’s oil leave populations already highly vulnerable. Many production could further contribute to volatility in non-GCC economies also are ill-equipped to global oil markets. Yemen’s peace prospects are respond owing to weak fiscal positions and heavily clouded by the instability of negotiated inadequate health systems, leaving them in danger agreements among various parties. U.S.-Iran of negative feedbacks between economic activity tensions have not eased appreciably even as both and health outcomes (Figure 2.4.2.E). Moreover, countries attempt to cope with the effects of the the adverse impacts of the simultaneous public pandemic. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 MID D LE E AS T AN D NO RTH AFRIC A 91 The pace of reform, especially in smaller oil the face of nearer-term pressures. If reform importers, has been impeded by political initiatives are not integrated as part of COVID-19 challenges recently, including delays in the policy responses, further delays could hinder formation of governments. COVID-19 has further medium and long-term growth prospects in the clouded the prospects of reforms, as it adds region via lower rate of job creation and private pressure to shift to non-reform policy priorities in sector development (Chapter 3). TABLE 2.4.1 Middle East and North Africa forecast summary Percentage point differences from January (Real GDP growth at market prices in percent, unless indicated otherwise) 2020 projections 2017 2018 2019e 2020f 2021f 2020f 2021f EMDE MENA, GDP 1 1.1 0.9 -0.2 -4.2 2.3 -6.6 -0.4 GDP per capita (U.S. dollars) -0.8 -0.9 -1.9 -5.8 0.8 -6.6 -0.3 (Average including countries with full national accounts and balance of payments data only)2 EMDE MENA, GDP 2 1.4 0.9 -0.6 -3.8 2.3 -6.1 -0.4 PPP GDP 1.7 1.0 -0.7 -3.5 2.4 -5.9 -0.5 Private consumption 2.7 0.6 0.5 -1.8 1.6 -3.7 -0.6 Public consumption 5.0 3.6 -0.5 0.0 1.7 -2.1 -0.6 Fixed investment 2.1 1.2 3.0 -2.0 4.1 -7.2 -1.6 Exports, GNFS 3 5.9 2.5 -5.4 -6.9 3.1 -9.9 -0.5 Imports, GNFS 3 9.1 -2.1 -3.3 -3.5 2.5 -6.9 -1.5 Net exports, contribution to growth -0.5 2.2 -1.6 -2.1 0.5 -2.4 0.1 Memo items: GDP Oil exporters 4 0.5 0.2 -0.9 -5.0 2.1 -7.0 -0.2 GCC countries 5 -0.4 2.0 0.6 -4.1 2.2 -6.3 -0.4 Saudi Arabia -0.7 2.4 0.3 -3.8 2.5 -5.7 0.3 Iran 3.8 -4.7 -8.2 -5.3 2.1 -5.3 1.1 Oil importers 6 3.9 3.9 2.7 -0.8 3.2 -5.2 -1.4 Egypt 7 4.2 5.3 5.6 3.0 2.1 -2.8 -3.9 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. 1. GDP and expenditure components are measured in 2010 prices and market exchange rates. Excludes Libya, Syria, and Yemen due to data limitations. 2. Aggregate includes all countries in notes 4 and 6 except Djibouti, Iraq, Qatar, and West Bank and Gaza, for which data limitations prevent the forecasting of GDP components. 3. Exports and imports of goods and non-factor services (GNFS). 4. Oil exporters include Algeria, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. 5. The Gulf Cooperation Council (GCC) includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. 6. Oil importers include Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank and Gaza. 7. Data for Egypt corresponds to the fiscal year. The fiscal year runs from July 1 to June 30 in Egypt; the column labeled 2018 reflects the fiscal year ended June 30, 2018. Click here to download data. 92 CHAPTER 2.4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 TABLE 2.4.2 Middle East and North Africa economy forecasts1 Percentage point differences from January (Real GDP growth at market prices in percent, unless indicated otherwise) 2020 projections 2017 2018 2019e 2020f 2021f 2020f 2021f Algeria 1.3 1.4 0.8 -6.4 1.9 -8.3 -0.3 Bahrain 4.3 1.8 1.8 -4.5 2.3 -6.6 -0.1 Djibouti 5.4 8.4 7.5 1.3 9.2 -6.2 1.2 Egypt2 4.2 5.3 5.6 3.0 2.1 -2.8 -3.9 Iran 3.8 -4.7 -8.2 -5.3 2.1 -5.3 1.1 Iraq -2.5 -0.6 4.4 -9.7 1.9 -14.8 -0.8 Jordan 2.1 1.9 2.0 -3.5 2.0 -5.7 -0.4 Kuwait -4.7 1.2 0.4 -5.4 1.1 -7.6 -0.9 Lebanon 0.9 -1.9 -5.6 -10.9 -6.3 -11.2 -6.7 Morocco 4.2 3.0 2.3 -4.0 3.4 -7.5 -0.2 Oman 0.3 1.8 0.5 -4.0 2.0 -7.7 -2.3 Qatar 1.6 1.5 -0.3 -3.5 3.6 -5.0 0.4 Saudi Arabia -0.7 2.4 0.3 -3.8 2.5 -5.7 0.3 Tunisia 1.9 2.7 1.0 -4.0 4.2 -6.2 1.6 United Arab Emirates 0.5 1.7 1.7 -4.5 1.4 -7.1 -1.6 West Bank and Gaza 1.4 1.2 0.9 -7.6 5.1 -10.1 2.5 Source: World Bank. Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of economies’ prospects do not significantly differ at any given moment in time. 1. GDP and expenditure components are measured in 2010 prices and market exchange rates. Excludes Libya, Syria, and Yemen due to data limitations. 2. Data for Egypt corresponds to the fiscal year. The fiscal year runs from July 1 to June 30 in Egypt; the column labeled 2018 reflects the fiscal year ended June 30, 2018. Click here to download data. The COVID-19 pandemic has sharply weakened consumption and manufacturing activity, and has damaged the tourism and other services industries across the South Asia region. The deterioration in domestic conditions, together with spillovers from a global economic contraction, are expected to result in an output contraction of 2.7 percent in 2020. Growth in 2021 is projected to rebound to around 3 percent after the effects of the pandemic fade and global headwinds taper. Downside risks to the outlook predominate and could materialize as a stronger surge of COVID-19 within the region, an intensification of financial market stress, a deeper pullback in remittance inflows, or a stronger-than-expected global economic contraction. Recent developments concomitantly fallen in economies like Pakistan (Figure 2.5.1.B). Key trading corridors in the Although the South Asia (SAR) region has thus far region also witnessed disruptions. witnessed a smaller number of reported COVID- 19 cases than most other regions, previously Private consumption has been severely hindered as supportive factors, such as solid tourism activity, large-scale lockdowns were instituted in several have largely faded, and domestic pandemic economies, including Bangladesh, India, Nepal, mitigation measures are weighing heavily on short- and Pakistan. Some recent relaxations to these term economic activity. Sharply deteriorating measures have been cautious, given continued rise economic conditions in advanced economies and in COVID-19 cases. Non-essential business major emerging market and developing economies closures stalled retail sales. In rural areas, food and (EMDEs) have severely impacted export and other other essential activity deliveries also faced major industries in SAR, while nationwide lockdowns impediments. Closure of small and medium sized have curtailed consumption. The pandemic enterprises, a key engine of regional private sector reached SAR later than some other regions, but activity, induced substantial loss in employment the incidence of cases has been rising rapidly. and private investment. Industrial and services activity has plummeted in Tourism activity was on a path to recovery but the region after global demand collapsed. This is became severely damaged by the pandemic. This reflected in sharp decelerations in the purchasing includes sharp declines in tourist arrivals in managers’ indexes and new export orders in India, economies like Bhutan, Nepal, Sri Lanka and the largest regional economy (Figure 2.5.1.A). especially Maldives, where tourism directly and Trade activity has sharply fallen across the region. indirectly accounts for more than two-thirds of Sales and production in a number of key sectors in GDP. This includes a decline in arrivals from regional economies (e.g., autos in Pakistan, China, a key market, since early in the year. garment in Bangladesh) have been hit especially International travel bans and other restrictions hard amid anemic demand. Business confidence in adopted by regional economies (e.g., airport both manufacturing and services sectors have closure for arrivals in Sri Lanka) have further contributed to the weakness in tourism. Note: This section was prepared by Lei Sandy Ye. Research In response to the pandemic, fiscal and other assistance was provided by Heqing Zhao. stimulus actions have been announced in virtually 94 CHAPTER 2.5 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 2.5.1 SAR: Recent developments all major regional economies. These stimulus The COVID-19 outbreak has significantly reduced industrial and services packages have included health spending increases, activities and confidence in the region. The pandemic has also rattled its direct transfers, social assistance, employment financial markets, including some exchange rate depreciation. Inflation in protection, support for migrants and rural area the region is now contained by subdued activity and low oil prices, allowing room for monetary stimulus to help resuscitate activity and private workers, credit support for small and medium- sector credit. sized enterprises, and food security measures. A. India: Purchasing managers’ B. Pakistan: business confidence Financial markets in SAR have been rattled earlier indexes surveys in the year by the global market turmoil associated with the pandemic. Equity indexes tumbled and capital flows in large economies have reversed amid high investor risk aversion, with some stabilization recently (Figure 2.5.1.C). Due to balance of payment pressures, the exchange rates of large economies have also deteriorated somewhat (Figure 2.5.1.D). High financial market uncertainty has contributed to delays in capital spending in large corporate conglomerates. C. Equity indices: SAR D. Exchange rates Upward pressure on inflation late last year is now offset by the effects of lower oil prices and markedly more subdued activity. As a result, inflation is beginning to ease in the region (Figure 2.5.1.E). Central banks in virtually all SAR countries have taken measures to stimulate economic activity as the impacts of COVID-19 become increasingly pronounced, lowering policy interest rates and providing additional liquidity to E. Inflation F. Private sector credit growth the financial system in attempt to support already- weak private sector credit growth (Figure 2.5.1.F). Outlook Growth in the region is projected to register a contraction of -2.7 percent in 2020 and is marked by high uncertainty (Table 2.5.1). Across the region, pandemic mitigation measures will severely Source: Haver Analytics, JPMorgan, World Bank. hinder consumption and services activity, while A. IHS Markit Diffusion PMI indexes. New export orders are a subcomponent under the manufacturing and services PMI indexes. high uncertainty about the pandemic will con- B. State Bank of Pakistan business confidence indexes. C. MSCI local currency share price indexes. “EMDE” denotes MSCI Emerging Market Index. strain private investment. The sheer depth of D. Parentheses indicate start month of event. “GFC” denotes global financial crisis. Bilateral USD average monthly exchange rate. Columns denote percent depreciation relative to start month. global contractionary activity in the current E. CPI inflation (year-on-year monthly rate). environment will also weigh substantially on SAR F. Monthly year-on-year growth of private sector credit.. Data for India refers to credit to the commercial sector, for Bangladesh refers to deposit money banks and central bank’s claim to the activity, despite relatively more modest trade private sector, for Pakistan refers to claims on public nonfinancial corporations and other sectors, and for Sri Lanka refers to credit to corporations and private sector. linkages with advanced economies than other Click here to download charts and data. EMDE regions (Special Focus). Despite the rela- tively low number of reported cases per capita, COVID-19 infections are still rising in several economies in the region (Figure 2.5.2.A). As a result, the outlook is highly uncertain and subject to large downside risks (Figure 2.5.2.B, Chapter 1). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 SOUTH ASIA 95 In India, growth is estimated to have slowed to 4.2 FIGURE 2.5.2 SAR: Outlook and risks percent in FY 2019/20 (the year ending in March- Growth in SAR is projected to contract as a result of the COVID-19 2020) and output is projected to contract by 3.2 pandemic, damaging consumption, tourism, and other services activities. percent in FY2020/21, when the impact of Despite aggressive monetary policy, inadequate health systems and weak infrastructure mean that a large-scale domestic outbreak of COVID-19 COVID-19 will largely materialize. Stringent could have humanitarian consequences. High debt could further measures to restrict the spread of the virus, which compound global financial market stress and may hinder monetary policy effectiveness. While low oil prices may provide some support, they will heavily curtail activity, will contribute to the weaken remittance flows, especially from the Gulf Cooperation Council. contraction. Spillovers from contracting global growth and balance sheet stress in the financial A. COVID-19 cases: 2020 B. Growth outlook sector will also adversely impact activity, despite some support from fiscal stimulus and continued monetary policy easing (Figure 2.5.2.C). Pakistan and Afghanistan are both projected to experience contractions in 2020. Mitigation measures imposed in these countries are expected to weigh heavily on private consumption, contributing to output contractions of -2.6 percent (FY2019/20) and -5.5 percent, respec- tively. Key labor-intensive export sectors like C. Policy rates D. Average days for firms to obtain electricity connection textiles are expected to contract sharply and subsequently recover slowly. Bangladesh and Nepal are projected to experience substantial decelerations in FY2019/20. In Bangladesh, growth is expected to slow to 1.6 percent, 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 Nepal, growth is projected to decline to 1.8 percent due to largely E. Debt profile F. Remittance inflows, by source region the same factors, in addition to a drop in tourism (more than one-third of which are from China and India). Both economies are also vulnerable to supply chain disruptions, both domestic and those stemming from imports of intermediate goods, as well as travel-related disruptions to international contractors in sectors like construction. A sharp decline in tourism is also expected to weigh on activity in Bhutan and Sri Lanka, and Source: Institute for International Finance, Haver Analytics, Johns Hopkins University, World Bank. A. Denotes confirmed cases of COVID-19. RHS denotes weekly change in regional total cases. even more so in the Maldives. In Sri Lanka, the Based on weekly data. Last observation is week 4 of May. combination of falling tourism, manufacturing B. Legend dates denote the relevant editions of the GEP. Diamonds denote 2020 and 2021 regional growth downside scenarios. activity and services associated with the pandemic C. Refers to repo rate for Bangladesh, India, and Pakistan, and standing deposit facility rate for Sri Lanka. is envisaged to cause output to contract by 3.2 D. Days for firms to obtain electricity connection upon application, based on latest available years of percent, despite the earlier recovery from the April World Bank Enterprise Surveys data. E. Based on 2019Q3 or Q4 data. Data come from Institute for International Finance. 2019 terrorist attacks. The Maldives is expected to F. Denotes share of remittances inflows from MENA and non-MENA countries. Based on 2018 bilateral remittance data. GCC=”Gulf Cooperation Council” and includes Bahrain, Oman, Kuwait, experience a deep contraction in 2020, of 13 Qatar, Saudi Arabia, and the United Arab Emirates; and are all part of the MENA region. Click here to download charts and data. percent, owing to their heavy reliance on tourism, especially from China and Western Europe. 96 CHAPTER 2.5 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 The sharp decline in oil prices in 2020 could A continuation of recent disruptions in global provide some support to the region, given sizable financial markets could further add pressure to oil imports in India and Pakistan, and help vulnerable balance sheets of the banking and non- cushion fiscal and current account balances. This banking financial sectors in several large positive effect may be offset by falling remittance economies in the region (e.g., India). These inflows from oil-exporting economies, however, as vulnerabilities include elevated non-performing economies that host migrants from SAR struggle loan levels in many regional economies. Public with the twin challenges of the pandemic and the banks in the SAR region have a large market oil price collapse. These flows are expected to presence, which may help provide countercyclical decline by about one-fifth in the SAR region this support during times of stress, but are also subject year (World Bank 2020l). to inefficiencies associated with agency problems and information asymmetry (World Bank 2020n; Growth in 2021 is projected to recover to 2.8 Hossain, Jain, and Mitra 2013). percent as pandemic mitigation measures are rolled back and services and manufacturing High levels of debt among systemically important activity resume. An expected tapering of global firms in some economies risk saddling headwinds is expected to further support recovery governments with contingent liabilities should of activity in the region. Lingering legacies from balance sheets deteriorate to the point that the pandemic, such as slow revival of confidence government bailouts are needed, with adverse and tourism activity, will still weigh on the pace of implications for future public debt sustainability. this recovery, however. Government debt refinancing needs can be vulnerable to deeper reversal of global capital flows Risks and higher global financial market uncertainty. A further pullback in capital flows would likely Risks to the outlook are heavily titled to the reduce investment activity and private sector credit downside. The most acute of these risks are growth. Corporate balance sheet weakness in associated with the COVID-19 pandemic. regional economies could also hinder capital Although reported COVID-19 outbreaks in SAR investment. High debt and deficits, as well as have started later and remain smaller in per capita inadequate fiscal management regimes across the terms compared to most other regions, they are region, also limit the scope and effectiveness of expanding at a faster pace. Coupled with fiscal stimulus (Goretti et al. 2019; Figure widespread mobility restrictions, this could result 2.5.2.E). In some instances, financial sector in humanitarian consequences, given the region’s support due to COVID-19 could raise financial high population, large informal sectors, high sector risks by stressing the capacity of commercial inequality, and underdeveloped health systems banks to support private-sector credit. (Special Focus). Besides the potential for substantial loss of lives, there is a risk that the Spillovers from major trading partners could be pandemic will trigger a long-lasting rise in poverty, more severe than expected. Despite the limited especially among the low-income countries in the integration of SAR into global value chains relative region. This could occur through food shortages, to regions such as East Asia and Pacific or Europe for example, if supply disruptions raised food and Central Asia, the region is still somewhat prices to unaffordable levels. Estimates for selected reliant on countries abroad for intermediate inputs areas in the region suggest that those that face in some sectors (e.g., Bangladesh’s pharmaceutical food insecurity could be a significant share of and textile sector; India’s auto sector). Economies population in vulnerable economies (UN 2020). like Nepal are also vulnerable to sharper-than- Inadequate infrastructure, such as existing major expected deceleration in India, an important intra- constraints to electricity access, can magnify the regional trade partner (Masha and Ding 2012, negative impacts of lockdowns via low World Bank 2016). Permanent loss in gross productivity and poor service delivery (Figure value-added supply chain linkages after the fading 2.5.2.D). of the pandemic could damage medium-term G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 SOUTH ASIA 97 growth prospects of SAR via lower productivity regional economies are heavily dependent on these (Chapter 3). types of remittance flows, a large portion of which is from MENA, especially in the Gulf Co- Further volatility in oil prices and even more operation Council. Although these flows are often severe contracting activity in economies in the countercyclical, that’s unlikely to be the case in the Middle East and North Africa (MENA) could current environment given the highly synchro- further curtail remittance flows from South Asian nized nature of the global shock (World Bank expatriate workers (many of whom work in the 2020b; Figure 2.5.2F). Gulf economies) to their home countries. Many TABLE 2.5.1 South Asia forecast summary Percentage point differences from January (Real GDP growth at market prices in percent, unless indicated otherwise) 2020 projections 2017 2018 2019e 2020f 2021f 2020f 2021f EMDE South Asia, GDP1, 2 6.5 6.5 4.7 -2.7 2.8 -8.2 -3.1 GDP per capita (U.S. dollars) 5.2 5.2 3.5 -3.8 1.7 -8.1 -3.0 (Average including countries with full national accounts and balance of payments data only) 3 EMDE South Asia, GDP3 6.5 6.5 4.7 -2.7 2.8 -8.2 -3.1 PPP GDP 6.5 6.5 4.7 -2.8 2.8 -8.3 -3.1 Private consumption 6.4 7.2 4.5 -2.6 3.3 -8.4 -3.0 Public consumption 12.1 8.7 10.8 8.4 6.3 0.6 -1.3 Fixed investment 5.8 11.2 -0.1 -8.2 1.2 -14.6 -5.3 Exports, GNFS4 4.8 10.2 0.3 -12.5 4.1 -17.7 -1.8 Imports, GNFS4 14.1 13.2 -5.8 -13.6 2.6 -18.4 -3.5 Net exports, contribution to growth -2.6 -1.6 1.8 1.1 0.1 1.4 0.6 Memo items: GDP2 16 /17 17 /18 18 /19e 19 /20f 20 /21f 19 /20f 20 /21f South Asia excluding India 5.8 6.0 5.1 2.1 -0.7 -2.7 -5.4 India 8.3 7.0 6.1 4.2 -3.2 -0.8 -9.0 Pakistan (factor cost) 5.2 5.5 1.9 -2.6 -0.2 -5.0 -3.2 Bangladesh 7.3 7.9 8.2 1.6 1.0 -5.6 -6.3 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. 1. GDP and expenditure components are measured in 2010 prices and market exchange rates. 2. National income and product account data refer to fiscal years (FY) for the South Asian countries, while aggregates are presented in calendar year (CY) terms. (e.g., aggregate under 20/21 refers to CY 2020). The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. 3. Subregion aggregate excludes Afghanistan, Bhutan, and Maldives, for which data limitations prevent the forecasting of GDP components. 4. Exports and imports of goods and non-factor services (GNFS). Click here to download data. 98 CHAPTER 2.5 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 TABLE 2.5.2 South Asia country forecasts Percentage point differences from January (Real GDP growth at market prices in percent, unless indicated otherwise) 2020 projections 2017 2018 2019e 2020f 2021f 2020f 2021f Calendar year basis 1 Afghanistan 2.7 1.8 2.9 -5.5 1.0 -8.5 -2.5 Maldives 6.8 6.9 5.2 -13.0 8.5 -18.5 2.9 Sri Lanka 3.6 3.3 2.3 -3.2 0.0 -6.5 -3.7 Fiscal year basis1 16 /17 17 /18 18 /19e 19 /20f 20 /21f 19 /20f 20 /21f Bangladesh 7.3 7.9 8.2 1.6 1.0 -5.6 -6.3 Bhutan 6.3 3.8 3.9 1.5 1.8 -4.1 -5.8 India 8.3 7.0 6.1 4.2 -3.2 -0.8 -9.0 Nepal 8.2 6.7 7.0 1.8 2.1 -4.6 -4.4 Pakistan (factor cost) 5.2 5.5 1.9 -2.6 -0.2 -5.0 -3.2 Source: World Bank. Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. 1. Historical data is reported on a market price basis. National income and product account data refer to fiscal years (FY) for the South Asian countries with the exception of Afghanistan, Maldives, and Sri Lanka, which report in calendar year. The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. Click here to download data. Sub-Saharan Africa has been ravaged by the COVID-19 pandemic this year, likely leading to the sharpest contraction in activity on record. In addition to its heavy toll on health and safety, efforts to contain the spread of the virus—such as travel restrictions, border closures, and national lockdowns—have disrupted the functioning of domestic economies. In addition, sharply lower growth in major trading partners, as well as a collapse in commodity prices, have weighed heavily on exports. Although growth is projected to recover in 2021, the region is especially vulnerable to a larger and longer lasting downturn given the weakness of its health care systems, constrained fiscal policy space, and its limited capacity to effectively implement social distancing measures. It is also at risk of debt distress given high levels of debt and sharply higher borrowing costs. Recent developments balance sheet vulnerabilities to financing shocks, or that are dependent on commodity exports. Activity in Sub-Saharan Africa (SSA) collapsed in In Nigeria, and South Africa—the two largest the first half of this year. The COVID-19 economies in the region—activity has fallen pandemic has spread rapidly across the region, precipitously during the first half of this year. The taking a heavy human and economic toll with over other economies in the region have also suffered 2,500 reported fatalities among more than markedly during the first half of 2020. In addition 100,000 confirmed infections, while causing an to domestic disruptions, several industrial unprecedented disruption to region-wide commodity exporters have had to cope with economic activity (Figure 2.6.1.A). Social- weaker external demand and lower prices for oil distancing measures implemented in most and metals (Angola, Democratic Republic of countries to limit the spread of the pandemic and Congo, Ghana; Chapter 4). Many agricultural ease pressures on often-fragile health systems have commodity exporters have suffered from a collapse brought activity close to a halt in many sectors in export demand as well as disruptions to supply (Figure 2.6.1.B). Moreover, the region has chains (Côte d’Ivoire, Ethiopia, Kenya). The suffered as a result of the impact of the pandemic precipitous fall in global travel as a result of the on key trading partners, the disruption to global pandemic has had a particularly severe impact on travel and supply chains, and the collapse in global countries with significant exposure to global travel commodity prices—particularly those of oil and and tourism (Cabo Verde, Ethiopia, Mauritius, industrial metals (Figure 2.6.1.C). The effect of Seychelles). these shocks has been exacerbated by heightened investor risk-aversion, which has spurred Inflation in the region is expected to edge up this unprecedented capital outflows from the region, year, on average, reflecting sharp currency dislocating currency depreciations, steep stock depreciations and disruptions to supply chains. market falls, and sharply-higher sovereign Despite this, several central banks have eased their borrowing costs (Figures 2.6.1.D and E). monetary stances in response to the COVID-19- Countries that have been most affected are those related slowdown in activity (Democratic with weak health systems, large tourism sectors, Republic of Congo, Ghana, Kenya, Mauritius, South Africa), while others have lowered reserve Note: This section was prepared by Rudi Steinbach. Research requirements to free up liquidity (Botswana, assistance was provided by Maria Hazel Macadangdang. Mozambique), implemented asset purchase 100 CHAPTER 2.6 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 2.6.1. SSA: Recent developments programs (Rwanda, South Africa), or deployed a COVID-19 has spread throughout Sub-Saharan Africa and pushed regional variety of macroprudential measures to enable activity into contraction due to necessary but disruptive domestic financial institutions to support distressed containment measures and weakening external demand. Industrial borrowers (Ghana, Madagascar, Nigeria, South commodity exporters have also faced deteriorating terms of trade as most commodity prices declined sharply. Heightened risk aversion has led to Africa; Figure 2.6.1.F). sharp rises in sovereign borrowing costs and large currency depreciations. A variety of monetary and macroprudential policies have been Most countries have also announced fiscal implemented to help support activity. measures to support activity and buttress health sector responses to the pandemic. However, given A. COVID-19 infections in SSA B. Median purchasing managers indexes for SSA countries binding fiscal policy constraints, these measures have often involved reprioritization of existing budgets. To help alleviate funding shortfalls, international financial institutions have called on bilateral creditors to temporarily suspend debt payments from fiscally constrained low-income countries. They have also made emergency support packages available to assist governments; however, given the scale of the pandemic, further external assistance from the broader global C. Commodity prices D. Change in sovereign borrowing development community appears necessary. costs in 2020 Outlook As a result of these severe economic strains, activity in the region is expected to contract by 2.8 percent this year—the sharpest contraction on record and 5.8 percentage points weaker than previous forecasts (Figure 2.6.2.A). The fall in per capita GDP is bound to be even deeper, likely E. Exchange rates versus the U.S. F. Monetary and macroprudential causing millions in the region to fall back into dollar policy measures in SSA during the COVID-19 pandemic extreme poverty (Lakner et al. 2020; Figure 2.6.2.B). Growth in the region is expected to rebound to 3.1 percent in 2021; however, the outlook is subject to substantial uncertainty. The projected pick-up assumes that the pandemic will have faded by the second half of 2020, that domestic outbreaks in the region follow a similar path, and that growth in major trading partners will Source: Haver Analytics; Johns Hopkins University; J.P. Morgan; World Bank. Note: “Industrial-commodity exporters” represents oil and metal exporting countries. “Other SSA” rebound. Commodity prices are also expected to includes agricultural commodity exporting and commodity importing countries. recover but remain below 2019 levels. However, A. Last observation is May 29, 2020. B. Medians. Sample includes Ghana, Kenya, Mozambique, Nigeria, South Africa, Uganda, and the pandemic’s progression is particularly hard to Zambia. Last observation in April 2020. C. Bars represent the percentage change in the April 2020 monthly price relative to December 2019. predict in Sub-Saharan Africa, as the region faces Dashes represent the percentage change in the April 2020 monthly price relative to 2019 average. D. Change in EMBI sovereign spreads since January 20, 2020. Weekly averages. Last observation is significant hurdles in containing the virus. These May 25, 2020. Index (0 = January 20, 2020). include weak and underfunded health care E. Change in USD exchange rates since December 2019. Monthly averages. Last observation is May 2020. Index (100 = December 2019). systems—government per capita spending on F. Prudential includes prudential measures and measures to support borrowers. Last observation is May 27, 2020. health care is about 2 percent of that in advanced Click here to download data and charts. economies—and lack of access to basic sanitation G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 SUB-SAHARAN AFRICA 101 (Walker et al. 2020; Figure 2.6.2.C). The region FIGURE 2.6.2 SSA: Outlook and risks also has large populations with underlying health Activity is forecast to contract sharply this year as a result of COVID-19. A conditions that elevate their risk of developing longer lasting and more severe pandemic would trigger an even deeper complications in case of infection, only partly recession in the region. Falling per capita incomes will reverse some of the progress in poverty reduction. Governments’ ability to contain the virus is offset by a relatively young population (Figures limited by weak and underfunded health care systems. Large populations 2.6.2.D and E). with existing underlying health conditions are at greater risk of developing complications in the event of infection, although the region’s generally young population helps alleviate some of this risk. Rising fiscal burdens are Pandemic-control measures such as social expected to cause significant debt sustainability concerns. distancing and self-isolation are made more challenging to implement by the fact that the A. GDP growth B. Growth per capita majority of workers in most countries are in the informal economy and depend on daily incomes that are insufficient to stockpile food and other essential items (World Bank 2019c, Special Focus 1). For many, living conditions are also not suited to these measures, as more than two-thirds of urban populations live in crowded slums, and necessities like water are often accessed at communal points (World Bank 2020o). Without external assistance, constrained fiscal space across C. Health care indicators in SSA D. Tuberculosis incidence and HIV most of the region also limits governments’ ability prevalence to respond to the outbreak. The challenges of containing outbreaks and providing fiscal support could both deepen this year’s contraction and significantly delay the expected recovery. Against this background, activity in Nigeria—the region’s largest economy and most populous country—is expected to shrink by 3.2 percent in 2020. Amid the unprecedented collapse in oil prices, this year’s contraction in activity is set to be E. Population distribution F. Fiscal balances the most severe in four decades. The economy depends heavily on oil revenues, which represent over 80 percent of exports, about one-third of banking-sector credit, and one-half of general government revenues. Faced with a twin shock, the country’s slump in activity has been compounded by measures to slow the domestic spread of the virus—including closing of national and state borders, schools, and the temporary Source: International Monetary Fund (World Economic Outlook); United Nations; World Bank (World shutdown of markets. The oil sector is projected Development Indicators) A.-B. "Industrial-commodity exporters" represents oil and metal exporting countries. Aggregate to contract by 10.6 percent, while non-oil output growth rates calculated using GDP weights at 2010 prices and market exchange rates. "Industrial- commodity exporters" excludes Nigeria and South Africa. falls by 2.1 percent. The recovery in Nigeria is C. Sample includes 48 countries for SSA and 126 for non-SSA EMDEs. forecast to be moderate. Lower oil prices are D. TB = Tuberculosis; HIV = Human immunodeficiency viruses. Unweighted averages. “TB incidence” expressed per 100,000 of the population; “HIV prevalence” expressed as percent of the expected to dent investor confidence, while the total population. “TB incidence” sample reflects 106 non-SSA EMDEs and 48 SSA economies. “HIV prevalence” sample reflects 70 non-SSA EMDEs and 46 SSA economies. assumed fiscal adjustment to lower oil revenues F. Simple averages of country groups. and tighter borrowing conditions is expected to Click here to download data and charts. constrain public investment. 102 CHAPTER 2.6 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 In South Africa, activity is expected to contract by prices and demand. Of those countries in the 7.1 percent this year—the deepest contraction in a highest quartile of growth in 2020, more than 80 century and 8 percent weaker than previously percent are agricultural commodity exporters. forecast—as stringent but necessary domestic With the impact of the pandemic assumed to have containment measures, including an extended faded by next year, the recovery in agricultural national lockdown, have severely disrupted commodity exporters is expected to be activity. Growth is expected to rebound in 2021, underpinned by investment in infrastructure, helped in part by the government’s announced 10 greater export diversification, and continued percent-of-GDP fiscal stimulus package to soften implementation of reforms to improve business the impact of the pandemic and help set the stage environments (Benin, Côte d’Ivoire, Ethiopia, for a robust recovery. The recovery could gain Rwanda, Senegal, Togo). However, an expected further traction if planned structural reforms are fall in foreign direct investment amid the global implemented, including plans to improve public recession, as well as tighter financial conditions, investment management and to encourage greater could delay the delivery of infrastructure projects private-sector participation in infrastructure in these economies. development. However, prospects for faster growth over the medium term are likely to be The financing of current account deficits has constrained by needed fiscal tightening and will become more difficult this year, as heightened risk continue to be dampened by persistent power- aversion has caused significant capital outflows supply disruptions and the need for extensive and tighter financial conditions. This is maintenance and repair work on the national grid. particularly challenging for countries dependent on portfolio inflows (Nigeria, South Africa), or Elsewhere in the region, growth prospects have official development assistance (Central African also been eroded. Among commodity importers, Republic, Malawi). Several countries also depend activity is forecast to contract particularly sharply on remittance inflows, which are expected to slow this year—despite the oil price collapse improving markedly (Ghana, Kenya, Lesotho, Nigeria, their terms of trade—as international travel Uganda). If these conditions were to continue for restrictions weigh heavily on large tourism sectors a prolonged period, the lack of access to external in several of these economies (Cabo Verde, financing could weigh heavily on foreign reserves, Mauritius, Seychelles). Activity in industrial while those without adequate buffers could face commodity exporters is also expected to contract balance of payment stress. notably in 2020, as domestic disruptions from the pandemic are compounded by low prices and Fiscal deficits in the region are projected to demand for oil and metals (Angola, Democratic deteriorate sharply this year—doubling on average Republic of Congo, Gabon, Ghana, Namibia, to roughly 5 percent of GDP (Figure 2.6.2.F). Republic of Congo, Sudan). With commodity Larger deficits reflect increased public spending to prices projected to remain depressed, the recovery help limit the transmission and economic in these economies is expected to be sluggish. In consequences of the virus, sharp falls in revenue as Senegal, oil and gas production was projected to mitigation and other control measures have come on stream in 2022; however, these capacity- dampened activity, higher interest payments, and enhancing investments have been delayed to at in some instances, the impact of weaker exports on least 2023 amid pandemic-related disruptions. government revenues (Angola, Cabo Verde, Republic of Congo, Seychelles). Among agricultural commodity exporters, growth is projected to all but collapse this year, falling by Risks roughly two-thirds, on average, from 2019 growth rates. Although exports of agricultural goods have Risks are firmly to the downside. Given the suffered from the collapse in global demand, these underlying vulnerability of the region, a longer economies are somewhat more insulated from the lasting and more severe pandemic would trigger an effects of sharply lower industrial commodity even deeper recession in the region and have G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 SUB-SAHARAN AFRICA 103 devastating effects on the health and well-being of There are also growing concerns that the COVID- the region’s population. It would also have long 19 pandemic may cause a food security crisis in lasting effects on development and growth, as has the region. Before the pandemic, 72 million been the case during previous epidemics people across 35 countries in Sub-Saharan Africa (Chapter 1; World Bank 2014; World Bank were already in food crisis, with many millions on 2020o). Even if the current pandemic is the verge of falling into acute food insecurity successfully contained, a second wave of infections (WFP 2020). Border closures and other trade- could erupt within the region, especially if the restrictive policies, such as export bans for easing of current measures to mitigate the spread domestic stockpiling, are disrupting trading in of the virus is not guided by the evolution of the food and agricultural products (World Bank pandemic. 2020o). Shortages could also induce food price spikes that may further exacerbate poverty (World COVID-19 is also expected to markedly increase Bank 2019c). the vulnerability of the region to debt distress. Government debt had already risen to 60 percent The region’s large and growing number of of GDP, on average, in 2019—almost double the displaced populations—mostly due to conflict, level in 2013. The composition of debt had also violence, and insurgencies—could curtail efforts to become riskier, with a greater share owed to non- mitigate the spread of COVID-19 (Burkina Faso, concessional lenders at a higher cost (Calderón Cameroon, Central African Republic, Chad, and Zeufack 2020). These strains will be Ethiopia, Mali, Nigeria, Somalia; Dahab et al. compounded by the increased borrowing required 2020; Refugees International 2020). The virus is to fund larger deficits. In addition, borrowing likely to spread rapidly among displaced people, as costs across the region have risen sharply given they mostly live in densely populated camps or heightened risk aversion, placing further pressure informal settlements, where access to basic on fiscal capacity. Significantly larger, and more sanitation and health care is limited. expensive, government debt burdens than last year mean that the risk of sovereign debt defaults has There is also a risk that violence and social unrest increased, and may rise further if the projected may erupt as a result of the pandemic, weighing recovery in activity were to disappoint. further on mitigation efforts and activity. Critical peacekeeping missions in many countries may lose Severely constrained government resources, as well momentum if governments are forced to refocus as restrictions due to social-distancing measures, their efforts toward the pandemic and its could lead to a loss of critical public services associated mitigation measures, which could create during the pandemic and further weigh on room for insurgencies to gain greater footholds in activity. These include provision of water, vulnerable areas. Moreover, rising unemployment, electricity, and normal health care services. falling incomes, and potential shortages of Evidence suggests that during the 2014-16 Ebola essential items such as food could likely lead to crisis in West-Africa, mortality rates unrelated to social unrest and instability in several countries the Ebola disease increased (Menéndez et al. that may continue to weigh on activity even after 2015). the pandemic has faded. 104 CHAPTER 2.6 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 TABLE 2.6.1 Sub-Saharan Africa forecast summary Percentage point differences from January 2020 (Real GDP growth at market prices in percent, unless indicated otherwise) projections 2017 2018 2019e 2020f 2021f 2020f 2021f EMDE SSA, GDP 1 2.6 2.6 2.2 -2.8 3.1 -5.8 0.0 GDP per capita (U.S. dollars) -0.1 -0.1 -0.4 -5.3 0.5 -5.6 0.0 (Average including countries with full national accounts and balance of payments data only) 2 EMDE SSA, GDP2,3 2.6 2.5 2.2 -2.8 3.1 -5.7 0.0 PPP GDP 2.8 2.7 2.5 -2.4 3.2 -5.5 -0.1 Private consumption 2.7 3.3 1.3 -1.7 2.7 -4.3 -0.1 Public consumption 0.7 4.5 2.5 3.6 1.9 1.2 -0.6 Fixed investment 7.9 8.7 3.3 -5.0 4.1 -8.1 0.0 Exports, GNFS4 6.2 2.7 3.3 -10.7 4.2 -12.2 1.6 Imports, GNFS4 1.4 8.4 3.1 -7.2 3.5 -9.7 0.4 Net exports, contribution to growth 1.4 -1.6 0.1 -1.1 0.2 -0.8 0.3 Memo items: GDP SSA excluding Nigeria, South Africa, and Angola 4.8 4.4 3.7 -0.3 4.1 -4.9 -0.6 Oil exporters5 1.4 1.3 1.7 -3.0 1.7 -5.3 -0.6 CFA countries6 3.5 4.0 4.1 -0.1 4.1 -5.2 -1.1 CEMAC 0.1 1.4 1.7 -2.7 1.2 -6.0 -2.2 WAEMU 6.5 6.3 6.1 1.9 6.3 -4.5 -0.2 SSA3 1.0 1.0 1.0 -5.0 2.3 -6.5 0.5 Nigeria 0.8 1.9 2.2 -3.2 1.7 -5.3 -0.4 South Africa 1.4 0.8 0.2 -7.1 2.9 -8.0 1.6 Angola -0.1 -2.0 -0.9 -4.0 3.1 -5.5 0.7 Source: World Bank. Note: e = estimate; f = forecast. EMDE = emerging market and developing economies. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. 1. GDP and expenditure components are measured in 2010 prices and market exchange rates. Aggregate excludes Somalia. 2. Subregion aggregate excludes Central African Republic, Eritrea, Guinea, São Tomé and Príncipe, Somalia, and South Sudan, for which data limitations prevent the forecasting of GDP components. 3. Subregion growth rates may differ from the most recent edition of Africa's Pulse (https://www.worldbank.org/en/region/afr/publication/africas-pulse) due to revisions. 4. Exports and imports of goods and non-factor services (GNFS). 5. Includes Angola, Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon, Ghana, Nigeria, South Sudan and Sudan. 6. Includes Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Republic of Congo, Côte d’Ivoire, Equatorial Guinea, Gabon, Guinea-Bissau, Mali, Niger, Senegal, and Togo. Click here to download data. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 SUB-SAHARAN AFRICA 105 TABLE 2.6.2 Sub-Saharan Africa country forecasts1 Percentage point (Real GDP growth at market prices in percent, unless indicated otherwise) differences from January 2020 projections 2017 2018 2019e 2020f 2021f 2020f 2021f Angola -0.1 -2.0 -0.9 -4.0 3.1 -5.5 0.7 Benin 5.8 6.7 6.9 3.2 6.0 -3.5 -0.7 Botswana 2.9 4.5 3.5 -9.1 4.2 -13.2 0.0 Burkina Faso 6.3 6.8 5.7 2.0 5.8 -4.0 -0.2 Burundi 0.5 1.6 1.8 1.0 2.3 -1.0 0.2 Central African Republic2 4.5 3.7 3.1 0.8 3.5 -4.1 -1.4 Cabo Verde 3.7 5.1 5.5 -5.5 5.0 -10.5 0.0 Cameroon 3.5 4.1 3.9 -0.2 3.4 -4.4 -0.9 Chad -3.0 2.6 3.2 -0.2 4.7 -5.7 -0.1 Comoros 3.8 3.4 1.9 -1.4 3.2 -6.2 -0.5 Congo, Dem. Rep. 3.7 5.8 4.4 -2.2 3.5 -6.1 0.1 Congo, Rep. -1.8 1.6 -0.9 -6.2 -1.1 -10.8 -3.0 Côte d’Ivoire 7.4 6.8 6.9 2.7 8.7 -4.3 1.6 Equatorial Guinea -4.7 -6.1 -6.2 -8.4 -1.6 -6.1 -2.6 Eritrea2 -10.0 13.0 3.7 -0.7 5.7 -4.2 1.7 Eswatini 2.0 2.4 1.3 -2.8 2.7 -5.4 0.2 Ethiopia3 10.0 7.9 9.0 3.2 3.6 -3.1 -2.8 Gabon 0.5 0.8 3.3 -3.2 -2.6 -6.2 -5.8 Gambia, The 4.8 6.6 6.0 2.5 6.5 -3.8 0.7 Ghana 8.1 6.3 6.5 1.5 3.4 -5.3 -1.8 Guinea 10.3 6.2 5.6 2.1 7.9 -3.9 1.9 Guinea-Bissau 5.9 3.8 4.7 -1.6 3.1 -6.5 -1.9 Kenya 4.8 6.3 5.4 1.5 5.2 -4.5 -0.6 Lesotho -0.4 1.5 1.4 -5.1 5.5 -5.8 3.4 Liberia 2.5 1.2 -2.3 -2.6 4.0 -4.0 0.6 Madagascar 3.9 4.6 4.8 -1.2 4.0 -6.5 -0.4 Malawi 4.0 3.5 4.4 2.0 3.5 -2.8 -1.7 Mali 5.3 4.7 5.1 0.9 4.0 -4.1 -0.9 Mauritania 3.0 3.6 6.3 -2.0 4.2 -7.7 -1.6 Mauritius 3.8 3.7 3.6 -6.8 6.4 -10.7 2.4 Mozambique 3.7 3.4 2.2 1.3 3.6 -2.4 -0.6 Namibia -0.3 0.7 -1.1 -4.8 3.0 -5.7 1.3 Niger 4.9 6.5 6.3 1.0 8.1 -5.0 2.5 Nigeria 0.8 1.9 2.2 -3.2 1.7 -5.3 -0.4 Rwanda 6.1 8.6 9.4 2.0 6.9 -6.1 -1.1 São Tomé and Príncipe2 3.9 2.7 2.4 -9.5 6.1 -12.5 2.6 Senegal 7.4 6.4 5.3 1.3 4.0 -5.5 -3.0 Seychelles 4.3 4.1 3.8 -11.1 6.3 -14.4 3.0 Sierra Leone 3.8 3.5 5.1 -2.3 4.0 -7.2 -0.9 South Africa 1.4 0.8 0.2 -7.1 2.9 -8.0 1.6 Sudan 4.3 -2.3 -2.6 -4.0 0.5 -2.6 1.1 South Sudan2,3 -6.9 -3.5 3.2 -4.3 -23.6 -14.6 -29.0 Tanzania 6.8 5.4 5.8 2.5 5.5 -3.3 -0.6 Togo 4.4 4.9 5.3 1.0 4.0 -4.5 -1.5 Uganda3 3.9 6.2 6.5 3.3 3.7 -3.2 -2.2 Zambia 3.4 4.0 1.7 -0.8 2.4 -3.4 -0.2 Zimbabwe 4.7 3.5 -8.1 -10.0 2.9 -12.7 0.4 Source: World Bank. Note: e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time. 1. GDP and expenditure components are measured in 2010 prices and market exchange rates. 2. Percentage point differences are relative to the World Bank’s October 2019 forecast. The January 2020 Global Economic Prospects did not include forecasts for Central African Republic, Eritrea, São Tomé and Príncipe, and South Sudan. 3. Fiscal-year based numbers. For South Sudan, the year 2019 refers to FY2018/19. 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Economic disruptions are likely to be more severe and protracted in those countries with larger domestic outbreaks, greater exposure to international spillovers (particularly through exposure to global commodity and financial markets, global value chains, and tourism), and larger pre-existing challenges such as informality. Growth forecasts for all regions have been severely downgraded; Latin America and the Caribbean (LAC) and Europe and Central Asia (ECA) in particular have large downgrades partly because of the size of their domestic outbreaks and exposure to global spillovers, while South Asia’s substantial downgrade is primarily the result of stringent lockdown measures. Many countries have avoided more adverse outcomes through sizable fiscal and monetary policy support measures. Despite these measures, per capita incomes in all EMDE regions are expected to contract in 2020, likely causing many millions to fall back into poverty. Introduction • How has the pandemic evolved across EMDE regions? With the epicenter of the COVID-19 pandemic • How have regional vulnerabilities affected moving from EAP to advanced economies— regional economic developments? particularly in Europe and the United States— outbreaks among most EMDEs initially lagged • What policy measures have regions adopted? those in these major economies. However, since mid-March, the number of confirmed infections • What impact will the pandemic have on in all EMDE regions has been rising sharply.1 To regional growth, per capita incomes and mitigate the spread, more than 100 EMDEs have poverty? closed schools, many have banned public gatherings, imposed national or regional • What are the key risks to regional growth lockdowns, and banned international travel. outlooks? While these measures are necessary, they have Recent reports from international institutions have severely disrupted economic activity among provided an initial assessment of the impact of the EMDEs. The magnitude of disruption varies, pandemic on regional prospects (ADB 2020; EDB however, according to the scale of the domestic 2020; IDB 2020; IMF 2020; World Bank 2020a, outbreak, the vulnerability of the economy to 2020b, 2020d, 2020e, 2020f). These publications spillovers from global weakness, and the severity of converge on several common points: the pandemic pre-existing issues such as debt and informality. In will have a large impact through multiple response, EMDE central banks and governments channels, no region will be unaffected, growth have implemented a wide range of policy measures forecasts are highly uncertain, and support from to limit the economic and financial fallout. policymakers is essential. This special focus builds on the existing regional analysis with the following In this context, this special focus addresses the specific contributions. First, it provides an up-to- following questions: date, concise, and cross-regional update of the latest developments. Second, it discusses how Note: This Special Focus was prepared by Patrick Kirby and Rudi important vulnerabilities—such as exposure to Steinbach. The box on the impact of COVID-19 on global value commodity and financial markets, global value chains was prepared by Patrick Kirby and Maryla Maliszewska, and chains and tourism, as well as informality—differ includes simulation results prepared by Maryla Maliszewska, Aaditya Mattoo, and Dominique van der Mensbrugghe. Research assistance by region. Third, it summarizes the health, was provided by Yushu Chen, Hrisyana Doytchinova, Fuda Jiang, monetary and fiscal policy responses in each Maria Hazel Macadangdang, Julia Renee Roseman Norfleet, Ceylan region. Finally, it assesses how the combination of Oymak, Vasiliki Papagianni, Maria Filipa Seara E. Pereira, and Kaltrina Temaj. incoming information, pre-existing data, and 1 The World Bank groups EMDEs into six geographical regions. policy responses combine into a forecast for They are East Asia Pacific (EAP), Europe and Central Asia (ECA), Latin America and the Caribbean (LAC), Middle East and North regional growth, with important implications for Africa (MENA), South Asia (SAR), and Sub-Saharan Africa (SSA). the poverty outlook. 112 S P EC IAL FO CU S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 The pandemic and health Malaysia, and the Philippines fell to 27.4, 31.2, and 31.6, respectively. policy responses • ECA. Europe and Central Asia (ECA) has the Spread of the pandemic. As of early June, there second largest outbreak, after Latin America have been over 6 million confirmed COVID-19 and the Caribbean (LAC), with 770,000 cases globally, of which almost one-half are in cases, of which about one-half are in Russia EMDEs (Figure 2.1.1.A). The rising number of and a further one-fifth in Turkey. The virus infections in EMDEs represents a third global has been confirmed as the cause of 15,000 wave of COVID-19 outbreaks, following an initial deaths in the region, but excess mortality wave in China and neighboring countries that has statistics suggest the true human toll could be largely subsided and a second wave in advanced much higher. PMIs in the region fell sharply economies that is slowing. The scale of the EMDE in April as the pandemic spread: The wave is likely being substantially understated, as manufacturing indexes for Poland, Russia, testing capacity is limited in EMDEs—when and Turkey fell to 31.9, 31.3, and 33.4, available, tests are often restricted to include only respectively. patients with existing symptoms or those who have been in contact with a known case (Figure • LAC. The region initially accounted for a SF.1.B and SF.1.C). About 100,000 deaths in small share of COVID-19 cases in EMDEs EMDEs have been attributed to COVID-19 but but has recently become the new epicenter as this too may be an under-estimate given generally outbreaks in the region have spread rapidly. weaker health care capacity and difficulties in Of the region’s roughly 1 million infections, tracing deaths outside of hospitals. Excess one-half are in Brazil. Large outbreaks are also mortality statistics suggest such under-estimation occurring in Peru, Chile, Mexico, and could be large. Ecuador. More than 50,000 deaths have been officially reported as a result of the virus. Cases first mounted in East Asia Pacific (EAP) and Activity in Mexico fell 6.2 percent in 2020Q1 the Middle East and North Africa (MENA) (q/q saar), while the composite PMI for Brazil (especially the Islamic Republic of Iran) but have fell to 26.5 in April. since then spread rapidly in other regions, with Sub-Saharan Africa (SSA) lagging. At this point, • MENA. In MENA, the virus was first the largest regional outbreak is in LAC, followed recorded in the United Arab Emirates in late closely by ECA. January, but began spreading rapidly in Iran after the first cases were identified there mid- • EAP. In EAP, there are currently about February. The region currently has about 140,000 confirmed COVID-19 cases as the 450,000 confirmed cases, of which around virus has spread rapidly within some of the one-third are in Iran. Sizable outbreaks have region’s large economies. In addition to the also occurred in Saudi Arabia (87,000), Qatar 84,000 cases in China, notable outbreaks are (58,000), and the United Arab Emirates occurring in Indonesia, the Philippines, and (35,000). Over 11,000 people in the region Malaysia, with a combined 55,000 cases. are reported to have lost their lives due to the Close to 7,500 people in the region are virus. Non-oil activity has decelerated sharply reported to have died from the virus. Most in large regional economies. economies in the region contracted in the first quarter—including China, where output fell • SAR. The pandemic reached SAR later than 35 percent (q/q saar) in 2020Q1, the first some other regions, but the incidence of cases drop since 1976. While China’s purchasing is rising rapidly. The number of confirmed manager indexes (PMIs) partially rebounded COVID-19 cases has risen to around 350, at the start of the second quarter, those in 000, with more than 8,000 people having other countries reached unprecedented lows in died as a result. While limited testing capacity April; manufacturing PMIs in Indonesia, may understate the true scale of the regional G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S P EC IAL FO CU S 113 outbreak, the majority of infections in the FIGURE SF.1 COVID-19 outbreaks region are in India (200,000), Pakistan The number of confirmed COVID-19 cases is rising rapidly among EMDEs, (70,000), and Bangladesh (50,000). with ECA and LAC becoming the new epicenters. However, limited testing capacity is likely understating the true intensity of outbreaks in many Nationwide lockdowns in these three largest countries. To help mitigate the spread of the virus, most EMDEs have regional economies sharply curtailed activity imposed necessary, but economically disruptive, mitigation measures. in the services sector and manufacturing These measures have involved school closures, lockdowns at regional and national level, and travel bans. production. A. Confirmed cases per region B. Testing capacity • SSA. In SSA, confirmed COVID-19 cases have also lagged those in other regions—partly reflecting limited testing capacity—but they are gathering significant pace. There currently have been more than 100,000 cases of the virus in the region, with sizable outbreaks in South Africa (34,000), Nigeria (10,500), Ghana (8,000), and Cameroon (6,500). However, challenges due to limited testing C. Testing strategies D. Peak mitigation measures capacity are particularly acute in SSA, even more so in rural areas, likely understating the true number of infections. In Nigeria and South Africa—the two largest economies in the region—activity has fallen precipitously during the first half of this year, with the composite PMIs falling to 25.5 and 23.7 in April, respectively. Mitigation measures. To help mitigate the spread E. Stringency of government response F. Contact tracing to COVID-19 and workplace mobility of the virus, most EMDEs have implemented necessary but severely disruptive measures (Figure SF.1.D). These have included school closures in more than 100 countries, restrictions on non- essential business activities, prohibitions of public gatherings, suspension of public transport, restrictions on movement, border closures, and travel bans. Traffic data show that regions with more stringent containment measures have less Source: Hale et al. 2020; Johns Hopkins University; Oxford University; Our World in Data; World Bank. activity around workplaces (Figure SF.1.E). Note: EMDE = Emerging Market and Developing Economies, EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. A. Last observation is May 29, 2020. Many EMDEs face challenges in implementing B. Bars reflect tests per 100,000 people in each region (for countries that report testing data) as a some of these measures. In regions such as SAR percent of those in advanced economies. Red markers reflect confirmed COVID-19 cases per 100,000 people in each region as a percent of those in advanced economies. For tests (cases), the and SSA, where the majority of workers are in the sample includes the following number of economies per region: EAP 6 (13); ECA 11 (22); LAC 12 (32); MNA 5 (19), SAR 4 (8), and SSA 9 (46). Last observation is May 28, 2020. informal economy and depend on daily incomes C. “Open public testing” is aggressive testing such as in a “drive-through” and available to everyone. “Testing if symptoms” refers to testing anyone who shows COVID-19 symptoms. “Limited testing” is that are insufficient to stockpile food and other when an individual is showing symptoms and meets a specific criterion (e.g. key workers, admitted to hospital, came in contact with a known case or came from overseas). “No policy” refers to having no essential items, social-distancing and self-isolation testing policy in place. Last updated on May 29, 2020. Individual countries may be several days older. are difficult to implement (World Bank 2019a). D. Bars shows the peak level of stringency imposed for each containment measure from January to May. The diamond markers indicate the latest level of stringency for each measure. The yellow lines In many countries, living conditions are also not indicate the share of countries who have recommended or implemented the containment measure, without weighting by the level of stringency or whether the measure was targeted to a region or was suited to these measures, especially for those who at the national level. Each letter on the x-axis corresponds to a containment measure. A = School closings, B = Restrictions on gatherings, C = Stay-at-home requirements, and D = Restrictions on live in crowded slums, and where necessities like international travel. The sample includes 154 EMDEs. Last observation is May 29, 2020. E. Aggregates are calculated as medians. Sample includes 97 EMDEs for mobility and 136 EMDEs water are often accessed at communal points for stringency. Last observation is May 25, 2020. Individual countries may be several days older. (World Bank 2020a). F. “Limited contact tracing” is tracing not done for all cases. “Comprehensive contact tracing” is tracing of all cases. Last observation is May 29, 2020. Individual countries may be several days older. Click here to download data and charts. 114 S P EC IAL FO CU S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 Survey indicators suggest the most stringent or required closing of non-essential businesses, measures have been implemented in MENA but and restricted travel from heavily hit areas. even in SSA, with limited state capacity, mitigation measures have been introduced on a • LAC. The majority of countries have closed broad scale. The most commonly used measures schools and partially or completely shut their across EMDEs have been international travel borders to foreigners. Numerous countries restrictions (74 percent of countries), shelter-in- (Argentina, Chile, Colombia, Ecuador, place orders and restrictions on internal mobility Honduras, Peru, Venezuela) have mandated (71 percent), and school closures (68 percent). business closures and imposed large-scale mobility restrictions. Some countries have Of these measures, international travel restrictions, embarked on comprehensive contact tracing shelter-in-place requirements, and restrictions on efforts, but such measures have generally been internal mobility have been most broadly imposed limited in most of the region. in MENA, LAC, and SSA. School closures have been particularly broad-based in MENA, where • MENA. From late February, widespread and virtually all countries have imposed such measures, highly stringent mitigation measures have as well is in SAR and SSA (more than 85 percent). been implemented to help limit the spread Many countries have also imposed restrictions on of infection. These include curtailing the size the use of public transport, particularly in MNA of public gatherings, air travel restrictions (95 percent), SAR (89 percent) and LAC (69 in the Gulf Cooperation Council (GCC) percent). Cancellation of public events and that brought tourism to a halt, cancellation of restrictions on the size of public gatherings have large international events, closing schools been more stringent in MENA, LAC, SSA, and throughout the region, and shelter-in-place ECA. Restrictions on non-essential work have requirements orders. been broad-based in MENA and LAC, but imposed in only about one-half of countries in • SAR. International travel bans and school EAP and SSA. closures have been widespread in SAR economies. Public transport has also been To further help prevent the domestic spread of closed in two-thirds of countries. Near total COVID-19, many countries have supplemented lockdowns in several regional economies these social distancing measures with public severely hindered mobility and impeded information campaigns, broad-based testing, and delivery of essential services. In Bangladesh, contact tracing of individuals who were potentially large sections of the workforce left major cities exposed to known cases. Contact tracing has been to return to their villages. Non-essential most comprehensive in ECA, EAP and MENA businesses have been closed in Pakistan, and (Figure SF.1.F). airports have been shut for arrivals in Sri Lanka. • EAP. Measures to mitigate the spread in these economies have included the prohibition of • SSA. Stringent measures to mitigate the mass gatherings, school closures, restrictions pandemic’s spread have been implemented in on internal movement, shelter-in-place orders, most countries. These include school closures, and travel restrictions, but have been less travel bans, border closures—national and broadly imposed than in other regions (World provincial in some—and lockdowns of entire Bank 2020b). countries or in other cases large cities. While shelter-in-place orders have been broad-based, • ECA. In response to domestic outbreaks, 20 they have still accommodated essential trips. of the 24 countries in ECA have closed In about 6 percent of countries in the region, schools since mid-March, and many have shut closing of non-essential businesses has been international borders, issued shelter-in-place recommended, as opposed to required orders, closed public transport, recommended (Malawi, Mauritania, Somalia). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S P EC IAL FO CU S 115 FIGURE SF.2 Regional vulnerabilities and economic Regional vulnerabilities to impacts health and economic stress Dependence on commodity exports constitutes a severe vulnerability for many regions. Incoming data suggest that some of the worst-affected The combination of COVID-19 outbreaks, countries are commodity exporters integrated in GVCs through forward restrictions to reduce the pandemic’s spread, and linkages. Domestic-currency depreciation makes it more challenging to finance foreign-currency-denominated debt. Informal workers are likely to spillovers from the global recession is disrupting find it difficult to smooth lost income and adapt to food shortages, which activity for all EMDE regions. The magnitude of will worsen existing malnutrition. the disruptions varies, however, according to the scale of the domestic outbreak, the vulnerability of A. Share of industrial commodity B. Foreign currency denominated exporters by region debt and domestic currency the economy to spillovers from global economic depreciation and financial stress, the severity of pre-existing challenges such as widespread poverty and informality, and the degree to which debt levels constrain the fiscal response. Growth forecasts and equity market valuations have fallen most steeply in LAC. Exposure to commodity market disruptions. Dependence on commodity exports currently constitutes a severe vulnerability. COVID-19 has C. New export orders and degree of D. Prevalence of undernourishment caused a sharp fall in global commodity demand, forward linkages to GVCs and thus prices, with oil prices down 60 percent since late January and many metals prices down by about 20 percent (Chapter 4). Commodity prices are projected to remain low in the near term. The decline in commodity prices has undermined government and export revenues for industrial- commodity exporting EMDE regions, where commodities accounted for more than 75 percent of exports in 2019, on average. MENA and SSA Source: Haver Analytics; Organisation for Economic Co-operation and Development; World Bank. have the largest proportion of such countries Note: EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the (almost 60 percent and almost half, respectively). Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. B. Data for foreign currency denominated corporate debt are 2019Q3. Aggregates are calculated as More than a third of countries in ECA are unweighted averages. Sample includes 21 EMDEs for exchange rates and 22 EMDEs for corporate debt. Last observation is May 29, 2020. industrial commodity exporters, as are a quarter of C. GVC = global value chain. PMI = Purchasing Managers' Index. Figure shows change in new export orders PMI since January 2020. Forward participation indicates share of exports for the region those in EAP and LAC (Figure SF.2.A). that are inputs for other region’s to further process and then re-exported as finished goods. Data for forward participation are 2015. Aggregates are calculated using the median for PMI and nominal U.S. dollar exports for forward participation. Last observation is April 2020 for new export orders PMI. Exposure to global financial market stress. D. Undernourishment is defined as the share of population whose food intake is insufficient to meet dietary energy requirements on a continuous basis. COVID-19 has also led to widespread financial Click here to download data and charts. turbulence and record capital outflows, while foreign direct investment in many countries is expected to fall considerably. Since the global financial crisis, debt loads have risen sharply, with • Governments. Risk premia for sovereign bonds EMDE debt reaching a historic high of 170 in LAC rose especially sharply during March, percent of GDP in 2019. In almost 40 percent of with investors differentiating according to EMDEs, government debt is now at least 20 per- credit risk. In Argentina, there has been centage points of GDP higher than it was in 2007 ongoing negotiations around debt restruc- (Kose et al. 2019). These figures are set to rise turing between the government and bond further through a combination of lower revenues, holders. Many countries in the region have larger expenditures, and higher borrowing costs, sought out lending from official sources to especially for foreign-currency-denominated debt. avoid debt servicing difficulties and balance of 116 S P EC IAL FO CU S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 payment pressures. In SSA, sovereign Exposure to global value chains. Regions are also borrowing spreads have risen in South Africa, exposed to global spillovers through their as sovereign debt lost its investment-grade participation in global value chains, which account rating. By contrast, the increase in borrowing for about half of global trade and can propagate costs in EAP has been less pronounced international shocks (Box SF.1). Regions with a reflecting robust monetary, prudential, and greater prevalence of forward linkages such as fiscal policy frameworks. ECA, MENA (mostly through oil), and SSA have experienced substantial falls in demand and prices • Corporates. More than a quarter of corporate for their exports (Figure SF.2.C).2 Regions with a debt in the average EMDE is denominated in preponderance of backward linkages, such as EAP foreign currency. Regions with greater and ECA, are vulnerable to disruptions in exposure to foreign-currency corporate debt— production abroad leading to shortages of critical ECA, LAC, and SSA—have tended to have inputs. PMIs in these regions have declined larger currency depreciations, increasing debt sharply: in Vietnam and Poland, for example, the service burdens (Figure SF.2.B). Informal headline PMI dropped 28 and 27 points between SMEs, which are especially prevalent in SAR January and April, respectively. In LAC, the and SSA, face a different problem: they often abrupt slowdown in China’s economy disrupted face significant financing constraints that supply chains for Mexico and Brazil and caused a prevent them from accessing the lending that sharp drop in exports from commodity-producing would help keep them afloat during periods of economies. In ECA, supply chain disruptions and economic weakness. falling demand have caused a collapse in exports from the auto sector among the countries in • Financial systems. The ability of banking Central Europe and the Western Balkans systems to withstand financing shocks varies (Bulgaria, Hungary, Poland, Serbia). While it is across regions. While MENA countries in the less integrated in global value chains than some Gulf Cooperation Council entered the crisis other regions, SAR has experienced disruptions in with relatively sound financial system buffers, its textile, garments, and auto sectors. SAR entered the crisis with weaker financial sector balance sheets. Exposure to tourism. Regions that rely on tourism • Households. Lost incomes are expected to are being adversely affected by widespread travel weigh heavily on households, and may lead to restrictions and the associated collapse in tourist difficulties with debt servicing which may arrivals in the first half of 2020. They also face migrate to the financial system, for example large declines in services activity, particularly in through a spike in mortgage defaults. food, entertainment, and retail services. This is Household are also expected to lose incomes particularly important for many EAP and LAC through falling remittances (World Bank countries, such as both regions’ small island 2020c). Recessions in the Euro Area and economies. Travel bans and changes in consumer Russia will weigh on remittance inflows to behavior have led to a collapse in the number of ECA, which averaged 10 percent of GDP in visitors to popular tourist destinations such as the 2019 and were as high as 30 percent for some Caribbean, North Africa, Southern Europe, and countries. Similarly, the deep U.S. recession Pacific Island countries, among others. In all, will substantially reduce remittances to global tourism is set to contract by about two- Central America, while weakness in oil- thirds in March, which will weigh heavily on exporting MENA countries will likely have the same impact for countries in SAR and 2 Countries with forward linkages are those whose exports are not EAP that supply many guest workers. In fully absorbed in the importing country and are instead embodied in addition to lost work for migrants, many the importing country’s exports to third countries (World Bank money transfer agencies in either the origin or 2019b). Countries with backward linkages are those whose exports embody value added previously imported from abroad, such as auto recipient countries have closed as a result of or electronics manufacturers, that process and then export inputs lockdown measures. from abroad. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S P EC IAL FO CU S 117 BOX SF.1 The impact of COVID-19 on global value chains One of the ways that the COVID-19 pandemic is disrupting economic activity is through its impact on global value chains (GVCs), which can amplify the effects of shocks on trade, production, and financial markets. Workplace closures or transportation difficulties have caused interruptions to the delivery of intermediate goods, severely affecting production in manufacturing industries that practice lean inventory management. Governments have become concerned about shortages of essential products from offshore sources. A simulation of the current crisis using a model with input-output linkages suggests that all countries and almost all sectors will suffer a decline in exports, with worse outcomes in regions more dependent on international trade, particularly through GVCs and tourism. In the wake of this shock, firms as well as countries may seek to reduce the risk exposure of supply chains over the medium term by increasing the geographical diversity of their suppliers. Countries that wish to seize this opportunity to become more integrated into GVCs could pursue sound government policies with respect to infrastructure investment, education, and public health. The benefits to real incomes and welfare associated with GVC production have been large, but could be undermined by a rise in protectionism. Introduction production and transportation of items needed in other processes, the pandemic and the aggressive controls The COVID-19 pandemic is causing the worst brought in to contain it increase the risk that critical contraction in global trade in the post-war era. One inputs will be unavailable. Many high-productivity GVC important channel for its impact is through global value participants rely on just-in-time delivery of inputs and lean chains (GVCs). Industries that participate in GVCs are inventories. In 2020 these buffers are likely to be limited often dependent on “just-in-time” delivery of intermediate by the fact that the countries at the center of GVC inputs. This contributes to lean inventories and higher production have been among the worst-affected by productivity, but also makes companies vulnerable to COVID-19 (Figure SF.1.1.A). interruptions in the supply of critical components from abroad, such as those that have occurred as a result of the Supply shocks tend to be felt most among countries with regional quarantines, production shutdowns, and border greater backward linkages, i.e., those whose exports controls implemented to slow the spread of COVID-19. embody imported value-added, such as auto or electronics In this context, this box addresses the following questions: manufacturers (World Bank 2019b). Demand shocks, by contrast, are more acutely felt by countries with greater • How has COVID-19 disrupted GVCs? forward linkages. This includes, for example, many com- modity exporters, which experience a fall in demand from • How might disruptions to GVCs amplify the impact manufacturing centers, which is in turn a reaction to the of COVID-19? drop in exports to third countries for the finished goods they produce. Thus far, the steepest declines in activity • Which countries and sectors are more vulnerable? have been in countries with strong forward linkages, suggesting that the demand factor in the COVID-19 How has COVID-19 disrupted GVCs? economic shock has been more severe than the supply factor (Figures SF.1.1.B and SF.1.1.C). Even before COVID-19, the growth in GVCs had already been trending lower. GVC’s share of global trade peaked How might GVC disruptions amplify the impact at just over 50 percent prior to the global financial crisis, but slipped thereafter as activity slowed, particularly that of COVID-19? of investment, and as trade liberalization efforts stalled The propagation of shocks through economic networks (World Bank 2019b). More recently, GVCs had been and industry interlinkages such as GVCs is historically a further strained by the increase in tariffs and uncertainty major driver of macroeconomic fluctuations (Acemoglu, driven by U.S.-China trade tensions. Akcigit, and Kerr 2015). Global trade, approximately half of which flows through GVCs, is particularly volatile, and The prevalence of GVCs could amplify the disruptive tends to fall considerably more than overall activity during effects of COVID-19. By slowing or halting the crises (Freund 2009; Taglioni and Zavacka 2016). This has been ascribed to several factors. They include the dependence of export-oriented firms on external finance; Note: This box was prepared by Patrick Kirby and Maryla Maliszewska, and includes simulation results prepared by Maryla the strongly cyclical behavior of investment and Maliszewska, Aaditya Mattoo, and Dominique van der Mensbrugghe. inventories; and the fact that fiscal stimulus has tended to 118 S P EC IAL FO CU S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX SF.1 The impact of COVID-19 on global value chains (continued) FIGURE SF.1.1 The impact of COVID-19 on GVCs The countries at the center of the initial waves of the global pandemic are also those at the center of GVC production, which will contribute to a sharp contraction in global trade. Thus far, the steepest declines in trade and industrial production have been concentrated in countries that export more basic intermediate goods for higher value added (i.e., a concentration of forward value added). This is consistent with a greater shock to demand than to supply. A. Major economies’ share of global B. Latest mobility and production growth C. Latest mobility and production growth aggregates data, by concentration of backward value data, by concentration of forward value added in trade added in trade Source: Google; Johns Hopkins University; Organisation for Economic Co-operation and Development; World Bank; World Trade Organization. Note: GVCs = global value chains. EMDEs = emerging market and developing economies. IP = industrial production. A. Trade is the average of export and import volumes. “Euro Area top 4” is a weighted average of Germany, France, Italy, and Spain. Sample includes 28 advanced economies and 34 EMDEs, which represent 89 percent of global GDP. Data for GDP and trade are 2019 and industrial production is December 2019. B.C. Countries are considered to have “low” forward value added if the domestic value added in foreign exports as a share of gross exports is less than 25 percent, and “high” if above 25 percent. The same threshold applies for backward forward value added, in terms of the foreign value added share of gross exports. Last observation for industrial production is March 2020. “Mobility” is the percent change in workplace mobility relative to the global median change for May 21st from baseline, which is the median value for the corresponding day of the week during the 5-week period January 3-February 6, 2020, based on data from Google. Sample includes 32 advanced economies and 23 EMDEs for the Mobility data and 29 advanced economies and 22 EMDEs for IP. Click here to download data and charts. provide relatively stronger support for non-tradable sectors spreads has made sharply more expensive (Bruno, Kim, (Ahn, Amiti, and Weinstein. 2011; Bénassy-Quéré et al. and Shin 2018). This would offset the edge in 2009; Bricogne et al. 2012; Bussière et al. 2011; Chor and competitiveness arising from the depreciation of their Manova 2012). Sharp declines in trade through GVCs are currencies (Boz, Gopinath, and Plagborg-Møller 2018). generally followed by rapid recoveries.1 For regions with significant backward linkages, such as EAP and ECA, the increased cost of imported inputs also The fact that trade flowing through GVCs is highly reduces the effect of exchange rate depreciation on dependent on just-in-time delivery of critical components competitiveness (Ahmed, Appendino, and Ruta 2015). from abroad may make it particularly vulnerable to the Disruptions to agri-food supply chains could lead to interruptions of supply caused by regional quarantines, especially severe problems: food insecurity; health risks; production shutdowns, and border controls implemented and social unrest. Many countries are suffering from to slow the spread of COVID-19. GVCs are likely to shortages of chemicals, fertilizers, and seeds, which are amplify the effects of the pandemic through other channels sometimes exacerbated by restrictions on exports by as well. For example, they are particularly prominent in trading partners (World Bank 2020a). These pose a clear the manufacture of durable goods, purchases of which can threat of smaller harvests, higher food prices, and rising be postponed until consumers have more freedom to travel levels of poverty, with the most vulnerable of the world’s and shop (Taglioni and Zavacka 2016). population most exposed. Moreover, GVCs in emerging markets tend to be reliant Which countries and sectors are more on external U.S. dollar financing, which increases in risk vulnerable? 1 This is known as the “bullwhip effect”, and takes place even when A global computable general equilibrium (CGE) model the negative shock is largely from demand (Altomonte et al. 2011). illustrates the heterogenous impact of COVID-19 on G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S P EC IAL FO CU S 119 BOX SF.1 The impact of COVID-19 on global value chains (continued) output and trade, and the transmission channels. It Bank 2020d). Regions that are less integrated through encompasses 20 countries, 7 regional country groups, and trade and tourism, such as SSA and LAC, are the least 29 economic sectors.2 The model incorporates GVCs affected. On a sectoral level, industries more integrated in through input-output linkages and durable relationships in GVCs tend to suffer from more severe contractions in production networks. Shocks applied identically to all activity (Figure SF.1.2.B). This aligns with the results of countries for one year represent the economic impact of a other simulations (Sforza and Steininger 2020). stylized representation of COVID-19: Medium- and long-term implications • Employment shock. A 3 percent drop in employment as factory closures and social distancing force capital and The shock from COVID-19 comes at the same time as workers into idleness. U.S.-China trade relations are once again deteriorating. These shocks may well cause GVC participants to re-assess • Trade cost shock. A 25 percent rise in the costs of all the viability of existing production networks, and explore imports and exports, driven by a combination of whether they should increase the geographical diversify- additional inspections, reduced hours of operation, cation of supply chains, or even reshore production road and border closures, and increases in transport (Freund 2020). Efforts to force reshoring could damage costs, among other factors. The Ebola crisis, in productivity and incomes, especially among EMDEs comparison, caused an estimated 10-percent increase whose economic development and poverty reduction in trade costs for affected countries (Evans et al. efforts have benefitted from their participation in GVCs 2015). (World Bank 2019b). • Tourism shock. A sharp drop in international tourism, The current environment of global recession and equivalent to approximately 25 percent, which aligns heightened risk aversion has been very unfavorable for with the forecast of the World Travel and Tourism international trade. This poses a threat to the gains from Council for 2020. trade through comparative advantage, specialization, and economies of scale. Regions that are already well-integrated • Services shock. A 15 percent switch in household in GVCs should take steps to ensure that they retain, demand away from services requiring close human strengthen, or expand their attractiveness as participants in interaction—such as mass transport, domestic GVCs, including by ensuring the free flow of their tourism, restaurants, and recreational activities— manufactured goods across borders. In regions that are not towards consumption of goods and other services. as well integrated, such as MENA, LAC, SAR and SSA, the desire of companies to increase the geographic diversity Short-term implications of their supply chains may provide an opportunity to undertake the structural reforms that would encourage The combination of four shocks in the simulation causes a greater integration (Engel, Winkler, and Farole 2016; severe global recession. On a sectoral level, services affected World Bank 2019c). by social distancing and tourism experience a sharper decline than agriculture and manufacturing, as they are Policymakers more generally need to avoid the negatively impacted by all four shocks. Country-specific implementation of trade restrictions that could reverse the results show differences reflecting the composition of global welfare gains, including a large reduction in global output and exports by sector and destination, as well as poverty, that GVCs have facilitated. Protectionism does relative levels of openness, reliance on tourism, and not offer a solution to the problems of security of supply endogenous changes in competitiveness. All countries highlighted by the pandemic, and countries with more suffer a decline in exports (Figure SF.1.2.A). The EAP and GVC linkages tend to be more reluctant to impose trade ECA regions are among the worst-affected, consistent with barriers (Blanchard, Bown, and Johnson 2017). Shortages their significant exposure to GVCs and tourism (World would be even more likely in situations where offshore suppliers are shut out, or where domestic suppliers lack the technology and skills available offshore. During the crisis, 2 The model and the simulations are detailed in Maliszewska, Matoo, offshore sourcing has posed less risk to supply in several and van der Mensbrugghe (2020). This box describes the paper’s amplified global pandemic scenario. The model used is ENVISAGE, key sectors than has concentration of production in a few calibrated to GTAP Version 10A. It is used in its comparative static large facilities (e.g., meat packing, medicines)—a reduced specification, and uses 2014 as a reference year. reliance on foreign inputs often results in an increased 120 S P EC IAL FO CU S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX SF.1 The impact of COVID-19 on global value chains (continued) FIGURE SF.1.2 Simulation results In the modeled scenario, all countries and most sectors suffer a decline in total exports, with the worst-affected regions those that are closely integrated into global trade or dependent on tourism. Using the example of Vietnam, the worst-affected sectors are those with a high share of foreign value added, such as textiles and transport equipment. A. Regional responses of GDP and exports B. Sectoral responses in a modeled COVID-19 shock, the case of Vietnam to modeled COVID-19 shock Source: World Bank. A.B. “Foreign Value Added share of exports” is the value added of inputs that were imported in order to produce intermediate or final goods/services to be exported. “Impact on GDP” and “Exports” show the change with respect to benchmark in the CGE simulation. B. Sectors are as follows: A = Agriculture, B = Fishing, C = Mining and Quarrying, D = Food & Beverages, E = Textiles and Wearing Apparel, F = Wood and Paper, G = Petroleum, Chemical and Non-Metallic Mineral Products, H = Metal Products, I = Electrical and Machinery, J = Transport Equipment, K = Other Manufacturing, L = Electricity, Gas and Water, M = Construction, N = Wholesale Trade, O = Transport, P = Post and Telecommunications, and Q = Other Services. Click here to download data and charts. reliance on domestic inputs, which are also vulnerable to supply. The threat to profitability of GVCs provides in disruption from the pandemic (Bonadio et al. 2020). The itself a market incentive to encourage transnational firms most effective way to reduce such risks lies in in this direction. Sound government policies with respect diversification of sources, which may well include some to infrastructure investment and improving governance, reshoring, as well as a broadening of foreign sources of education, and public health, would facilitate the process. regions where tourism accounts for a large share of challenging in the crowded settings of the urban activity, such as MENA (5.5 percent), EAP (5.2 poor. The spread of COVID-19 is expected to percent), and ECA (4.8 percent). cause the number of food insecure people to double in 2020, worsening malnutrition and Informality and food insecurity. In the average causing permanent developmental damage, EMDE, informal activity accounts for one-third of especially in SSA where 20 percent of the output and two-thirds of employment—and population is already undernourished (Figure considerably more in SSA and SAR. This may SF.2.D; WFP 2020). magnify both the health and economic impacts from COVID-19 (Chapter 1; Box 1.4). Workers and firms in the informal sector have limited Macroeconomic policy options to buffer temporary income losses, and responses often depend on daily incomes that are insufficient to permit the accumulation of Regional outcomes also depend on countries stockpiles of food or other essential items. having the space and ability to adopt and Measures to slow the spread of the virus such as implement an effective policy response. Many social distancing and self-isolation are more EMDEs have taken measures to support G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S P EC IAL FO CU S 121 households and firms through severe economic • ECA. About two-thirds of central banks in downturns. ECA have eased their monetary policy stances (Poland, Russia, Tajikistan, Turkey, Ukraine, Monetary and macroprudential policy measures Uzbekistan), and several have employed liq- uidity measures to boost funding conditions EMDE central banks and governments have (Hungary, Poland, Romania, Serbia, Turkey). implemented a wide range of policy measures to In Poland, the central bank has also started an limit the economic and financial fallout of the asset purchase program, as have those in pandemic (Figure SF.3.A). Prospects of reduced Hungary and Turkey. About 80 percent of inflationary pressures during the remainder of this economies in the region have also adopted year, helped by the collapse in oil prices and weak macroprudential measures to further support demand, have aided policy easing efforts in many activity. These have included the easing of countries. On aggregate, every region has provided regulatory capital buffers (Bulgaria, Hungary, monetary easing through a variety of traditional Poland, Russia), banking fee reductions and novel measures. Central banks have (Ukraine), loan repayment holidays (Russia), aggressively cut monetary policy rates, with some and mandated capitalization last year’s complementing this easing with unconventional banking sector profits. Although capital ratios monetary policies such as asset purchase today are on average higher than before the programs—a first for most EMDEs. In addition, global financial crisis, banking sector balance they have provided liquidity to help resolve credit sheets in several ECA economies are more crunches, and deployed an arsenal of impaired. macroprudential measures to further support lending. While the overall direction of monetary • LAC. Several economies in LAC aggressively and macroprudential policy has been common cut their monetary policy interest rates (Brazil, across all regions, a considerable degree of Chile, Mexico, Paraguay, Peru). Brazil’s variation stems from each region’s policy central bank has reduced the policy interest framework and economic circumstances. rate by 150 bps since the start of the year, to a historic low of 3 percent, while also easing • EAP. Several economies in EAP implemented capital conservation buffers, reserve require- conventional monetary policy rate cuts to help ments, and provisioning rules to increase support activity (China, Indonesia, Malaysia, liquidity in the banking system. Mexico’s Philippines, Thailand, Vietnam). Relatively central bank has established several new muted inflation in the region has further liquidity facilities for banks to ease constraints aided policy efforts. To ease funding stresses, and enable lending to firms. The central central banks also provided emergency banks of Brazil and Mexico have also liquidity to markets (China, Philippines). benefited from a newly established temporary Indonesia, the Philippines, and Thailand also swap line with the U.S. Federal Reserve that embarked on asset purchase programs that provides dollar liquidity equivalent to 17 and would buy government securities worth an 32 percent of their international reserves. estimated 1-2 percent of GDP. These Colombia and Chile have launched asset measures have been further complemented by purchase programs valued at about 1 and 3 a variety of macroprudential measures, percent of GDP, respectively. including the relaxation of regulatory capital buffers (Indonesia, Malaysia), the lowering of • MENA. Many economies in MENA have liquid-ity coverage ratios (Malaysia), and the eased their monetary policy stances (Egypt, easing of Basel III net stable funding ratios. Algeria, Morocco, Tunisia). Among the Gulf Heading into the COVID-19 shock, the Cooperation Council (GCC) countries, policy banking sector in EAP is better capitalized and rates have also fallen, reflecting these its balance sheets are stronger when compared economies’ peg to the U.S. dollar tying to before the global financial crisis of 2008. changes in their policy stances to that of the 122 S P EC IAL FO CU S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE SF.3 Policy measures Federal Reserve. Some countries have also EMDEs have embarked on unprecedented monetary policy stimulus, used macroprudential measures to comple- including liquidity measures and an array of macroprudential policies. A ment changes in their monetary policy broad range of fiscal stimulus programs have also been announced that stances. However, scope for further are expected to markedly widen already-large fiscal deficits. Government debt is elevated in some regions, reducing fiscal room to maneuver. forbearance might be limited, as banking Inflation is also expected to exceed central bank targets, weighing on the sector capital ratios in many non-GCC scope for further monetary policy easing. Banking sectors across EMDE regions are better capitalized today than before the global financial crisis, MENA economies are vulnerable. although some have been grappling with greater balance sheet impairments. • SAR. Several central banks in SAR have also lowered policy interest rates, aided by an A. EMDE monetary and financial B. Fiscal support measures, by region policy measures impending drop in inflation due to falling oil prices (Bangladesh, India, Pakistan, Sri Lanka). These monetary policy actions have been complemented with measures to provide liquidity to financial markets and banking systems in several economies. In India, the central bank has been purchasing government bonds to further ease financial conditions. In Bangladesh, the central bank lowered the cash reserve ratio and announced purchases of C. Government debt, by region D. Expected inflation deviations from targets in 2020 government securities from banks. Some economies have also reverted to macro- prudential measures to free up capital in the banking system and help support borrowers. These have included loan repayment holidays (Bhutan, Sri Lanka), easing of regulatory capital buffers (India), and lowering of liquidity coverage ratios (Sri Lanka). Non- performing loan ratios in SAR are however E. Regulatory capital ratios by region F. NPLs by region among the highest across EMDEs, on average—reflecting existing financial sector weaknesses. These could limit the scope for further regulatory forbearance in some economies. • SSA. Monetary policy stances have also been aggressively eased in SSA (Democratic Republic of Congo, Ghana, Kenya, Mauritius, Source: Bloomberg; Bank for International Settlements; Central Bank News; Consensus Economics; South Africa), despite expectations that Haver Analytics; International Monetary Fund; Morgan Stanley; World Bank. inflation will edge up this year due to sharp Note: EMDE = Emerging Market and Developing Economies, EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and currency depreciations and higher food prices. North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. A. Macroprudential includes prudential methods and measures to support borrowers. Sample Others have lowered reserve requirements to includes 120 EMDEs. Last observation is May 27, 2020. free up liquidity (Botswana, Mozambique), B. Total measures either planned or under consideration as of May 29, 2020. Aggregates are calculated using 2019 nominal U.S. dollar GDP. Orange vertical lines indicate interquartile range. implemented asset purchase programs Sample includes 29 EMDEs. C. Figure shows median for each region. Shaded areas indicate forecasts. (Rwanda, South Africa), or deployed a variety D. Bars reflect the average expected inflation deviation from target in 2020 among EMDEs with inflation targeting regimes. Vertical orange lines indicate interdecile range. Sample includes 56 of macroprudential policies to enable financial EMDEs. institutions to support distressed borrowers E.F. Figures show simple averages for each EMDE group. Due to data limitations, 2008Q2 represents nearest available data no later than 2009Q1. Latest represents most recent data up to (the Central Bank for the West African 2019Q4. Click here to download data and charts. Economic and Monetary Union, and the Central Banks of Ghana, Madagascar, G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S P EC IAL FO CU S 123 Nigeria). Although several countries’ banking business support initiatives. Indonesia and the sectors have stronger capital positions today Philippines have both announced sizable fiscal than before the global financial crisis (Ghana, stimulus packages that range between 3-5 Kenya, Rwanda, South Africa), banking sector percent of GDP, which includes targeted capitalization is slightly weaker in the region support to vulnerable groups. Sharply higher on average—potentially limiting the scope for spending is expected to contribute markedly leveraging macroprudential policies to provide to widening fiscal deficits in the region this further support to activity. year, with the median deficit expected to increase to 5 percent of GDP, from 2.2 Fiscal policy measures percent in 2019. EMDEs have also implemented a wide range of • ECA. Sizable fiscal measures have also been fiscal stimulus programs equivalent to around 5 announced in ECA—the fiscal deficit of the percent of GDP in the EMDEs where they have median economy is projected to widen from 1 been announced (Figure SF.3.B). These measures percent in 2019 to 6.8 percent of GDP in have been targeted at confronting the immediate 2020. In Poland, an economic package of health crisis, as well as to limit the magnitude of around 12 percent of GDP will be aimed at the economic contraction and to provide support boosting health care, expanding social for the eventual recovery, and have included protection coverage, supporting wages, and expansion of social protection, cash transfers to providing loan guarantees and credit households, increased access to unemployment extensions. Measures in Turkey amount to 9 benefits, and wage subsidies to firms to protect percent of GDP and include increased health jobs. To further support firms, policymakers have care spending, support for utility payments, also provided access to credit, loan guarantees, and and increased social protection. In Georgia, vouchers or cash for critical employers and announced fiscal measures are equivalent to 3 affected sectors such as tourism. However, elevated percent of GDP over the next few years and debt-to-GDP ratios and large fiscal deficits in include additional health spending, support many EMDEs is constraining their room to for the tourism sector, accelerated and aggressively ease fiscal policy—particularly among increased VAT refunds, a moratorium on tax some industrial commodity exporters, reflecting payments for low-income earners, subsidized the loss of revenue due to the collapse in utility costs of the poor, and unemployment commodity prices. Although most EMDEs have subsidies. In Kazakhstan, fiscal measures—on managed to implement discretionary fiscal support and off-budget—amount to 5.7 percent of packages, those with more fiscal space have GDP, while several other economies in the generally provided greater support. region have announced similar measures that range between 2-7 percent of GDP. These • EAP. Several countries in EAP have include increased health care spending announced large fiscal stimulus packages to (Armenia, Azerbaijan, Russia, Tajikistan, help support activity. Measures in China Uzbekistan), tax payment deferrals totaled 5.4 percent of GDP and included tax (Azerbaijan, Albania, Russia), support for breaks and deferrals and special central and utility payments (Armenia), and employment local government bond issuances. Malaysia protection (Armenia, Albania, Kazakhstan, and Thailand have both implemented Russia), and expansion of social protection extraordinary policy support packages coverage (Armenia, Azerbaijan, Kyrgyz equivalent to around 17 and 13 percent Republic, Russia, Uzbekistan). of GDP respectively, which included direct fiscal stimulus packages of about 6 percent • LAC. The median fiscal deficit in the region is of GDP in both countries. The remainder expected to nearly double this year to 5.2 covers health care, public welfare and the percent of GDP. Brazil’s announced fiscal expansion of social protection, and other package of more than 8 percent of GDP 124 S P EC IAL FO CU S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 includes income support measures for have announced fiscal, liquidity, and loan vulnerable groups, tax deferments, and loan support measures, ranging from 3 to 10 guarantees, among others. Peru has percent of GDP. Measures in India include announced a fiscal package equivalent to 7 spending on health care to bolster the percent of GDP, which includes direct COVID-19 response, wage support, in-kind transfers to poor households, deferrals of tax and cash transfers to lower-income payments, and utility-payment support, households, deferral of tax payments, as well among others. Fiscal measures in the region as loan and liquidity support for small have targeted a range of areas, including businesses and financial institutions. In health spending (Argentina, Chile, Pakistan, measures also include additional Guatamala), tax payment deferrals (Chile), tax spending on health care, cash transfers, and cuts (Jamaica), and loans or credit guarantees relief of utility payments. The fiscal support to SMEs (Argentina, Chile), and enhanced package in Bangladesh includes subsidies on employment protection (Argentina, Chile, interest payments for loans to businesses, loan Guatamala). Governments in Mexico, guarantees equivalent to almost 2 percent of Paraguay, and Honduras, and Uruguay have GDP, food distribution, targeted cash provided support for SMEs, including transfers to the poor, additional procurement through the provision of additional resources of rice and paddy, and an agricultural lending to their development banks and other program. The median fiscal deficit in SAR is financial institutions. Fiscal support has also foreseen to widen from 5.4 percent of GDP in included the expansion of social protection 2019 to 6.9 this year. coverage (Argentina, Brazil, Peru). In Brazil, limited fiscal space has required reallocation of • SSA. Several countries in SSA have expenditures toward income support and announced various fiscal measures to support health spending. activity and buttress health sector responses to the pandemic. However, given binding fiscal • MENA. Announced fiscal policy responses policy constraints, these measures have mostly have ranged between 1 and 13 percent of been smaller than in other EMDE regions and GDP in MENA—a region hit hard by both often involved reprioritization of existing the pandemic and the collapse in oil prices. As budgets (Cabo Verde, Nigeria, Zimbabwe). a result, fiscal deficits in the region are The median fiscal deficit in the region is expected to widen to 10 percent of GDP in projected to reach 5.1 percent of GDP this 2020, from 3.1 percent in 2019, on average. year, almost doubling from 2019. Despite In the GCC economies, measures have severely constrained fiscal space and a recent included health spending and social sovereign rating downgrade to sub-investment protection spending increases, employment grade, the South African government has protection measures, and support for service announced a near 10 percent-of-GDP fiscal sectors like tourism. In several GCC support package, which includes loan economies (e.g., Qatar, Saudi Arabia, United guarantees—equivalent to almost 4 percent of Arab Emirates), packages also specifically GDP—measures to strengthen the health provided relief for small and medium-sized sector, bolster sanitation infrastructure, and enterprises. In non-GCC economies (e.g., relieve social distress, as well as tax relief. Egypt, Iran), measures have focused on health Announced fiscal support in Ethiopia spending, cash transfers, and social protection. equivalent to close to 2 percent of GDP will With the collapse in oil prices weighing boost health care spending and assist in further on fiscal positions in MENA, some emergency food distribution. In the Republic support packages have entailed budgetary of Congo, the government’s 1.6 percent-of- reallocations (Algeria, Saudi Arabia). GDP fiscal package is targeted at bolstering the health system and includes tax payment • SAR. In SAR, India, Pakistan, and Bangladesh deferrals. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S P EC IAL FO CU S 125 To help alleviate funding shortfalls among the space in the third of the region’s economies world’s poorest economies, many of which are in that are industrial commodity exporters SSA, the World Bank and the IMF have called on (Azerbaijan, Kazakhstan, Russia, Tajikistan, bilateral creditors to suspend debt payments from Turkmenistan). In some countries, however, fiscally constrained countries. Both institutions elevated shares of foreign-currency-denom- have also made emergency support packages inated debt could leave their debt burdens available to assist governments; however, given the vulnerable to sharp depreciations. In over one- scale of the pandemic, further external assistance half of economies in ECA—particularly from the broader global development community among oil exporters—inflation is expected to is imperative. exceed its target next year by a greater margin than the EMDE median, likely constraining Limitations on policy room to maneuver further easing of monetary policy. Many economies have limited room to implement • LAC. A few LAC economies have weak additional fiscal and monetary stimulus. EMDE foreign reserve buffers, with the region’s government debt has risen sharply over the last economies accounting for one-quarter of those decade, rising to above 60 percent of GDP in EMDEs in the bottom quartile for reserves-to- one-third of EMDEs by 2019, while fiscal deficits imports cover. There is wide heterogeneity, were wider than 3 percent of GDP in 40 percent however, as countries like Brazil have strong of countries (Figure SF.3.C). Although inflation reserve buffers. Reserve buffers in some among EMDEs is expected to moderate as a result countries with fixed exchange rates, such as of the pandemic, inflation in many EMDEs is the Caribbean islands, have also come under projected to remain above central bank targets, severe pressure amid the international constraining these economies’ ability to ease financial turmoil. A number of countries in their monetary policy stances further (Figure LAC also have large external financing SF.3.D). In general, EMDE banking sectors were requirements, exacerbating the limitations of better capitalized in 2019 than they were before low reserves. the global financial crisis in 2008; however, elevated balance sheet impairments in some • MENA. The region’s disproportionate regions could weigh on banks’ ability to extend exposure to the collapse in oil prices is much-needed credit to firms and households expected to weigh heavily on fiscal balances as during the COVID-19 crisis, and could put government revenue is bound to drop steeply, financial stability at risk (Figures SF.3.E and constraining the room for significant SF.3.F). countercyclical fiscal stimulus. Fiscal deficits • EAP. Banking sectors in EAP are the best are expected to widen to beyond 9 percent in capitalized on average of all EMDE regions, 2020—from around 4 percent in last year. As with the average regulatory capital to risk- a result, median government debt is expected weighted assets ratio around 22 percent. to rise 10 percentage points this year, with However, banking sectors in the region also debt-to-GDP ratios in about half of the have the highest loan-to-deposit ratios of all region’s economies being in the worst quartile EMDE regions, suggesting an increased for EMDEs. likelihood of liquidity constraints arising in the event of severe funding stress. • SAR. Although banking sectors in SAR are well capitalized relative to regulatory • ECA. Debt levels in a number of ECA requirements, capital adequacy ratios are the economies are below that of the average lowest among EMDE regions, on average. EMDE, facilitating the implementation of Even before the pandemic, credit extension large fiscal stimulus packages. However, the was slowing in some countries (Bangladesh, fall in revenues as a result of the decline in India). Non-performing loan ratios in SAR commodity prices is expected to reduce fiscal are among the highest of all EMDE regions. 126 S P EC IAL FO CU S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 In about 90 percent of the region’s economies, • EAP. Regional growth is projected to slow non-performing loan ratios exceed that of the sharply from 5.9 percent in 2019 to 0.5 EMDE median. This weighs heavily on the percent in 2020—the lowest rate since banking sector’s ability to provide credit 1967—with sizable policy support preventing during the current downturn. High debt a more severe deceleration. Although subject burdens in a number of countries are also to significant uncertainty, regional growth is constraining fiscal space. expected to rebound to 6.6 percent in 2021. Per capita incomes are forecast to contract by • SSA. Around 40 percent of economies in the 0.1 percent, on average, this year—the worst quartile for government debt are in weakest performance and first contraction SSA. In addition, half of the EMDEs in the since 1968—before rebounding to 6 percent worst quartile for government debt-to-revenue in 2021. Over the last 30 years, per capita ratios—a crude indication of the years of income growth in EAP has averaged 7 revenue needed to repay debt—are in the percent. Falling per capita incomes amid the region. Many countries in SSA also have COVID-19 pandemic is likely to have a limited foreign reserve buffers, with the devastating impact on poverty and welfare in median economy having enough reserves to the region (Lakner et al. 2020; World Bank cover 3.5 months of imports. 2020b). ECA. Regional economies are forecast to Prospects for per capita • contract by 4.7 percent in 2020—the steepest growth and poverty fall since the 5 percent contraction during the global financial crisis—with recessions in Nearly 80 percent of EMDEs are expected to nearly all ECA economies. The outlook register negative growth—the highest share on assumes that containment and mitigation record (Figure SF.4.A). In general, forecast measures are gradually lifted by the start of the downgrades are larger and the recessions are second half 2020. Growth in ECA is projected deeper in EMDE regions with the most severe to recover to 3.6 percent in 2021, as the COVID-19 outbreaks or those most susceptible to economic effects of the pandemic gradually global spillovers, such as economies that are wane and the recovery in trade and heavily dependent on tourism, economies deeply investment gathers momentum. Per capita embedded in global value chains, and major incomes in 2020 are projected to contract 5 exporters of industrial commodities (Figure percent. Although extreme poverty is less SF.4.B). LAC and ECA have large downgrades prevalent in ECA than in other EMDE partly because of the size of their domestic regions—about 6 million people in the region outbreaks and exposure to global spillovers, while live in extreme poverty, or 1.2 percent of the South Asia’s substantial downgrade is primarily population—the steep decline in per capita the result of stringent lockdown measures. incomes is expected to raise the poverty headcount (Lakner et al. 2020). Per capita incomes among more than 90 percent of EMDEs are expected to contract in 2020— • LAC. The regional economy is projected to markedly affecting living standards and likely shrink by 7.2 percent in 2020—the most of causing many millions to fall back into poverty all EMDE regions and a much steeper decline across all EMDE regions (Figure SF.4.C and D; than during the global financial crisis— Lakner et al. 2020; ILO 2020; World Bank reflecting measures to slow the domestic 2020b). Per capita income losses are forecast to be spread of the pandemic, significant steepest in ECA, LAC, MENA, and SSA. These deterioration in financing conditions and four regions are home to many oil exporters, commodity prices, and spillovers from a which will be severely affected by the precipitous global recession. As mitigation measures are fall in oil prices (see Chapter 4). scaled back and financing, commodity price, G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S P EC IAL FO CU S 127 and external demand conditions become more FIGURE SF.4 Prospects for growth, per capita incomes supportive, regional growth is projected to and poverty recover to 2.8 percent in 2021. The implied Nearly 80 percent of EMDEs are expected to register negative growth this 8.1 percent drop in per capita incomes this year, with the deepest regional contractions in ECA, LAC, and MNA. Revisions to growth forecasts have been substantial across all EMDE year will also be the steepest among all EMDE regions. The decline in per capita incomes due to the fall in activity is regions. This sharp contraction in per capita expected to be even steeper and could cause many millions to fall back incomes is likely to cause millions to lapse into extreme poverty. into extreme poverty, as many of those who A. Regional growth B. Downgrades to growth forecasts escaped poverty in recent years are still vulnerable to falling back into it (World Bank 2020d). • MENA. Activity in the region is expected to contract by 4.2 percent in 2020, as consumption, exports, and services activity like tourism are severely disrupted by the COVID-19 pandemic, and in oil exporters, export and fiscal revenues collapse with the plunge in oil prices. Regional growth is C. Regional per capita growth D. Level of per capita incomes relative expected to resume in 2021-22 as the impact to January 2020 of the pandemic fades and investment improves. Per capita GDP in MENA is expected to contract by 5.8 percent this year—the steepest contraction among EMDE regions after LAC—reflecting the region’s disproportionate exposure to the oil price collapse. It will also be the fourth consecutive year in which per capita incomes in for the region as a whole have fallen. Although per Source: World Bank. Note: EMDE = Emerging Market and Developing Economies, EAP = East Asia and Pacific, capita growth is expected to recover to 0.8 ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. percent in 2021, it will remain below the A.C. Bars denote latest forecast; diamonds correspond to January 2020 forecasts in the Global long-term average, as the region is foreseen to Economic Prospects report. Average for 1990-2019 is constructed depending on data availability. For Europe and Central Asia, the long-term average uses data for 1995-2019 to exclude the continue struggling with macroeconomic immediate aftermath of the collapse of the Soviet Union. Aggregate growth rates calculated using GDP weights at 2010 prices and market exchange rates. Shaded areas indicate forecasts. fragility (World Bank 2020e). A. Since the largest economies account for about 50 percent of GDP in some regions, weighted averages predominantly reflect the developments in the largest economies in each region. B. Figure shows the downgrade in regional GDP forecasts in 2020. Sample includes 145 EMDEs. • SAR. Activity in the region is projected to D. Bars show the percent difference between the level of per capita GDP in the January and June 2020 editions of Global Economic Prospects. Sample includes 144 EMDEs. shrink by 2.7 percent in 2020. Consumption Click here to download data and charts. and services activity have been severely hindered by pandemic mitigation measures. The depth of the global contraction will also weigh substantially on SAR activity, despite first contraction since 1979. Per capita income more modest trade linkages with advanced growth is forecast to rebound to 1.7 percent economies compared to other EMDE regions. next year, but remain well-below the long- Growth in 2021 is projected to recover to 2.8 term average of 4.4 percent. percent as pandemic mitigation measures are rolled back and manufacturing and services • SSA. Activity in the region is expected to activity resume. An expected tapering of contract by 2.8 percent this year—the deepest global headwinds is expected to further contraction on record and 5.8 percentage support recovery of activity in the region. SAR points weaker than previous forecasts. Efforts is expected to experience a reduction of per to contain the spread of the virus have capita incomes of 3.8 percent in 2020, the disrupted the functioning of domestic 128 S P EC IAL FO CU S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 economies, and will be compounded by the United States and China would cause sharply lower growth in major trading renewed disruption to trade, and increase partners and the collapse in commodity prices. existing pressures on the supply of Growth in the region is expected to rebound intermediate goods. to 3.1 percent in 2021; however, the outlook is subject to substantial uncertainty. Per capita • ECA. An even sharper-than-expected slow- GDP this year is projected to fall by 5.3 down in the Euro Area, perhaps from a percent, likely causing millions to fall back worsening of the pandemic or more prolonged into extreme poverty. With the region already mitigation measures, could amplify the home to about 60 percent of the world’s negative spillovers from the region, including extreme poor, this rise is bound to further through global value chains, as well as through concentrate global poverty in the region commodity, financial, and remittance (Lakner et al. 2020; World Bank 2020a). channels. With remittances accounting for 10 percent of GDP in the region, a sharp fall could amplify the regional economic down- Risks turn. Similarly, a prolonged deterioration in global investment sentiment could have Given the size and unprecedented nature of the material implications for the region if it COVID-19 shock to the global economy, any weighs on foreign direct investment. numerical forecast for the period ahead is subject to an unprecedented level of uncertainty. • LAC. Downside risks to the outlook in LAC Downside risks to the outlook predominate for all include a resurgence of last year’s wave of EMDE regions and could lead to a substantially social unrest, increasingly adverse market greater loss of output in the near term if they reactions to rising public debt, weaker-than- materialize. Several risks common to all regions are expected commodity prices, and persistent discussed in Chapter 1. These include a longer- pandemic-related uncertainty slowing the than-expected pandemic, financial crises, and a recovery of the services sector. In addition, retreat from global value chains. These risks are LAC faces persistent risks related to natural global in nature, notwithstanding a degree of disasters and weather-related events. A major regional variation in their impact. For example, natural disaster on the heels of the COVID- the likelihood of more persistent outbreaks of 19 pandemic would be economically COVID-19 is higher in regions with weaker devastating for some countries in the region. health systems, financial crises are more likely and more damaging in regions burdened with higher • MENA. The recent sharp decline in oil debt, and a global retreat from value chains would prices and the continued high uncertainty be more damaging for regions that are tightly about their future path pose an important integrated in world trade. In addition to these downside risk to the region’s outlook. More global risks, there are also myriad risks specific to widespread COVID-19 outbreaks could exact each region. a significant humanitarian toll, especially among the fragile economies where forced • EAP. Key risks include the possibility of a displacement and insecurity leave populations second wave of the outbreaks, which would already highly vulnerable. In addition to the renew pressure on countries’ health care effects of the pandemic, conflict-related risks systems and interrupt the recoveries which in MENA remain high. have begun in countries that have largely brought domestic outbreaks under control. • SAR. The regional spread of COVID-19 Moreover, it remains to be seen whether the could have especially severe humanitarian policy accommodation being provided will be consequences given the region’s high sufficient to prevent a more severe deteriora- population, large informal sectors, high ine- tion in confidence, investment, and trade. quality, and underdeveloped health systems. Finally, a renewal of trade tensions between An intensification of financial market stress G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S P EC IAL FO CU S 129 would add further pressure to financial sector Bénassy-Quéré, A., Y. Decreux, L. Fontagné and D. balance sheets already burdened with existing Khoudour-Casteras. 2009. “Economic crisis and global vulnerabilities, including high levels of non- supply chains.” CEPII Working Paper 2009 (15). performing loans. Financial stress also risks Available at https://papers.ssrn.com/sol3/papers.cfm? abstract_id=1588946. risk saddling governments with contingent liabilities should bailouts be needed, with Blanchard, E. J., C. P. Bown, and R. C. Johnson. adverse implications for public debt 2017. “Global Value Chains and Trade Policy.” CEPR sustainability. While the region is an oil Discussion Paper 11044, Center for Economic Policy importer, further volatility in oil prices could Research, London. curtail remittance flows from South Asian Boz, E., G. Gopinath, and M. Plagborg-Møller. 2017. expatriate workers in Gulf economies. “Global Trade and the Dollar.” NBER Working Paper • SSA. The region is especially vulnerable to a 23988, National Bureau of Economic Research, Cambridge, MA. larger and longer lasting downturn given the weakness of its health care systems, Bonadio, B., H. Zhen, and A. Levchenko. 2020. constrained fiscal policy space, and its limited “Global Supply Chains in the Pandemic.” NBER capacity to effectively implement social- Working Paper, National Bureau of Economic distancing measures. SSA is at risk of debt Research, Cambridge, MA. distress given high levels of debt and sharply higher borrowing costs. There are also Bricogne, J.-P., L. Fontagné, G. Guillaume, D. Taglioni, and V. Vicard. 2012. “Firms and the Global growing concerns that border closures and Crisis: French Exports in the Turmoil.” Journal of trade-restrictive policies may cause a food International Economics 87 (1): 134-146. security crisis in the region. Bruno, V., S. J. Kim, and H. Shin. 2018. “Exchange rates and the working capital channel of trade fluctuations.” BIS Working Paper 694, Bank for International Settlements, Basel. References Bussière, M., G. Callegari, F. Ghironi, G. Sestieri, and Acemoglu, D., U. Akcigit, and W. Kerr. 2015. N. Yamano. 2011. “Estimating trade elasticities: “Networks and the Macroeconomy: An Empirical Demand composition and the trade collapse of 2008- Exploration”. Research Discussion Paper 25, Bank of 2009.” NBER Working Paper 17712, National Bureau Finland, Helsinki. of Economic Research, Cambridge, MA. ADB (Asian Development Bank). 2020. Asian Chor, D., and K. Manova. 2012. “Off the cliff and Development Outlook 2020: What Drives Innovation in back? Credit conditions and international trade during Asia? April. Manila, Philippines: Asian Development the global financial crisis.” Journal of International Bank. Economics 87(1): 117-133. Ahmed, S., M. Appendino, and M. Ruta. 2015. EDB (Eurasian Development Bank). 2020. 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Transparency can Help the Middle East and North Africa. 2020. “How Much Does Reducing Inequality Matter April. Washington, DC: World Bank. for Global Poverty?” Global Poverty Monitoring Technical Note 13, World Bank, Washington, DC. ———. 2020f. Europe and Central Asia Economic Update: Fighting COVID-19. April. Washington, DC: Maliszewska, M., A. Mattoo, and D. van der Mens- World Bank. brugghe. 2020. “The Potential Impact of COVID-19 on GDP and Trade: A Preliminary Assessment.” Policy ———. 2020g. South Asia Economic Focus: The Cursed Research Working Paper 9211, World Bank, Blessing of Public Banks. April. Washington, DC: World Washington, DC. Bank. CHAPTER 3 Lasting Scars of the COVID-19 Pandemic G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 133 The COVID-19 pandemic has struck a devastating blow to an already-fragile global economy. Lockdowns and other restrictions needed to address the public health crisis, together with spontaneous reductions in economic activity by many consumers and producers, constitute an unprecedented combination of adverse shocks that is causing deep recessions in many advanced economies and emerging market and developing economies (EMDEs). Those EMDEs that have weak health systems; those 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. These effects may well lower potential growth and labor productivity in the longer term. Immediate policy measures should support health care systems and moderate the short-term impact of the pandemic on activity and employment. In addition, a comprehensive reform drive is needed to reduce the adverse impact of the pandemic on long-term growth prospects by improving governance and business environments, and expanding investment in education and public health. Introduction • What is the short-term growth impact of the pandemic? On March 11, the World Health Organization declared COVID-19 a pandemic—the first such • What are the likely long-term growth declaration since the swine flu in 2009. As implications of the pandemic? infections and deaths soared, governments around the world have taken unprecedented measures— Contributions. This chapter makes several including lockdowns and quarantines, school and contributions to a rapidly growing literature on business closures, and travel restrictions—to stem the macroeconomic effects of the pandemic. First, the spread of the pandemic. These measures, while extensive analysis of the effects on advanced together with the spontaneous reactions of economies is widely available, work on the consumers, workers and businesses, have caused pandemic’s impact on EMDEs has thus far been severe disruptions to activity in many sectors and a very limited. This chapter provides the first sharp global economic downturn. This has been comprehensive overview of the effects of the accompanied by record capital outflows from pandemic on EMDEs, highlighting the features emerging market and developing economies that make these economies more vulnerable than (EMDEs), a collapse in global trade, and a plunge advanced economies. Second, while much recent in oil demand. analysis has been devoted to the short-term implications, with forecasts for this year and next, This chapter takes stock of the consequences of this chapter also analyses the long-term the pandemic for the global economy. Specifically, macroeconomic effects of the pandemic. Third, it addresses the following questions: the chapter presents, for the first time, a systematic synthesis of the copious literature developed over • How has the pandemic evolved? the past few decades on the macroeconomic effects of past disease outbreaks, including epidemics and • Through which channels does the pandemic pandemics. affect the global economy? Main findings. The chapter reports several novel findings. Note: This chapter was produced by a team led by M. Ayhan • Evolution of the pandemic: While outbreaks in Kose and Franziska Ohnsorge and including Carlos Arteta, Alistair Dieppe, Justin-Damien Guenette, Alain Kabundi, Sergiy most advanced economies appear to be Kasyanenko, Sinem Kilic Celik, Gene Kindberg-Hanlon, Patrick abating, the pandemic is rapidly spreading Kirby, Hideaki Matsuoka, Yoki Okawa, Cedric Okou, M. Rudi across EMDEs, including low-income Steinbach, Dana Vorisek, and Shu Yu. Research assistance was provided by Hrisyana Doytchinova, Maria Hazel Macadangdang, countries (LICs), where health care systems Vasiliki Papagianni, and Heqing Zhao. have very limited capacity. 134 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 • Severe short-term impact. The pandemic, the formation. In most years during the past widespread restrictions put in place to stem it, decade, EMDE growth fell short of its long- and the spontaneous reactions of many term average. This was reflected in repeated consumers and producers have already caused downgrades to long-term growth projections a deep global recession. Along with the public for EMDEs. The pandemic is expected to health crisis, EMDEs are facing tighter exacerbate the multi-decade trend slowdown financing conditions, plunging oil and other in potential output growth and productivity commodity prices, sharp declines in remit- growth. tances, and collapsing international trade. • Policies. While the immediate priorities of • Magnifying short-term weakness. Many EMDEs policymakers are to address the health crisis entered this global recession less well-prepared, and moderate the short-term economic losses, and with larger vulnerabilities, than when they the likely long-term consequences of the were hit by the last global recession in 2009. pandemic highlight the need to forcefully EMDEs that are most vulnerable to the undertake comprehensive reform programs to impact of the pandemic include those that improve the fundamental drivers of economic have weak health systems, that rely heavily on growth. global trade or tourism, that are vulnerable to financial disruptions, and that depend on oil Spread of the pandemic and other commodity exports. The recession will prolong a decade of disappointing growth Outbreak. As of May 22, more than 5.2 million for EMDEs. cases of COVID-19 have been confirmed globally, alongside about 340,000 deaths attributed to the • Persistent damage in the long run. COVID-19 disease. Although the number of confirmed cases and the resulting recessions engulfing vast represents just 0.07 percent of the global swaths of the developing world will leave population, cases continue to rise rapidly in most lasting scars, eroding productivity and countries, including in EMDEs (Figure 3.1). potential output for extended periods. The Reported cases may be significantly lower than the long-term damage will be particularly severe in number actually infected, given the sparseness of economies that suffer financial crises, and in testing in some countries (Bendavid et al. 2020; energy exporters because of plunging oil Hortaçsu, Liu, and Schwieg 2020; Barro, Ursúa, prices. In the average EMDE, over a five-year and Weng 2020). horizon, a recession combined with a financial crisis could lower potential output by almost 8 Comparison with previous pandemics. The percent while, in the average EMDE energy COVID-19 pandemic is the latest in a long series exporter, a recession combined with an oil of epidemics and pandemics during the twentieth price plunge could lower potential output by and twenty-first centuries. These have included 11 percent. The pandemic is expected to Ebola in West Africa (2014-15), MERS in the exacerbate the weakness in productivity Middle East (2012), swine flu (2009-10), SARS in growth and private investment that were East Asia (2002-03), Hong Kong flu (1968-69), features of the past decade. Asian flu (1957-58) and Spanish flu (1918-19). Preliminary estimates suggest that COVID-19 • Aggravating long-term challenges. Recessions may be considerably more infectious than many of associated with the pandemic will likely have these diseases, but not among the most deadly for an even larger impact on long-term growth those infected (Figure 3.1). prospects because of pre-existing vulnerabilities, fading demographic dividends Influenza pandemics during the past century are and structural bottlenecks, and permanent estimated to have infected around one-quarter to changes in behavior patterns, including one-half of the global population, although these consumption habits, and human capital estimates are highly uncertain (Annex 3.1; Van G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 135 Kherkove et al. 2013). Previous coronavirus FIGURE 3.1 The COVID-19 pandemic and mitigation outbreaks, SARS and MERS, are estimated to measures have been significantly less contagious than The global number of infections has been growing rapidly. Many countries, COVID-19; they resulted in approximately 8,000 accounting for almost all of global GDP, have put in place mitigation policies that restrict school, work, public gatherings and events, and travel. and 2,500 worldwide cases, respectively (Wilder- Reflecting a near-halt to much of economic activity, indicators of mobility Smith, Chiew, and Lee 2020). In some historical as well as air pollution have declined. episodes, prophylactic measures were taken to reduce the spread of the diseases, but on a much A. Number of cases in EMDEs B. Contagiousness (R0) of selected epidemics and pandemics smaller scale than the measures implemented to counter COVID-19.1 Estimates of COVID-19 fatality rates are currently in flux, in part due to uncertainties over the true number of cases: they have ranged from 0.3 to 3.4 percent, with many of the higher estimates likely to have been biased upwards due to shortfalls in testing and the presence of unrecorded asymp- tomatic cases (Rajgor et al. 2020). This range is C. Case fatality rates of selected D. Share of global GDP affected by lower than estimates of fatalities resulting from the epidemics and pandemics mitigation measures Spanish flu, which is estimated to have killed 50- 100 million people during 1918-19, with case fatality rates of 3.5-20.0 percent (Johnson and Meuller 2002; Spreeuwenberg et al. 2018). The range of estimates of COVID-19 case fatality rates is closer to estimates for the Asian and Hong Kong flus. These pandemics are estimated to have had case fatality rates of approximately 0.01 percent (Li et al. 2008; Wang and Nguyen Thi 2013). E. Mobility F. Pollution Mitigation measures. Restrictions and voluntary actions taken to stem the pandemic, including social distancing, have helped to lower the infection rate and thus to delay, and lower, the peak number of infections (Eichenbaum, Rebeloz, and Traband 2020; Ferguson et al. 2020). A key part of the policy response to COVID-19 has been the implementation of restrictions on people’s movements and economic activity of unprece- Source: Air Quality Open Data Platform; Biggerstaff et al. (2014); Centers for Disease Control and Prevention; Cobos et al. (2016); Coburn et al. (2009); Dawood et al. (2012); Google’s Mobility dented scope and scale, beginning in China and Tracker; Johns Hopkins University Coronavirus Resource Center; Johnson and Mueller (2002); extending to most countries (Figure 3.1). By end- University of Oxford COVID-19 Government Response Tracker; Raigor et al. (2020); Sanche et al. (2020); Taubenberger (2006); UN World Population Prospects; Van Kerkhove et al. (2013); WHO April, nearly 150 countries had closed schools and Ebola Response Team (2016); World Bank, World Development Indicators; Yi et al. (2020). A. Seven-day rolling average of daily new cases. Sample includes 154 EMDE. Last observation is mandated cancellation of events, and more than May 20, 2020. 80 had closed all workplaces. Travel restrictions B.C. Range of estimates from the literature. C. Confirmed cases are estimated number of those with symptoms for seasonal flu, swine flu, and were widespread. Hong Kong flu; confirmed cases for SARS, MERS, and Ebola; and total infections for Spanish flu. D. Figure shows share of GDP accounted for by economies with restrictions. Restrictions are counted if required (i.e., not only recommended) and, for school and work closures, if applied across all levels and sectors, respectively. Travel restrictions are counted if they entail a ban on arrivals from all regions or a total border closure. Data is for April 1, 2020. Sample includes 125 EMDEs and 34 AEs. E.F. GDP-weighted averages (at 2010 prices and market exchange rates). E. Based on data from Google’s Mobility Tracker. Weekly averages for weeks ending May 13 and 1 During the Spanish flu, for example, only 6 percent of cities in February 15. the United States declared general business closures, while 82 percent F. Baseline is defined as daily average for same month in 2015-19. NO2 = nitrogen dioxide; of U.S. states issued statewide stay-at-home orders in 2020 (Hatchett, PM2.5 = particulate matter with diameter less than 2.5 micrometers. Based on daily data from Air Quality Open Data Platform. GDP-weighted monthly averages for January and April. Mecher, and Lipsitch 2007). Click here to download data and charts. 136 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 3.2 Health vulnerabilities in EMDEs 19 lower should medical attention be needed. The EMDEs, with generally younger populations, might be better placed to limit median LIC, for instance, has less than one fatalities from COVID-19 than advanced economies. However, EMDEs also hospital bed per 1,000 people—compared to more tend to have poorer clinical care, are less prepared to manage health than four in the median advanced economy. crises, and their populations have less access to safe water and sanitation. Finally, a higher proportion of the population of EMDEs live in informal, crowded housing A. Age structure of population B. Health preparedness index conditions where access to clean water and sanitation services is limited, making the hygiene and physical distancing measures needed to contain the virus impractical or impossible (Corburn et al. 2020). The economics of the pandemic: Shocks and C. Hospital beds D. Access to handwashing facilities spillovers COVID-19 is the most adverse peacetime shock to the global economy in a century. Demand for goods and services has been severely curtailed, while at the same time supply has fallen sharply, as the number of people working has declined and the cost of doing business has risen. The shock has caused unprecedented disruptions to global trade, travel, and tourism; stress in global financial Source: Johns Hopkins University and Nuclear Threat Initiative, Global Health Security Index; UN World Population Statistics; World Bank, World Development Indicators. markets; and sharp declines in commodity prices. A. Population-weighted averages. Data for 2020. Sample includes 37 advanced economies and 143 EMDEs, of which 29 are LICs. B. “Early detection and reporting” reflects countries’ capacity for detecting and reporting epidemics of Demand shortfalls. While the measures taken by potential international concern; “Rapid response and mitigation” reflects their ability to respond to and mitigate the spread of an epidemic; and “Sufficient and robust health sector” reflects the capacity of governments, consumers, and firms to reduce health sectors to treat the sick and protect health workers. Data reflects 2019. Sample includes 31 LICs, 123 EMDEs, and 35 advanced economies. EMDEs exclude LICs. social interaction have been critical to slow the C. Bars denote medians. Whiskers indicate first and third quartile ranges. Data for 2015 or closest spread of the virus, they have entailed significant available year (earliest 2010). Sample includes 36 advanced economies and 155 EMDEs, of which 31 are LICs. disruptions to economic activity. A substantial D. Bars denote medians. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub- share of private consumption requiring social Saharan Africa. Data for 2017 or closest available year (earliest 2015). Sample includes 154 EMDEs. Click here to download data and charts. interaction was lost in the first half of the year. Reduced consumption of goods and services has been one of the main drivers of lost output in a range of model-based estimates of the effects of EMDE-specific considerations. One feature of pandemics (Annex 3.1). Investment has also been COVID-19 is that its lethality has been highest curtailed, not only by difficulties in maintaining among the elderly (CDC 2020). This may production and construction but also by sharply help lower the case fatality rate in EMDEs, weaker growth prospects, rising financing costs, including LICs, which typically have younger eroding confidence, and increased uncertainty. populations. The proportion of the population older than 60 years is 11 percent, on average, in Supply disruptions. Air travel, schools and EMDEs, and only 5 percent in LICs (as well as in universities, restaurants, theaters, sports venues, Sub-Saharan Africa more broadly), compared with and other facilities servicing masses of people have 26 percent in advanced economies (Figure 3.2). been largely closed down. Labor supply has However, EMDEs generally are less prepared for declined, because of restrictions on movement and epidemics and have poorer public health and human interaction, illness of workers and family medical care systems than advanced economies, members, and school closures (Keogh-Brown et al. making the likelihood of recovery from COVID- 2010; Kilbourne 2004). Workers able to work at G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 137 home have in many countries been encouraged or FIGURE 3.3 Indicators of economic activity and instructed to do so, but fewer jobs can be international trade undertaken remotely in EMDEs than in advanced The recent decline in global economic activity is one of the steepest and economies, partly because of more limited internet deepest on record. Purchasing managers’ indexes have fallen sharply in major economies and global sentiment has plunged. Global trade connectivity (ILO 2020). In some advanced indicators, such as container shipping and the new export order economies, such restrictions as quarantine component of PMI, experienced historically large falls in February. Air requirements on the entry of temporary foreign traffic volumes have fallen to a fraction of early 2020 values. workers have been threatening agricultural production. Delays in input deliveries and limited A. Composite PMIs B. Global Sentix Index access to financing, which have been exacerbated by the increased reliance on global value chains, have been causing operational challenges for firms. Over the longer term, workplace closures and quarantines can limit the diffusion of new technologies and knowledge, with lasting damage to productivity. Global spillovers to EMDEs. These adverse demand and supply shocks have resulted in cross- C. Steepest one-month declines in D. Steepest one-month declines in container shipping since 2007 new export orders since 2000 border spillovers to EMDEs through multiple channels—real channels, including disruptions in global trade, supply chains, travel, and tourism; and financial channels, including sharp declines in remittance flows and large capital outflows amid a flight to safety in March. Commodity prices have been depressed by the sharp decline in demand and, with oil the most affected. These cross-border spillovers have been amplified by plunging confidence and rising uncertainty. E. Steepest contractions in global F. Number of global commercial tourist arrivals since 2006 flights Initial impact: Economic activity, financial and commodity markets Consistent with the gravity of the shocks and spillovers discussed above, recent data point to substantial disruptions in global activity and trade, a sharp tightening of financial conditions, and a Source: flightradar.com; Haver Analytics; Institute of Shipping Economics and Logistics; J.P. Morgan; severe decline in commodity prices (Chapter 1). Sentix GMBH; World Bank. A. PMI = Purchasing managers’ index. GFC = global financial crisis. PMI readings above (below) 50 indicate expansion (contraction) in economic activity. For World (GFC), t=0 at November 2008, the lowest value over the period 2007-2009. For all other data, t=0 at January 2020. Last observations Global activity and trade are April 2020 for the Euro Area and March 2020 for China, the United States, and the world. Percent balance of sentiment on the current economic situation. Last observation is April 2020. B. Figure shows percent balance of sentiment on the current economic situation. Last observation is Data released in the first half of 2020 point to a May 2020. severe global recession. The global composite C-E. Consecutive months not shown. C. Data only available from 2007. Figure only considers dates that are at least six months apart. PMI—a gauge of worldwide manufacturing and D. Data only available from 2010. Figure only considers changes that are accompanied by declines below the threshold of 50, which indicates a contraction, and dates that are at least six months apart. services activity—sank deep into contractionary E. Year-on-year growth. Monthly data only available from January 2005. Sample includes 22 territory to a record low of 26.5 in April (Figure advanced economies and 29 EMDEs. F. Figure shows a 7-day moving average. Commercial flights include commercial passenger flights, 3.3). Along with the implied sharp drop in cargo flights, charter flights, and some business jet flights. Last observation is May 12, 2020. Click here to download data and charts. output, global trade has also contracted signifi- cantly. The new export orders PMI stood at 35.3 138 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 in April, deep in recessionary terrain. Its 11-point lockdown measures in some countries. Capital fall from March was the steepest on record and outflows from EMDEs have subsided and equity considerably steeper than at the onset of the global market valuations have retraced a share of their financial crisis, during the Euro Area crisis (2010- earlier losses. Nonetheless, financial conditions 13), or during the recent period of trade tensions remain fragile for many EMDEs. Remittance (2018-19). inflows to EMDEs are expected to collapse in 2020 across EMDE regions (World Bank 2020b). With international travel restricted and internal Foreign aid flows may also shrink in 2020 as travel discouraged in most countries, global donors focus on supporting their own economies tourism and travel have been severely curtailed. So (UNCTAD 2020). far this year, tourist arrivals declined by nearly 100 percent among reporting countries. Globally, the Commodity markets number of commercial flights is down about 70 percent since the beginning of the year. As a result of the sharp decline of global commodity demand, the prices of most Disruptions to production and international commodities have fallen steeply, particularly those transport have increased the risk that critical used in the transport industry. Benchmark oil inputs will be unavailable, potentially leading to prices have been most affected, with the European cascading production shortfalls in global value Brent spot price plunging by 85 percent between chains. Manufacturers’ stocks of purchases have late January—when the first human-to-human fallen, while suppliers’ delivery times have transmissions of the virus were announced—and lengthened. Industries reliant on “just-in-time” its trough in late-April and the WTI price briefly inputs from global value chains and lean trading at negative levels, before a gradual recovery inventories have been particularly affected. In the in May. The decline in oil prices in March was the automobile sector, a collapse in demand, largest one-month price plunge on record (Figure combined with production and delivery 3.4; Chapter 4). The restrictions implemented to challenges, has led to a precipitous plunge in sales control the outbreak have resulted in sharp worldwide. declines in travel and transport—which account for two-thirds of oil consumption—and in other Global financial conditions energy-using economic activities. Oil demand is expected to fall by about 20 percent in the year to Global equity markets fell sharply as the pandemic the second quarter of 2020 and an unprecedented spread across the world. Within a week of decline of 9 percent is projected for the year as a reaching an all-time high in mid-February, the whole. S&P 500 index in the United States experienced its fastest decline since October 1987, and stock Industrial metals prices declined by 24 percent markets in other major economies experienced between late January and late April—more than declines of similar magnitude. The VIX volatility one-quarter as much as they did at the peak of the index more than quadrupled in March before global financial crisis. With some exceptions, settling at about double its February value in mid- agricultural commodity prices have experienced May. only minor declines since January, reflecting their less direct relationship with economic activity Flight to safety resulted in a sharp tightening of (World Bank 2020a). While stocks-to-use ratios of EMDE financing conditions (Chapter 1). Net most grains are at near-record highs, concerns portfolio outflows from EMDEs during each of about food security as a result of the pandemic the last three weeks of March were the three have grown as countries have announced export largest on record (Figure 3.4). bans (for example, Russia for wheat, Vietnam for rice) or “excess” buying (for example, Philippines More recently, global risk sentiment improved in for rice, Egypt and Saudi Arabia for wheat). May amid large-scale liquidity injections by major Although most of these announcements have thus central banks and a gradual relaxation of far not resulted in policy action, such action could G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 139 result in localized food price spikes despite ample FIGURE 3.4 Financial and commodity market conditions global supply (Voegele 2020). Disruptions to Net portfolio outflows from EMDEs were the largest on record in March. supply chains have already affected the exports Across all EMDE regions, remittances in 2020 are expected to suffer larger from some EMDEs of perishable products such as declines than during the global financial crisis or the Asian financial crisis. Most commodity prices have fallen since January, with oil prices in March flowers, fruits, and vegetables. experiencing their largest one-month fall since at least 1960. Base metals prices have also declined amid weak industrial demand, while a sharp fall Short-term growth impact in platinum prices reflects the use of the metal in the automobile industry. In contrast, gold prices have risen on heightened uncertainty and safe-haven demand. The global economy was confronted by the pandemic when it was on a weak footing. Since A. Lowest weekly net portfolio inflows B. Annual change in remittances to EMDEs the 2009 global recession, growth in all country groups had fallen short of pre-crisis and long-term averages in most years. And, in 2019, the global economy delivered its weakest growth perfor- mance in the past decade. The global economy is now experiencing a deep recession. Its severity and duration will depend on a wide range of factors, including the intensity and duration of restrictions to stem the pandemic, global spillovers from developments in major C. Steepest one-month declines in oil D. Change in metal prices since late prices since 1960 January economies, the ability of policymakers to prevent financial market stress and protect firms and households hurt by the recession, the behavior of the virus, and the success of medical and other scientific advances to contain it. Previous studies have analyzed the roles of some of these factors in driving short-term growth outcomes, through multiple channels, in the context of the Spanish flu or a hypothetical Source: Bloomberg; Dealogic; Institute of International Finance; World Bank. A.C. Consecutive months or weeks not shown. pandemic influenza. They have found initial GDP A. One-week sum of net daily purchases of EMDE stocks and bonds by non-residents (published by losses in the range of 1-8 percent (Annex 3.1).2 International Institute for Finance) for 20 EMDEs. Data available from 2005. Chart only considers dates that are at least six weeks apart. However, these studies do not take into account B. Data exclude China. Figure for 2020 is a forecast. Orange bar for ECA is for 1999 – after the Russian financial crisis. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin the effects of restrictions of the kind used to stem America and the Caribbean, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub- Saharan Africa. the current pandemic, which reflect their D. Trough shows largest fall in prices relative to January 20th. Latest shows the change in price unprecedented nature. Taking them into account between January 20, 2020 and May 20, 2020. Click here to download data and charts. would be likely to increase estimates of short-term economic losses substantially (Eichenbaum, Rebelo, and Trabandt 2020). previous studies of the effects of severe pandemics (IMF 2020; World Bank 2020c). Some studies Although subject to considerable uncertainty, report that containment measures significantly studies that do take account of containment increase the economic costs of COVID-19.3 measures, as well as other channels for the Restrictions on retail, travel, and other service pandemic’s economic impact, have found that industries could reduce output by 25 percent in EMDEs could suffer output losses of 3-8 percent in the short term, in line with simulations in 3 For example, in a stylized model for the United States, con- sumption falls by 22 percent under “optimal” containment measures, 2 See Barro, Ursúa, and Weng 2020; Burns, van der Mensbrugge, compared to just 7 percent if only the effect on labor supply owing to and Timmer 2006; McKibbin and Sidorenko 2006; and Verikios et illness and mortality and consumer behavior is considered al. 2011. (Eichenbaum, Rebelo, and Trabandt 2020). 140 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 3.5 EMDE growth response to growth slowdown already weigh on investment. Both in the United in major economies States and in the Euro Area, economic policy A steep growth slowdown in advanced economies and China is expected uncertainty is currently at record highs. In the in 2020, which will generate considerable adverse spillovers for other past, such uncertainty significantly lowered EMDEs, especially the ones most open to global trade, including commodity exporters, and with less resilient policy frameworks. EMDE investment. For example, a doubling of the U.S. or Euro Area economic policy A. Response of EMDE growth B. EMDE growth response, by uncertainty index (approximately the rise thus far (excluding China) to a 1 percentage point growth slowdown in the United commodity exporter status in 2020) has been associated with 6 percentage States, Euro Area, and China point weaker investment growth in EMDEs and in EMDEs in Europe and Central Asia, respectively, over the following year (World Bank 2017a). More broadly, the world’s three largest economies—the United States, the Euro Area, and China—are expected to experience sharp economic downturns. It is not expected that any Source: World Bank. of these three economies will return to pre- A. “Combined” stands for GDP-weighted average (at 2010 market exchange rates and prices) of GDP pandemic output levels in the short term, before growth in the United States, China, and the Euro Area. Figure shows impulse response of growth in EMDEs excluding China after one year to a 1 percentage point growth slowdown in the United States the end of 2021. Since, together, these economies or China or in all three of these economies simultaneously. Estimates are based on the methodology discussed in Annex 3.2, replacing the “Combined” aggregate with the United States, the Euro Area, account for almost half of global GDP, this and China (in this order). B. Response of GDP-weighted average (at 2010 market exchange rates and prices) real GDP of implies important adverse spillovers to EMDEs. A groups of EMDEs to a 1 percentage point decline in GDP-weighted average real GDP of United 1 percentage point growth slowdown in the States, Euro Area and China as proxy for global growth, based on impulse responses from the structural vector autoregression described in Annex 3.2. Blue bars show median estimates, yellow United States or the Euro Area alone has been whiskers show 16-84 percent confidence intervals. Commodity exporter status as defined in Table 1.2. estimated to lower growth in EMDEs (excluding Click here to download data and charts. China) by 0.8 and 0.7 percentage point, respectively, in the following year (Annex 3.2; Figure 3.5). A similarly-sized growth slowdown in OECD economies during the enforcement period China alone could lower growth in other EMDEs (OECD 2020a). by 0.7 percentage point in the following year and, because China accounts for a large part of global Spillovers commodity demand, would set back growth in commodity-exporting EMDEs by considerably EMDEs face a perfect storm of both domestic more (Huidrom et al. 2020; Ahmed et al. 2019). shocks (health crises, restrictions to promote social Were growth in all three major economies to slow distancing) and external shocks (plunging trade, simultaneously by 1 percentage point, growth in collapsing tourism, capital outflows, falling EMDEs other than China would be 1.3 commodity prices). Most immediately, the percentage points lower in the following year. domestic shocks may well be more disruptive to economic activity than the external shocks. The impact of a slowdown in all three major However, the external shocks are likely to also economies would likely be more pronounced in leave a damaging legacy beyond the control of EMDEs that are more open to global trade, EMDEs. The growth slowdown in the world’s finance and commodity markets (Figure 3.5).4 For major economies, uncertainties about economic example, over the course of one year, growth policy, and financial market volatility are also would slow one-third more in commodity- expected to weigh heavily on short-term output exporting EMDEs than in commodity-importing and investment growth in EMDEs. The uncertainties surrounding economic policies 4 These estimates are based on a Bayesian vector autoregression in the major advanced economies alone would (Annex 3.2). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 141 ones if growth in the three largest economies since 2007, with particularly large deteriorations slowed by 1 percentage point. in fiscal vulnerabilities in commodity-importing EMDEs. In contrast, commodity-importing Vulnerabilities: Magnifying the short-term EMDEs have scaled back their openness, and impact corresponding vulnerability, to global trade and tourism since 2007. However, island states that The impact on individual EMDEs will depend on rely heavily on tourism have seen a small increase country-specific factors, including vulnerabilities in their exposure to this sector since 2007. With to external and domestic stresses and the ability to regard to poverty, commodity exporters continue provide income support or policy stimulus. These to have sizable vulnerable population groups, with vulnerabilities generally refer to conditions that limited savings and recourse to finance and increase the likelihood or severity of economic or typically reliant on informal sector activity. While financial stress when downside risks materialize. these vulnerable groups tend to be smaller in commodity-importing EMDEs, they have not Evolution of vulnerabilities shrunk there since 2007.5 During the last global recession, in 2009, many Vulnerable EMDEs EMDEs were able to implement large-scale countercyclical fiscal and monetary policies. They The large capital outflows and steep increases in were in a position to stimulate activity because borrowing costs that have occurred since the they could draw on sizable fiscal and monetary beginning of the pandemic are hurting most policy buffers accumulated during the pre- severely those economies that have large financing recession period of strong growth: government requirements; falling commodity prices are debt had fallen, current account and fiscal deficits hurting the economies that rely most heavily on had narrowed, and inflation had moderated. resource sectors for export and fiscal revenues; and the collapse of foreign demand is hurting most the These EMDEs had more resilient economies and, economies that are most open to trade and with more forceful stimulus, experienced milder tourism. Countries with weak public health and growth slowdowns (Ruch 2019a). medical care systems, high levels of informal economic activity, and vulnerabilities to food Today, the average EMDE is less well placed to insecurity may face the most disruptive respond to a global downturn than before the macroeconomic, social and poverty impacts. 2009 global recession. EMDEs are more vulner- able to external shocks, in part because of larger Weak public health and medical care systems. debt, the trend weakening of demand for EMDEs with weak public health infrastructure commodities, and slower underlying domestic and limited capacity to treat the sick will tend to growth. Softening external demand and trade experience higher mortality rates and larger labor disputes among major economies have also supply disruptions as a result of the pandemic. chipped away at an important engine of growth. Low- and lower-middle-income economies tend to At the same time, weaker fiscal positions make it suffer particularly large economic losses from more difficult for these economies to support epidemics as a result of lower-quality health care activity with expansionary fiscal policy. and poorer population health (Fan, Jamison, and Summers 2018; McKibbin and Sidorenko 2006). The evolution of vulnerabilities over time is COVID-19 mortality is greatly higher among captured in an index that aggregates 20 commonly populations with pre-existing chronic health used vulnerability indicators, grouped into five problems. Many EMDEs have limited medical broader categories of economic vulnerabilities: financial, fiscal, trade, tourism, and poverty (Annex 3.3; Figure 3.6). Both for commodity- 5 In the average LIC, 48 percent of the population is poor and importing and commodity-exporting EMDEs, another 26 percent is near-poor, compared with 13 percent of the financial and fiscal vulnerabilities have grown population in each category in other EMDEs (World Bank 2020e). 142 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 3.6 EMDE vulnerabilities care capacity, which even before the outbreak Financial and fiscal vulnerabilities have increased in all regions since 2007. suffered from lack of public funding and Some EMDEs are particularly open to trade, exposing them to spillovers underinsured populations. The median LIC has from steep recessions in major economies, or are heavily reliant on less than one hospital bed per 1,000 people, and commodity exports, exposing them to falling commodity prices. the median EMDE just under two, compared with more than four per 1,000 people in the A. Vulnerability indexes: EMDE B. Vulnerability indexes: EMDE commodity exporters commodity importers median advanced economy. Economic structure. Economies that rely heavily on certain sectors are more vulnerable to the adverse macroeconomic effects of the pandemic (Figure 3.6). • Service sector dependence. Demand contrac- tions in sectors that rely heavily on social interactions, such as the travel, accommoda- tion, and restaurant industries, were key C. Financial vulnerabilities, 2007 and 2019 D. Financial openness drivers of output losses in the SARS and MERS epidemics (Joo et al. 2019; Keogh- Brown and Smith 2008). Many small EMDEs that are heavily reliant on tourism will see a sudden stop in a major source of income and foreign exchange earnings because of travel restrictions, while mitigation measures last. • Openness to trade. EMDEs highly open to international trade or deeply integrated into global supply chains will be hit hard by the E. Trade openness F. Share of commodity exporters in country groups collapse in global trade. In several East Asian countries, for example, foreign inputs account for 50 percent or more of domestic exports, making them highly vulnerable to supply chain disruptions. • Dependence on commodity exports. Almost two- thirds of EMDEs are commodity exporters. Because of the decline in prices and demand this year, these economies are experiencing Source: IMF International Financial Statistics, World Economic Outlook; Kose et al. (2017); UN World Population Prospects; World Bank World Development Indicators. severe contractionary forces. When the A.-C. Unweighted averages for EMDEs and EMDE regions. Vulnerability indexes are defined in Annex 3.3. An index above 50 means that, on average, the indicators score worse than the median in pandemic erupted, many commodity a sample of up to 197 countries for 1960-2019. exporters already had more limited fiscal A.B. Grey lines denote 1980-99 averages. C. Data points above the 45-degree line indicate greater vulnerabilities in 2019 compared to 2007. buffers to counter a commodity price shock D.E. Unweighted averages across groups. EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the Caribbean, MNA = Middle East and North Africa, SAR = South than they had just before the 2009 global Asia, SSA = Sub-Saharan Africa. Data for 2018. recession, as a result of the 2014-16 D. Financial openness defined as the sum of international assets and liabilities in percent of GDP. Sample includes 25 advanced economies (excluding financial centers, such as Cyprus, Ireland, commodity price plunge (Stocker et al. 2018). Malta, Singapore, Switzerland, and the United Kingdom) and 80 EMDEs with population over 2.5 million people (excluding offshore centers). Their fiscal balances turned from (cyclically E. Trade openness is defined as the sum of exports and imports of goods and nonfactor services in percent of GDP. adjusted) surpluses of almost 1 percent of F. Commodity exporters as defined in Table 1.2. AEs = advanced economies, EMDEs = emerging GDP in 2007 to deficits of a similar and developing economies, IDA = International Development Association countries, FCV = fragile and conflict-affected countries, LICs = low-income countries. magnitude in 2018 (Ruch 2019a). The Click here to download data and charts. revenue losses stemming from this year’s commodity price declines will further G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 143 constrain commodity exporters’ ability to FIGURE 3.7 Fiscal and external positions of EMDEs support their economies with income support The global expansion before the global recession of 2009 helped EMDEs or fiscal stimulus. improve their fiscal and external positions. Since 2007, however, fiscal and current account deficits have widened, government debt has risen, and international reserves have declined. • Reliance on labor-intensive sectors. Many LICs have large shares of labor-intensive A. Fiscal balances B. Government debt production, which require working in close proximity, than higher-income countries. This type of production may suffer large disruptions as a result of social-distancing efforts or missed work due to illness (Smith and Keogh-Brown 2013). Financial vulnerabilities. EMDEs with large financing needs (including wide current account or fiscal deficits) or large debt burdens are particularly vulnerable to a sharp increase in C. Current account balances D. International reserves in months of imports borrowing cost or more limited access to financing. Between 2007 and 2019, government debt in EMDEs increased by about 11 percentage points of GDP, on average, to reach 55 percent of GDP. Over this period, debt ratios rose in three- quarters of EMDEs and by more than 20 percentage points of GDP in one-third of them. In LICs, following a steep fall between 2000 and 2010, government debt increased to 67 percent of Source: IMF International Financial Statistics, World Economic Outlook; Kose et al. (2017); World GDP in 2018 (Kose et al. 2020). In Bank. EMDEs, fiscal surpluses of more than 2 percent of Note: Bars denote unweighted averages. Orange whiskers denote interquartile ranges. Green lines denote 1990-99 averages. GDP in 2007, on average, had turned into deficits A. Based on data for 149 EMDEs. B. Based on data for up to 150 EMDEs. of 1 percent of GDP by 2019; near-balanced C. Based on data for up to 154 EMDEs. current accounts in 2007 had become sizable D. Based on data for up to 130 EMDEs. Click here to download data and charts. deficits (Figure 3.7). Financial vulnerabilities not only constrain Informality. The informal sector, on average, EMDEs’ ability to support their economies with accounts for about a third of official GDP and monetary and fiscal stimulus; they can also reduce about 70 percent of total employment in EMDEs the effectiveness of fiscal stimulus (Huidrom et al. (World Bank 2019b; Figure 3.8). Pervasive 2019). In addition, the health of public sector informality is associated with widespread poverty, balance sheets is an important determinant of the lack of access to sanitation, lack of access to costs of credit for banks and non-financial financial and medical resources, and poor social corporations since they are linked to the sovereign safety nets—all factors likely to amplify the health credit rating. In times of stress, sovereign-bank and economic impacts of the pandemic. financial linkages can amplify shocks (World Bank 2018). Banks hold sovereign debt to manage their Poverty. In EMDEs with large numbers of balance sheets and to fulfill regulatory extremely poor or near-poor, populations may not requirements. Losses on these holdings can disrupt be able to comply with restrictions on economic financial intermediation. Over the past decade, activity unless the restrictions are suitably designed bank exposures to sovereign debt have increased in (Chang and Velasco 2020). The poorest often live EMDEs relative to both GDP and total bank in crowded conditions that make social distancing assets (World Bank 2018). extremely challenging or impossible (Sánchez- 144 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 3.8 Informality, poverty, and food insecurity Páramo 2020). For example, 70 percent of city Informality is widespread in many EMDEs. It is associated with lower dwellers in SSA live in crowded slums where incomes and higher incidence of poverty, less access to medical handwashing facilities are sparse and communal treatment, and poorer sanitation. Even before the pandemic spread to and where sanitation is weak (World Bank EMDEs, several economies were struggling with the challenges of extreme poverty and food crisis. 2019c). Among the most vulnerable groups are women, which tend to be overrepresented in the A. Informality across EMDE regions B. Income in the informal sector informal sector and in services jobs that cannot easily move online (Freund and Hamel 2020). Women employed in the tourism industry and as small-scale farmers are particularly hard-hit (Freund 2020, Freund and Hamel 2020). Food insecurity. Among the poor, income losses, lack of savings, lack of access to finance, and breakdowns in local agricultural supply chains may all threaten food insecurity. Although global C. Access to medical resources D. Access to water, sanitation, and food markets were well supplied at the start of the hygiene facilities pandemic, availability of some foods has recently been strained by restrictions on the movement of workers and reductions in air freight capacity (FAO et al. 2020; Pangestu 2020). Restrictions on food exports could further amplify food insecurity (Figure 3.8). In parts of Africa, this could be compounded by the locust infestation currently underway. Globally, acute hunger could double in 2020, to E. Poverty F. People in food crisis, 2019 affect more than 260 million people (WFP 2020). In addition to being a serious health risk, insufficient food supply has the potential to trigger social unrest and conflict, with adverse economic outcomes (Hendrix and Brinkman 2013; Koren and Bagozzi 2016). Food insecurity could also generate significant migration pressure (FAO et al. 2018; Sadiddin et al. 2019). Source: Amin, Ohnsorge, and Okou (2019); Elgin et al. (forthcoming); Global Surgery and Social Change (PGSSC) at Harvard Medical School; Haver Analytics; IMF Government Financial Statistics; Long-term growth effects PovCalNet; WFP (2020); WHO/UNICEF Joint Monitoring Programme (JMP) for Water Supply, Sanitation, and Hygiene; World Bank (Enterprise Survey World Development Indicators); World Bank (2019). Prior to the pandemic, the global economy already A. Mean of informal output (DGE-based estimates) and employment estimate (share of self- employment) in each region during 2010-16. faced prospects of slower long-term growth, with A E. EAP = East Asia Pacific, ECA = Europe and Central Asia, MNA = Middle East and North Africa, SAR = South Asia, SSA = Sub-Saharan Africa. long-term (ten-year-ahead) growth forecasts B. *** indicates the group differences between formal and informal firms are not zero at 10 percent having been repeatedly revised down for all significance level. C.-D. Bars are group means calculated for EMDEs with “high informality” (i.e., the highest one-third country groups since the global recession of 2009. DGE-based informal output measure) and those with “low informality” (i.e., the highest one-third DGE -based informal output measure) over the period 2010-16. *** indicates the group differences are not This, in part, reflected a recognition of slowing zero at 10 percent significance level. potential growth in EMDEs, particularly China, E. Regional aggregates use a poverty line of $3.20 per day in 2011 purchasing power parity terms. F. Bars show peak number of people in IPC/CH phase 3 food crisis or worse. “Food crisis” is defined over the past decade and reaching into the next as having food consumption gaps that are reflected by high or above-usual acute malnutrition or being marginally able to meet minimum food needs but only by depleting essential livelihood assets decade (Kilic Celik, Kose, and Ohnsorge 2020; or through crisis-coping strategies. Sample includes 55 EMDEs. Click here to download data and charts. World Bank 2018). In addition to its devastating short-term health and macroeconomic effects, the pandemic may G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 145 have significant long-term effects. The substantial activity. All these forces will tend to lower long- economic dislocations, deep output contractions run as well as short-run labor productivity.7 across large numbers of countries, and heightened and wide-ranging uncertainties that have arisen The current pandemic may be particularly from the pandemic may dampen human and damaging to long-term growth prospects because physical capital accumulation. Supply chains and the disruptions caused by the measures to contain working arrangements in many industries may go the pandemic call into question the viability of through costly reconfigurations. There may also be global supply chains that have been a foundation long-lasting shifts in consumer behavior, including of growth over the past two decades. Productive in the composition of spending. Households may firms may be disproportionally affected by the also opt for increased precautionary saving in view disruptions because they are more likely to export, of heightened uncertainty about employment and are embedded in complex value chains and employ income prospects. Both consumer spending and workers with firm-specific skills (Didier et al. business investment may suffer from sustained 2020). declines in confidence. Depressed capital spending The current global recession has occurred with a would be particularly damaging to long-term severity that is unmatched in eight decades and growth prospects in EMDEs, coming on the heels has been accompanied by sharply tighter financing of several years of weak investment (World Bank conditions and a record oil price collapse. These 2019a). two key features of the current global recession— There is little research on the medium- or long- the higher likelihood of financial crisis and a term effects of disease outbreaks on output severe terms-of-trade shock to energy exporters— (McKibbin and Fernando 2020). However, it is increase the risk of lasting damage to potential well-known that other major adverse economic output in many EMDEs. shocks, such as financial or currency crises, have • Recessions and financial crises. The lasting been associated with persistently negative effects damage of recessions has been more severe on growth. This suggests that the current when they have been accompanied by pandemic may also leave lasting scars on the global financial crises.8 A range of channels drive economy by lowering potential output and this outcome. Financial crises increase productivity. liquidity demand and tighten credit Implications for potential output conditions more broadly—including for productivity-enhancing technologies embod- Sources of long-term effects. Severe recessions ied in new investment and for research and have been associated with highly persistent losses development spending; they curtail access to in output in both advanced economies and bank lending for creative firms; they leave a EMDEs (Box 3.1).6 These effects arise from legacy of obsolete capacity; they trigger self- various interlinked factors. Low levels of capacity fulfilling expectations of weak growth; and utilization discourage investment and lead to a legacy of obsolete capacity; expectations of weak growth also discourage investment and become 7 For technology absorption, see Anzoategui et al. (2016); for the self-fulfilling; protracted unemployment causes legacy of obsolete capacity, see Nguyen and Qian (2014); for self- fulfilling expectations of weak growth prospects, see Caballero and losses of human capital and reduces job-search Simsek (2017); and for human capital loss and reduced job search activity among the long-term unemployed, see Ball (2009); Blanchard and Summers (1987); Hall (2014); Lindbeck (1995); Lockwood (1991); and Reifschneider, Wascher, and Wilcox (2015). 8 Claessens, Kose, and Terrones (2009 and 2012); Furceri and 6 For estimates of the impact of contractions on actual output levels, see Ball (2014); Blanchard, Cerutti, and Summers (2015); Mourougane (2012); Mourougane (2017); Queralto (2019); and Cerra and Saxena (2008, 2017); and Martin, Munyan, and Wilson Reinhart and Rogoff (2014) estimate lasting losses from financial (2015). For estimates of the impact on actual output growth, see crises and Ball (2014) and Hall (2014) the lasting losses from the Candelon, Carare, and Miao (2016). For estimates of the impact on global financial crisis. Candelon, Carare, and Miao (2016) and Cerra potential output growth, see Haltmeier (2012) and World Bank and Saxena (2008) find longer-lasting losses from banking, debt, or (2018). equity market crises than from currency, inflation, or political crises. 146 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 3.1 How do deep recessions affect potential output in EMDEs? e global economy is currently in the midst of one of the deepest recessions in living memory, which is hitting emerging market and developing economies (EMDEs) hard. Historically, recessions accompanied by financial crises or, in energy exporters, by oil price collapses tend to generate particularly deep and lasting damage to potential output, especially in countries that enter the recession with larger vulnerabilities. e average EMDE is now more vulnerable to financial stress than before the 2007-09 global financial crisis, and the average energy-exporting EMDE remains as dependent on energy exports as before the last oil price collapse in 2014. Under these circumstances, the recessions associated with the COVID-19 are likely to have a severely adverse and lasting impact on potential output. Pro-active monetary and fiscal policies, and structural reforms, could moderate this damage. Introduction to have stabilized for now, tight financial conditions and record-high debt increase the probability of prolonged A deep global recession is underway, of a severity that is balance sheet repair or even outright financial crises. unmatched in decades. e world economy is expected to Second, oil prices have suffered a record collapse. Today’s start recovering once the pandemic recedes and restrictions average EMDE is more vulnerable to financial market on economic activity are lifted. stress than before the 2007-09 global financial crisis, with higher government and corporate debt, and wider fiscal However, historically, the setbacks to investment and deficits. And energy exporters remain as dependent on potential output (the level of output an economy can energy exports as before the last oil price plunge in 2014 sustain at full capacity and employment) caused by deep (Figure 3.1.1). recessions have been long-lasting.1 Beyond the immediate health crisis, two key features of the current global Against this backdrop, this box explores the likely impact recession increase the risk of lasting damage to potential of COVID-19 on potential output by addressing the output in EMDEs. First, even if financial markets appear question: How do recessions, crises and oil price plunges interact to generate long-term implications for potential Note: This box was prepared by Sinem Kilic Celik, Cedric Okou, growth? and Franziska Ohnsorge, with research assistance from Hrisyana Doytchinova. e box builds on earlier work that found that deep 1 Potential output is estimated using a production function approach recessions lower potential output levels four to five years (Kilic Celik, Kose, and Ohnsorge 2020; World Bank 2018). FIGURE 3.1.1 EMDE vulnerabilities to financial stress and oil price plunges Today’s average EMDE is more vulnerable to financial market stress, with higher debt and wider fiscal deficits, than before the global financial crisis. Today’s average energy-exporting EMDE is as dependent on commodity exports as before the last oil price plunge. A. EMDE government and corporate debt, B. Commodity export share of energy C. Economic activity indicators 2007 and 2019 exporters, 2013 and 2018 Source: Institute of International Finance; Institute of Shipping Economics and Logistics; International Monetary Fund; World Bank, World Integrated Trade Solution; World Bank. A.B. Bars show unweighted averages. Whiskers show interquartile range. Based on data for up to 150 EMDEs (A) and up to 27 energy-exporting EMDEs (B). C. Net portfolio inflows to EMDEs, based on data for 20 economies. EMDE = emerging market and developing economies. Click here to download data and charts. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 147 BOX 3.1 How do deep recessions affect potential output in EMDEs? (continued) FIGURE 3.1.2 Growth: Recessions, crises, and oil price plunges In EMDEs, three-quarters of recessions have been accompanied by financial crises or oil price plunges. These tend to be associated with particularly steep output contractions. A. Frequency of recessions B. Average EMDE growth during reces- C. Average growth during oil price sions and financial crises plunges Source: World Bank. Note: Based on a sample of 32 advanced economies and 91 emerging market and developing economies (EMDEs) with available data for potential growth for 1982-2018 (Annex 3.4). Recessions are years with negative growth; in the case of consecutive years with negative growth, the year of output trough is selected. Financial crises are banking, currency, or debt crises, as defined as in Laeven and Valencia (2018). Oil price plunges occurred in 1986, 1990-91, 1998, 2001, 2008, and 2014-15. B. Unweighted average for EMDE regression sample. Difference between the bars are illustrative and not statistically significant because of wide heterogeneity. Click here to download data and charts. after the event (World Bank 2018). It extends this work by average of the Brent, Dubai and West Texas Intermediate analyzing the extent to which the long-term impact of oil prices plunged by 30 percent or more over a six-month recessions differs when they are accompanied by financial period (1986, 1990-91, 1998, 2001, 2008, and 2014-15). crises or oil price plunges. Short-term output losses. In the average year of recession, Impact of recessions with crises and oil price output declined by more than 3 percent in advanced economies and more than 5 percent in EMDEs. On their plunges own, neither financial crises nor oil price plunges were e COVID-19 pandemic presents a public health crisis. associated with recessions (Figure 3.1.2). However, when e direct impact of sickness and mortality, and the they did accompany recessions, financial crises or oil price associated restrictions to stem the pandemic, alone would plunges were associated with steep output losses. constitute a major global economic shock. In addition, • Financial crises. On average, economies still grew by many EMDEs are facing exceptionally severe economic almost 1 percent in the year of financial crisis and the pressures from financial and oil markets. e 2020 global following year. More than one-half of these events recession will be extraordinarily deep and prolonged were currency crises, which tend to be associated with (Chapter 1). To shed light on its implications over a milder output losses (Cerra and Saxena 2008; longer time horizon, this section presents evidence on the Candelon, Carare, and Miao 2016). Financial crises long-term output cost of severe recessions and how they that did accompany recessions (about 24 percent of interact with financial crises and oil price plunges. financial crises in the sample) were associated with output contractions of more than 5 percent. Data and methodology. e medium-term impact of recessions on potential output is estimated using a local • Oil price plunges. Oil price plunges were, on average, projections model (Annex 3.4). Recessions are defined as accompanied by more than 3 percent growth in the years of negative output growth (see Huidrom, Kose, and same year. Energy-exporting EMDEs historically have Ohnsorge 2016). Financial crises include banking, had large fiscal buffers, which have allowed them to currency, or debt crises defined as in Laeven and Valencia provide substantial policy support to their domestic (2018). Years with oil price plunges are those in which the economies: their growth averaged more than 2 148 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 3.1 How do deep recessions affect potential output in EMDEs? (continued) FIGURE 3.1.3 Potential output in EMDEs: Recessions, crises, and oil price plunges Recessions in EMDEs, especially those associated with financial crises or (for energy exporters) oil price plunges, lowered potential output over the medium-term. Potential output losses were lower when countries entered these events with lower external debt or current account deficits, and with an inflation-targeting monetary policy framework. A. Cumulative potential output response B. Cumulative potential output response C. Cumulative potential output response after recessions, oil price plunges, and after recessions and financial crises in energy exporters after recessions and financial crisis oil price plunges D. Cumulative potential output response E. Cumulative potential output response F. Cumulative potential output response after recessions and financial crises, by after recessions and financial crises, by after financial crises, by current account inflation targeting external debt deficit Source: Ha, Kose, and Ohnsorge (2019); World Bank. Notes: Data and methodology are detailed in Annex 3.4. Charts show impulse responses for 75 EMDEs from a local projections model. Dependent variable is cumulative slowdown in potential output after a recession, financial crisis, or oil price plunge event. Year t is the year of the event. Bars show coefficient estimates; vertical lines show 90 percent confidence bands. E. 10th percentile of external debt in EMDEs is 27 percent of GDP; 90th percentile of external debt in EMDEs in 73 percent of GDP. F. 10th percentile of current account deficit in EMDEs is 1 percent of GDP; 90th percentile of current account deficit in EMDEs is 10 percent of GDP. Click here to download data and charts. percent in the year of the plunge (Stocker et al. 2018). also tended to be associated with lower potential output In cases when oil price plunges were accompanied by over the medium term. Five years after a financial crisis, recessions (17 percent of recessions in energy- potential output in EMDEs was about 4 percent below the exporting EMDEs), the output contractions in energy baseline. Five years after an oil price plunge, potential exporters were especially deep (about 10 percent). output in energy-exporting EMDEs was about 8 percent below the baseline. Medium-term potential output losses. In line with earlier findings, recessions left a legacy of lower potential output Recessions that were accompanied by financial crises for four to five years after their onset. Five years after the caused larger long-term potential output losses in EMDEs average recession, potential output were about 6 percent than recessions without financial crises. Five years after a below baseline in EMDEs (Figure 3.1.3). recession-cum-crisis, potential output in EMDEs remained Financial crises and oil price plunges alone—including almost 8 percent below baseline—more than the 6 percent those which were not associated with outright recessions— potential output loss following the average recession. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 149 BOX 3.1 How do deep recessions affect potential output in EMDEs? (continued) In energy-exporting EMDEs, oil price plunges that were to two broad sets of priorities to improve growth accompanied by recessions were associated with prospects. particularly severe and lasting potential output losses. On average five years after such plunges-cum-recessions, First, since financial crises cause longer-lasting and more potential output in energy exporting EMDEs remained 11 severe output losses, EMDEs need to avoid sliding into a percent below the baseline. financial crisis. Macroprudential policies as well as monetary and fiscal policy support and international Effect of policy regimes. Long-term potential output losses assistance are critical to ensure the maintenance of are somewhat more modest for countries that enter the confidence, the stability of lending institutions, and recession with fewer vulnerabilities. For example, normal flows of credit to households and firms. estimated potential output losses five years after a combined recession and financial crisis were lower in Second, oil price plunges cause particularly lasting output countries that entered the recession with external debt in losses in energy exporters when they are accompanied by the bottom decile of the sample than in those that entered outright output contractions—as will be the case for it in the top decile of the sample. Similarly, EMDEs with energy-exporting EMDEs in 2020 (Chapter 1). Once the inflation-targeting monetary policy regimes suffered about current crisis subsides, efforts to diversify these economies one-half the potential output losses in recessions and can help reduce their vulnerability to oil price shocks financial crises than countries with other monetary policy (Chapter 4). Such measures include ensuring appropriate regimes. EMDEs that entered financial crises with trade policies that promote diverse exports, infrastructure narrower current account deficits witnessed lower potential investment to enable private sector competition, output losses after five years. competition regulation to avoid market concentration, and support for innovation through research and development Conclusions (Ruch 2019b). ey also include reforms to establish e immediate policy priority is to address the COVID-19 institutional frameworks for sustainable fiscal and health crisis. Policies also need to take into account the monetary policies. ese would help to buffer external lasting economic damage from the deep recession triggered shocks and macroeconomic volatility in the short run, and by the health crisis. Evidence presented in this box points to provide a growth-friendly environment for the long run. they cause long-term unemployment that inflation and interest rates, and the expansion leads to human capital loss and reduced job- of energy-intensive activities. search activity.9 Estimates of potential output impacts. • Oil price plunges and recessions. Steep drops in Empirically, recessions were associated with large the price of oil have a direct negative impact and lasting potential output losses in EMDEs, in oil-exporting economies that magnifies the especially when accompanied by financial crises. depth and duration of a recession. They also Five years after a recession, EMDE potential weigh on global growth in the short-term output was about 6 percent below baseline and (Chapter 4). Once the global economic five years after recessions with financial crises, recovery gains momentum, however, the EMDE potential output was about 8 percent overall effect of lower oil prices, while they are below baseline (Box 3.1; Figure 3.9). For energy- sustained, on global growth may be positive, exporting EMDEs, recessions accompanied by oil through increased real incomes, lower price plunges were particularly damaging: on average, five years after such episodes, potential output in energy exporters was about 11 percent 9 For loss of access to bank lending for creative firms, see below baseline. These potential output losses were Queralto (2019); for lower labor productivity after financial crises, see Oulton and Sebastia-Barriel (2017); and for lower productivity- somewhat smaller when economies entered enhancing investment, see De Ridder (2016) or, specifically, for recessions and financial crises with lesser R&D spending, see Fatás (2000). 150 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 3.9 EMDE potential output and recessions and geological disasters (such as volcanic Recessions have tended to lower potential output in EMDEs over a five- eruptions). Evidence from different types of more year horizon. Recessions associated with financial crises have tended to common natural disasters suggests lasting reduce potential output by more than those without such crises. Oil price productivity losses. plunges have also significantly lowered potential output in EMDEs over the long term but by less than recessions or financial crises—except for EMDE energy exporters when oil price plunges have been accompanied by Since 2000, there have been several large-scale recessions. disease outbreaks, including SARS (2002-03), swine flu (2009-10), MERS (2012-13), Ebola A. Cumulative potential output B. Cumulative potential output (2014-15), and Zika (2016). These affected over responses after recessions, financial responses after recessions and crises, and oil price plunges financial crises 115 EMDEs and advanced economies. Climate disasters occurred twice as often as all other types of natural disasters combined, accounting for around 70 percent of all natural disasters in 2000- 19, but on average they lasted only half as long as epidemics. Estimates of productivity impacts. Major epidemics have had persistent adverse effects on productivity in the afflicted countries, although C. Cumulative potential output D. Cumulative potential output without the global reach of the COVID-19 responses in energy exporters after recessions and oil price plunges responses after recessions and financial crises, by external debt pandemic (Box 3.2). For example, major epidemics that have occurred since 2000—such as SARS, MERS, Ebola and Zika—are estimated to have been associated with 6 percent lower labor productivity in the affected countries after five years (Figure 3.10). This largely reflects a significant erosion in capital deepening: investment was, on average, about 11 percent lower five years after these events, amid Source: Ha, Kose, and Ohnsorge (2019); World Bank. heightened risk aversion and uncertainty. The Note: Data and methodology are detailed in Box 3.1 and Annex 3.4. Charts show impulse responses greater global spread and death toll of COVID-19 for 75 EMDEs from local projections model. Year t is the year of the event. Dependent variable is defined as cumulative slowdown in potential output after a recession event. Bars show coefficient than these previous epidemics suggest it could estimates; vertical lines show 90 percent confidence bands. D. 10th percentile of external debt in EMDEs is 27 percent of GDP; 90th percentile of external debt in have even more costly long-term consequences for EMDEs is 73 percent of GDP. Click here to download data and charts. productivity. Unique nature of the pandemic: Magnifying vulnerabilities (e.g., lower external debt, narrower the long-term impact current account deficits) or with more resilient monetary frameworks (e.g., inflation targeting). The deep recessions associated with the current pandemic are likely to leave more permanent Implications for productivity economic scars than typical recessions because of lasting effects of the pandemic and related Productivity growth is the primary source of mitigation policies on the behavior of households lasting growth in per capita incomes and living and firms—effects that will be exacerbated in standards, which in turn is the main driver of many countries by pre-existing vulnerabilities poverty reduction. The current pandemic is the (Figure 3.11). The key longer-term dangers to latest in a string of epidemics and pandemics in growth include the following: the twentieth and twenty-first century (Box 3.2). Pandemics are one of the rarest forms of natural • Weak confidence. Persistently weak confidence disasters, which also include climate disasters or could result in a buildup of precautionary extreme weather events (such as storms, floods, savings by households and also more cautious droughts, and periods of extreme temperature) spending by firms, markedly reducing G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 151 BOX 3.2 How do disasters affect productivity? Epidemics that occurred since 2000 are estimated to have lowered labor productivity by a cumulative 6 percent after five years, mainly through their adverse impact on investment and the labor force. In contrast, severe climate events tend to be of shorter duration and reduce labor productivity mainly through weakened total factor productivity. Severe disasters have disproportionately deeper negative effects on productivity partly because they have been more likely to trigger financial stress. Given its global nature, COVID-19 may lead to sizable adverse cross-border spillovers and weaken global value chains, which will further damage productivity. The immediate policy focus is to address the health crisis but policymakers also need to introduce reforms to rekindle productivity growth once the health crisis abates. Introduction long-term growth through supply- and demand-side channels. Prior to the emergence of COVID-19, there were already concerns about the prospects for long-term productivity Disasters can impact supply through: growth in emerging market and developing economies (EMDEs) and the achievement of development goals, • Depleted labor force and human capital. Major disasters especially the reduction of poverty. COVID-19 has put can disrupt the functioning of labor markets by these goals in even greater jeopardy (World Bank 2020e). making it difficult for workers to get to their places of In less than half a year since its start, COVID-19 already employment or (in the case of infectious diseases) ranks as a major disaster (Figure 3.2.1). Since pandemics work in close physical proximity with each other, or are rare events, this box sheds light on the effects of by causing widespread sickness, injuries and fatalities COVID-19 on labor productivity by examining severe that directly reduce the labor supply (Field 2019; disasters (including epidemics, climate disasters, and wars) Ksoll, Macchiavello, and Morjaria 2010; and Mueller since 1960. 2013). These disruptions undermine the productivity of those remaining in the workforce owing to the loss Natural disasters (such as biological, climate, and of complementary skills. Unexpected adverse events geophysical events), and wars have caused significant that affect large geographic areas have been shown to economic damage.1 Past severe disasters (more than 100 have lasting consequences on human capital deaths per million people) are relevant for gauging the formation (health, education and nutrition outcomes) likely effects of COVID-19 on labor productivity and regardless of the income group.2 understanding the channels through which disasters may affect the economy. The box examines three questions: • Destruction and misallocation of physical capital. Severe climate and geophysical disasters tend to reduce and • What are the main channels through which severe degrade the capital stock, and can lead to a disasters affect productivity? misallocation of capital which can weigh on productivity (Hallegatte and Vogt-Schilb 2019). • What are the frequency and extent of severe disasters? Disasters more generally can hold back growth- enhancing investment—including by damaging the • What are the likely implications of severe disasters for outlook for activity and profitability, increasing productivity? uncertainty, triggering capital flight, and tightening credit conditions (Collier 1999; Hutchinson and Channels through which severe disasters Margo 2006). By magnifying economic uncertainty, affect productivity disasters can also cause a misallocation of investment (Claessens et al. 1997; Claessens and Kose 2017, Severe disasters, such as pandemics, epidemics, severe 2018). climate disasters, and wars, can affect productivity and • Disruption of supply chains and innovation. Major disasters can damage global value chains.3 They also Note: This box was prepared by Alistair Dieppe, Sinem Kilic Celik, and Cedric Okou, with research assistance from Yi Li, Kaltrina Temaj, 2 See Acevedo et al. (2018), IMF (2017), and Thomas and López and Xinyue Wang. (2015). Biological epidemics can also disproportionally affect low-skilled 1 Natural disasters include climate (floods, cyclones), biological workers and raise inequality (Furceri et al. 2020). (epidemics, insect infestation), and geophysical disasters (earthquakes, 3 See Collier (1999), Reynaerts and Vanschoonbeek (2018), and volcanoes), and follow EM-DAT definitions. Rodrik (1999). 152 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 3.2 How do disasters affect productivity? (continued) FIGURE 3.2.1 Severity, frequency, and duration of pandemics, epidemics, and climate disasters In less than half a year, COVID-19 already ranks as a major disaster. In the most severely affected countries, its impact may be as large as those from a severe climate disaster, which typically results in mortality rates of over 100 per million of the population. Climate disasters were the most frequent type of natural disaster in 1960-2018, accounting for nearly 70 percent of all disasters. Epidemics and wars are much rarer although their duration is longer. About 20 percent of biological disasters that have affected EMDEs and LICs have been severe and resulted in death ratios of over 100 per million (0.01 percent) of the population. A. Global mortality rates for selected B. Global mortality rates for recent C. Mortality rates for severe climate pandemics epidemics events, pandemics, and epidemics D. Number of biological and epidemic E. Episodes by type of all disaster, F. Duration of natural disasters, episodes, 1960-2018 worldwide, 1960-2018 epidemics, and wars Source: Centers for Disease Control and Prevention; Correlates of War; EM-DAT; Johns Hopkins University; OurWorldInData.org; Peace Research Institute Oslo; United Nations; World Bank; World Health Organization. A.-C. Cumulative deaths per million habitants worldwide. Last observation of death toll for COVID-19 is May 14, 2020. Severe climate disasters are defined as events that led to at least 100 deaths per million population. C. Blue bars indicate the medians of mortality rates across affected countries. The bottom (top) of the yellow line represents the 1st (3rd) quintile. Red marker indicates 100 deaths per million habitants. D.-F. Natural disasters include climate (floods, cyclones), biological (epidemics, insect infestation), and geophysical (earthquakes, volcanoes) disasters, and follow EM- DAT definitions. Wars are identified using the World Bank’s Correlates of War database. The sample includes 170 economies: 35 advanced economies and 135 EMDEs, of which 27 are low-income countries. E. Biological disasters include epidemics. F. The five pandemics and epidemics considered are SARS (2002-03), MERS (2012), Ebola (2014-15), and Zika (2015-16) . Click here to download data and charts. undermine the incentives to invest in R&D and new and quarantines—can further limit the diffusion of technologies, including by triggering wide-scale technologies. institutional dysfunction, weakening property rights, and increasing costs of doing business. Capital Disasters can also impact demand through: outflows tend to be associated with drops in inward foreign direct investment, which can be an important • Lower business investment. Short-term projections of source of technology transfer. Containment efforts demand and economic activity tend to be scaled back during biological events—such as workplace closures and business uncertainty to increase sharply following G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 153 BOX 3.2 How do disasters affect productivity? (continued) major disasters, while financial conditions tighten, Epidemics since the 2000s. During 2000-18, the world including in response to increased risk aversion. These experienced SARS (2002-03), MERS (2012), Ebola typically cause a sharp drop in investment demand. A (2014-15), and Zika (2015-16). The increased frequency more prolonged disaster, even at the same magnitude, of epidemics increases the likelihood that pandemics will results in higher uncertainty. This causes firms to break out. Since 1960, there have been more than 250 delay or deter investments and thereby compounding episodes of biological disasters with losses of life of over 10 the negative economic effects of disasters (Bloom per million population in the countries affected. LICs have 2014; Baker, Bloom, and Terry 2019; and Bloom et been disproportionally affected by these types of disasters, al. 2018). The more severe the disaster, the larger the whereas advanced economies were not affected. The uncertainty (Ludvigson, Ma, and Ng 2020). Model- frequency of biological episodes has been increasing over based estimates by Baker et al. (2020) suggest that time, but they have mostly been contained in size and increased uncertainty accounts for half of the output severity. loss in the United States in early 2020. Frequent climate disasters. Climate disasters accounted • Weaker consumer demand. Job losses, reduced income, for around 70 percent of natural disasters during 1960- increased cost of debt service, higher uncertainty, the 2018, occurring twice as often as other types of natural forced closure of marketing outlets, and, in the case of disasters combined (Figure 3.2.1). However, the frequency diseases, fear of infection, all tend to cause consumers of severe climate disasters—defined as causing losses of life to reduce their spending on goods and services and to exceeding 100 people per million—has stabilized since increase saving rates. Furthermore, effects on 2000, perhaps reflecting better mitigation policies in some consumer behavior could be long-lasting—for countries as they have confronted climate change (Figure example, a pandemic could cause households to 3.2.2). Furthermore, climate disasters tend to be short- reduce their demand, over an extended period, for lived compared to epidemics which on average last twice as travel, tourism, eating out, entertainment, and other long. activities involving human interaction, and to increase their saving in the absence of close substitutes. Wars. Apart from their direct toll on human life and welfare, wars also have major adverse effects on output and Frequency and short-term effects of disasters productivity (Abadie and Gardeazabal 2003; Cerra and Saxena 2008). The frequency of wars has dropped over This section briefly reviews the experience of severe 2000-18, although a typical LIC was twice as likely to disasters over the past 60 years for insights into the main experience a conflict as a typical EMDE.4 The destruction, channels through which they impact productivity. disruption, and diversion effects of wars can cause sharp Pandemics, epidemics and wars are rare events although reductions in the labor force and physical capital, and also they last longer than other types of disasters. Biological dampen productive investment and innovation.5 disasters and geophysical disasters are more common. Climate disasters (such as storms, floods, droughts, and Damaging severe disasters. Compared to unaffected periods of extreme temperature) occur more often but countries, severe biological disasters are associated with 9 typically last for less than six months. All these events are percent lower median labor productivity and 8 percent associated with weaker productivity over long time spans. lower total factor productivity (TFP) three years after the shock (Figure 3.2.2). Severe natural disasters (including Pandemics. The Spanish flu (1918-19) has an unusually climate and biological disasters) also correlate with weaker high death toll and mortality rate, killing between 20-100 labor productivity and TFP compared to countries not million people globally. Other, more recent, pandemics suffering such disasters. In EMDEs, three years into a had far lower mortality rates. They included the Hong Kong flu (1968-69) and the Asian flu (1957-58), with nearly 300 and 400 deaths per million, respectively. This 4 e definition and data for wars are from the Correlates of War database (Singer and Small 1994). e dataset was updated after 2007 was followed by swine flu (2009-10), with 11 deaths per using the Peace Research Institute Oslo (PRIO) data (Pettersson, million globally (Figure 3.2.1). COVID-19 is the most Högbladh, and Öberg 2019). In the database, wars are defined as severe pandemic since the Hong Kong flu, despite the conflicts with at least 1,000 battle-related deaths. unprecedented mitigation efforts that have been 5 See Becker and Mauro (2006); Collier (1999); Easterly et al. implemented. (1993); Field (2008); Raddatz (2007); and Rodrik(1999). 154 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 3.2 How do disasters affect productivity? (continued) FIGURE 3.2.2 Disasters and productivity The frequency of the most severe climate disasters stabilized after 2000. In EMDEs, severe natural disasters, especially severe biological disasters, are associated with lower labor productivity. Severe biological disasters are also correlated with lower investment, possibly reflecting a sizable increase in uncertainty that holds off new spending. A. Average number of severe climate B. Average number of severe wars per C. Labor productivity disaster episodes per year, worldwide year, worldwide D. Total factor productivity E. Investment F. Output Source: EM-DAT; World Bank. A. B. Natural disasters include climate (floods, cyclones), biological (epidemics, insect infestation), and geophysical (earthquakes, volcanoes) disasters, and follow EM-DAT definitions. Wars include intra-state and external (extra-state and inter-state) wars. Severe climate or natural disasters and severe wars are defined as events that led to at least 100 deaths per million population. The sample includes 170 economies: 35 advanced economies and 135 EMDEs, of which 27 are low-income countries. C-F. Bars show the difference between the median growth of macroeconomic indicators in EMDEs with and without severe biological disasters (red) and severe natural disasters (blue; including climate, biological, geophysical disasters). A Fisher’s test is used to test if medians in two subsamples (with and without disasters) are equal. Severe natural disasters are defined as those that lead to at least 100 deaths per million population. The four biological disasters considered are SARS (2002-03), MERS (2012), Ebola (2014-15), and Zika (2015-16). Swine flu (2009), which coincided with the 2008-09 global financial crisis, is excluded to limit possible confounding effects. ***, ** and * indicates 1, 5, and 10 percent significance levels. Click here to download data and charts. severe natural disaster episode median labor productivity lowering it by between 6 percent and 15 percent (if was around 8 percent lower in the countries affected, and accompanied with recessions) after five years. Climate TFP was 7 percent lower than in countries unaffected disasters weaken productivity by between 4 to 8 percent. whereas investment remained virtually unchanged, which Wars also affect productivity for a sustained period. could reflect large-scale reconstruction investment offsetting other negative effects. Methodology. The local projection method (LPM) is used to provide a reduced-form estimate of the response of Long-term effects of severe disasters labor productivity to adverse events over various horizons, and to identify key transmission channels through output, To help draw inferences on the possible effects of investment, and TFP (Jordà, 2005; Jordà, Schularick, and COVID-19, this section examines the extent different Taylor, 2013). types of disasters such as epidemics, climate disasters, and wars have lasting negative effects on labor productivity. Adverse effects of epidemics. Results suggest that four Epidemics are particularly damaging to productivity, epidemics since 2000 (SARS, MERS, Ebola, and Zika) G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 155 BOX 3.2 How do disasters affect productivity? (continued) FIGURE 3.2.3 Impact of disasters Disasters have resulted in considerable losses in output and labor productivity in EMDEs. Severe disasters have larger effects. SARS, MERS, Ebola, and Zika left lasting scars on labor productivity with declines of around 6 percent and larger effects on investment, whereas estimates suggest that total factor productivity hardly declined. The impact of swine flu too was probably large, but impossible to assess because the epidemic overlapped with the 2008-09 global financial crisis. Climate disaster has also led to significant productivity losses, although public and private investment have tended to increase in the short term, reflecting the shorter duration of the shock and reconstruction. A. Epidemics: Labor productivity and B. Epidemics: Investment and output C. Severe climate disasters: Labor total factor productivity productivity and TFP D. Severe climate disasters: Investment E. Severe epidemics and recession: F. Severe epidemics and recession: and output Labor productivity Output Source: EM-DAT; World Bank. Note: Orange lines display the range of the estimates with 90 percentile significance. A.B. Bars show the estimated impacts of the four most severe biological epidemics on output, labor productivity, total factor productivity, and investment levels relative to non-affected economies. The four epidemics considered are SARS (2002-03), MERS (2012), Ebola (2014-15), Zika (2015-16). Swine flu (2009), which coincided with the 2008-09 global financial crisis, is excluded to limit possible confounding effects. The sample includes 116 economies: 30 advanced economies, and 86 EMDEs. C.D. Bars represents impulse responses of various economic variables to a severe adverse climate event. Severe climate disasters are defined as those that resulted in at least 100 in 1 million population death tolls. The sample includes 116 economies: 30 advanced economies and 86 EMDEs. E.F. Bars show the estimated impacts of the four most severe biological disasters on labor productivity and output. Orange lines display the range of the estimates with 90 percentile significance. The four epidemics considered are SARS (2002-03), MERS (2012), Ebola (2014-15), and Zika (2015-16). Swine flu (2009-10), which coincided with the 2008-09 global financial crisis, is excluded to limit possible confounding effects. Click here to download data and charts. had significant and persistent negative effects on epidemics led, on average, to a contemporaneous loss of productivity (swine flu is excluded since it coincided with productivity equal to about 1 percent (Figure 3.2.3). After the global financial crisis).6 These estimates indicate that five years, such disasters lowered labor productivity by a 6 Jordà, Singh, and Taylor (2020) consider major pandemics and (Dieppe, Francis, and Kindberg-Hanlon, forthcoming). Ma, Rogers, and find long lasting effects on output. Barro and Ursúa (2008) report that Zhou (2020) focused on the same set of epidemics in 210 countries and the macroeconomic impact of the Great Influenza Pandemic of 1918 is found that real GDP in EMDEs is around 2 percent lower, on average, in substantial. Sustained low levels of demand, and excess capacity during the first year, and 4 percent lower, on average, after five years. is disasters, including pandemics, can have persistent effects on productivity suggests some uncertainty around the long-run effects. 156 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 3.2 How do disasters affect productivity? (continued) FIGURE 3.2.4 Impact of wars and financial crises on productivity Wars tend to leave large and persistent productivity losses. Many disasters have been associated with financial crises, which often result in large and persistent losses in labor productivity. A. Effects of wars on labor productivity in B. Effects of financial crises on labor C. Estimates from the literature of effects EMDEs productivity in EMDEs of events on output per capita Source: Correlates of War (COW); EM-DAT; Laeven and Valencia (2018); Peace Research Institute Oslo (PRIO); World Bank Note: Wars include intra-state and external (extra-state and inter-state) wars (COW and PRIO). Financial crisis episodes include banking crisis, currency crisis, and sovereign debt crisis (Laeven and Valencia 2018). Natural disasters include climate, biological, and geophysical disasters (EM-DAT). EMDEs=emerging market and developing economies (including low-income countries), The sample includes 170 economies: 35 advanced economies and 135 EMDEs, of which 27 are low-income countries. A.B. Blue bars indicate the average impact of the event for each group and orange lines represent the 90 percent significance range. C. The range of estimates is from the literature. Click here to download data and charts. cumulative amount of about 6 percent. Over the same disaster lasts for a more extended period—as is the case horizon, investment declined by nearly 11 percent with biological disasters—or if reconstruction efforts are reflecting heightened uncertainty and risk aversion. delayed (Cerra and Saxena 2008; Sawada 2007).7 Twelve out of around 360 recessions (excluding the 2009 global Losses associated with severe climate disasters. In financial crisis) were associated with severe disasters; 38 EMDEs, severe disasters (greater than 100 deaths per were associated with epidemics. In the case of the four million) have resulted in considerable losses in output, major epidemics, the effects associated with recessions are labor productivity, and total factor productivity. The LPM significantly larger on productivity (Figure 3.2.3).8 estimates for climate disasters indicate that labor productivity was lower by 8 percent after five years (Figure Scarring effects of wars. This is due to the destruction of 3.2.3, Fomby, Ikeda, and Loayza; 2013). The estimates human and physical capital and reduced total factor show that lower labor productivity is mainly accounted for productivity. In EMDEs, wars (including internal and by weaker total factor productivity rather than reduced external wars) have been especially damaging as they investment. Possibly because after a severe disaster, firms lowered labor productivity by about 4.5 percent after five delay or cancel investment in R&D, which impedes the years (Figure 3.2.4). creation, transfer, and adoption of new technologies and hinders global value chains. On the other hand, reconstruction spending offsets to some extent the negative impact on other capital spending. 7 The pace of reconstruction may be slowed by financial, physical, The literature finds severe disasters have disproportionately and transaction constraints (Hallegatte and Rentschler 2018). larger economic impacts due to non-linear effects on labor 8 Severe disasters can widen inequalities and exacerbate political force participation and human capital, particularly tensions in affected countries. Besley and Persson (2011) estimated, for a sample of 97 countries in the period 1950-2005, that severe natural amongst younger workers (Cavallo et al. 2013; Hallegatte disasters increased the probability of wars by about 4 percentage points. and Przyluski 2010; Loayza et al. 2012). Furthermore, the Biological epidemics can also disproportionally affect low-skilled workers cumulative loss of productivity tends to be larger if the and raise inequality (Furceri et al. 2020). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 157 BOX 3.2 How do disasters affect productivity? (continued) Conclusions household bankruptcies and hence a systemic financial crisis. Whilst only a few disasters have been associated The COVID-19 pandemic raises questions about its with financial crises, governments and private sectors effects on productivity. Pandemics and epidemics are rare entered the COVID-19 pandemic with already- events in comparison to climate disasters and wars, but stretched debt burdens (Kose et al. 2020). ese have they have had adverse and persistent effects on since increased further and heighten risk of a financial productivity. Adverse impacts on productivity increase crisis should financial conditions tighten further more than proportionately with the severity and duration (Ludvigson, Ma, and Ng 2020). of these types of disasters. Severe disasters were lowered labor productivity by 6 percent over the subsequent five Mitigating factors. In some dimensions, disasters can years. accelerate productivity-enhancing changes. ey can encourage investment in new and more technologically The COVID-19 pandemic may have a significantly worse advanced capital and to train more highly skilled workers impact on productivity than most previous disasters for (Bloom 2014). Moreover, destruction of old capital may three reasons: lead to new opportunities for green growth with environmentally friendly new investment, especially if it is • Global reach. The COVID-19 pandemic appears to induced by structural reforms (Strand and Toman 2010). have considerably broader reach—in terms of e mitigation measures of COVID-19, including social numbers of both countries and people affected—than distancing, may encourage investment in more efficient other disasters since 1960 (Hassan et al. 2020). The business practices, including robotics and other digital increased integration of the global economy, through technologies such as artificial intelligence.10 trade and financial linkages will amplify the adverse impact of COVID-19. Structural reforms. e negative outlook ahead means that, after addressing the immediate health crisis, countries • Contagion prevention and physical distancing. As long need to make productivity-enhancing reforms a priority. as strict social distancing is required, some activities ese include facilitating investment in human and will not be viable. In the hospitality sector, where physical capital, as well as in research and development; close socialization is part of the product, the capital encouraging reallocation of resources toward more stock will become obsolete. Even in less directly productive sectors; fostering technology adoption and affected sectors, severe capacity under-utilization innovation; and promoting a growth-friendly macro- lowers TFP while restrictions to stem the spread of economic and institutional environment (World Bank the pandemic remain in place. Disruptions to 2020f). In addition, raising the quality and effectiveness of employment, schooling and other education while governance and improving the business climate can restrictions remain in place—or, in the event of severe encourage a faster rebound from disasters. Governments income losses, even once restrictions are lifted—will that improved labor and product market flexibility, also lower human capital and labor productivity strengthened legal systems and property rights, fostered (World Bank 2020d). effective competition, and addressed inequality set the foundations for more effective adjustment to adverse • Compounding financial stress. Financial crises tend to events (Anbarci, Escaleras, and Register 2005). result in especially protracted labor productivity losses (Figure 3.2.4, World Bank 2020f).9 Larger disasters are more likely to cause a cascade of business and 9 See Benson and Clay (2004); Blanchard, Cerutti, and Summers 10 See Hallward-Driemeier and Nayyar (2017); Hsiang (2010); (2015); Celiku and Kraay (2017); and Cerra and Saxena (2008, 2017). Skidmore and Toya (2002); and Strobl (2011). e accompanying job During 1990-2018, the number of financial crises—sovereign debt, losses are likely to be lower-skilled and less productive (Lazear, Shaw, and banking, and currency—nearly doubled compared to 1960-1989. Over Stanton 2013). To the extent vulnerable groups are particularly exposed the past three decades, labor productivity growth halved in advanced to economic losses from disasters, policies to protect these groups are economies and slowed, albeit less markedly, in EMDEs. needed (OECD 2020b). 158 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 3.10 Productivity and epidemics patterns motivated by the aim of lowering Since 2000, severe biological disasters (including SARS, MERS, Ebola, infection risks (Smith et al. 2014). and Zika) have left large and lasting scars on affected economies. On average, after five years, they lowered labor productivity by about 6 • Erosion of human capital. The learning percent and investment by about 10 percent. disruptions associated with widespread school and university closures, as well as income A. Labor productivity B. Investment losses, may cause lasting setbacks to human capital accumulation (UNESCO 2020; Wang et al. 2020).10 • Possible mis-steps in macroeconomic policy management. Governments in many countries have taken fiscal and monetary policy action on unprecedented scales in response to the pandemic to support demand and activity. Source: World Bank. Great care will need to be taken when Note: Bars show the estimated impacts of SARS (2002-03), MERS (2012), Ebola (2014-15), and Zika (2015-16). Orange lines display the range of the estimates with 90 percentile significance. Swine flu withdrawing this support, as multiple (2009-10), which coincided with the 2008-09 global financial crisis, is excluded to limit possible confounding effects. The sample includes 116 economies: 30 advanced economies and 86 EMDEs. objectives will need to be served, including Click here to download data and charts. sustaining the recovery of output and employment, ensuring the sustainability of public debt, maintaining price stability, FIGURE 3.11 Factors aggravating long-term costs promoting long-term growth, and ensuring social cohesion. The ability of safety nets to cushion income losses varies considerably across EMDEs, and tends to be less in LICs, highlighting the potential for severe welfare losses among the poorest. Prolonged school closures in EMDEs could have lasting implications for human capital accumulation. Conclusion A. Coverage of social insurance B. School closures The COVID-19 pandemic has already taken an programs among EMDEs exceedingly heavy human toll and ravaged the global economy. Both advanced economies and EMDEs are experiencing an unprecedented combination of public health crises; sharp increases in borrowing costs, especially in EMDEs; a collapse in global trade, travel, and tourism; and a plunge in commodity prices. These shocks have already led to sharp contractions in many economies. Source: UNESCO; World Bank, World Development Indicators; World Bank. Note. LICs = low-income countries. The pandemic is expected to have severe adverse A. Aggregates calculated using population weights for the latest available year of data for each country. Sample includes 106 EMDEs, of which 60 are commodity exporters, 46 are commodity effects on both short- and long-term economic importers, and 21 are LICs. Coverage of social insurance programs shows share of population participating in programs that provide old-age contributory pensions (including survivor benefits and growth. In the short term, the global economy has disability) and social security and health insurance benefits (including occupational injury benefits, paid sick leave, maternity leave, and other social insurance). already begun to experience a deep recession. B. Number of countries that have either recommended or required school closings as part of Many EMDEs will suffer particularly deep measures to contain the domestic spread of COVID-19. Last observation is May 19, 2020. Click here to download data and charts. downturns because of their substantial vulnerabilities. In the long term, the pandemic aggregate demand and supply (Bhandari, Borovicka, and Ho 2019; Ilut and Schneider 10 For example, evidence from the Ebola epidemic in West Africa in 2014 suggests that school closures were associated with higher 2014). dropout rates and wider gender gaps in educational attainment (UNDP 2015). Large declines in household income are also • Changing consumption patterns. There could associated with increased school dropout rates in EMDEs (Glick, be long-lasting changes in consumption Sahn, and Walker 2016). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 159 will weigh on potential output and productivity, FIGURE 3.12 Fiscal and monetary policy responses especially if financial crises erupt and oil prices Many countries have implemented unprecedented and wide-ranging fiscal remain depressed for an extended period. The support in the wake of the COVID-19 outbreak, while many central banks pandemic and the accompanying recessions will have moved quickly to provide accommodation, in many cases beyond levels seen during the global financial crisis. likely prolong and deepen the multi-decade trend decline in long-term growth prospects. A. Fiscal policies across advanced B. EMDE fiscal support, by type of economies measures The exceptional severity of the pandemic and economic collapse raises concerns about the risk of “super-hysteresis”: not only a permanent loss of output levels but a permanent slowdown in potential output growth (Ball 2014). The pandemic could alter the very structures upon which the growth of recent decades was built, since it could cause prolonged damage to global supply chains, global trade and financial flows, and global collaboration. C. Unconventional monetary policy in D. Monetary policy in EMDEs major advanced economies The evolving response to the pandemic has included an extensive menu of policies to dampen the effects of the health crisis, including the short- term economic losses. Many countries have instituted stringent measures to stem the pandemic, including full lockdowns. They have restricted international and domestic travel, closed schools and non-essential businesses, and discouraged work performed other than at home. Source: Bank for International Settlements; Bloomberg; European Central Bank; Haver Analytics; They have banned, or advised their citizens to World Bank; Yale Program on Financial Stability. avoid, large gatherings. As countries cautiously feel A. Sample comprises 27 advanced economies and the Euro Area. Last observation is May 20, 2020. B. Total of measures either planned or under consideration. Contains 147 EMDEs. Last updated May their way toward a gradual reopening of their 17, 2020. C. "COVID-19" reflects recently announced asset purchases and are expressed as a share of 2019 economies, they face the challenge of rebuilding a nominal GDP. "Global financial crisis" asset purchases reflect the increase in central bank balance sheets between August 2008 and December 2009 as a share of 2008 nominal GDP. healthy economy while at the same time guarding D. Sample consists of 26 EMDEs. against the threat of a renewed outbreak of the Click here to download data and charts. pandemic. To support their economies through the stronger long-term growth. The implication is that shutdowns, policymakers have implemented relief for policymakers to be able to fund health systems programs of an unprecedented scale (Chapter 1; and support domestic demand through the Figure 3.12). The immediate fiscal policy response eventual recovery, they need to credibly undertake has included support for health care systems, comprehensive reform programs to improve expanded social benefit programs, and measures to institutions and frameworks that can ensure an help firms and households. EMDE monetary eventual return to robust growth while setting the authorities across the world have eased monetary stage for stronger long-term prospects. This will conditions to support activity and provided require credible fiscal frameworks that ensure that emergency liquidity support to stabilize financial fiscal sustainability will be restored; it will also markets. demand credible monetary policy frameworks that ensure that monetary policy will safeguard low Beyond these short-term policies to confront the inflation and financial stability. In addition, it will current health and economic crisis, the likely long- require stronger governance and business term implications of the COVID-19 pandemic environments, and expanding investment in also highlight the need to lay the foundation for education and public health. 160 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 As the world emerges from the pandemic, it will Acute Respiratory Syndrome, or SARS) in 2002- also be critical to strengthen the mechanisms for 03, MERS-Cov (Middle East Respiratory preventing and responding to epidemics before the Syndrome, or MERS) in 2012, Ebola in 2014-15 next one strikes. Less than 5 percent of countries and again in 2018-20, the Zika virus in 2015-16, entered this pandemic scoring in the highest tier as well as endemic diseases such as cholera and for their ability to respond to and mitigate the yellow fever (Table A.3.1.1). spread of an epidemic (Johns Hopkins University and NTI 2019). Improving these capabilities will Past pandemics, especially the Spanish flu, have require international policy cooperation and imposed a heavy toll in terms of human lives. The coordination, especially given the global reach of number of fatalities from COVID-19 is rising such disasters. strongly, and is likely to rise considerably more (Figure A.3.1.1; Atkeson 2020; Ferguson et al. 2020). Pandemics and epidemics also have significant ANNEX 3.1 The macroeconomic economic impacts. Even a relatively mild effects of pandemics and pandemic, in terms of the number of deaths, can epidemics: A literature review generate substantial global output losses in the short term. This annex reviews the relevant A growing literature has examined the economic literature, addressing the following questions: losses from historical and simulated pandemics, taking account of a range of channels, including • What are the channels through which the labor force disruption; a collapse in consumption, global economy is disrupted by pandemics trade, and travel; and amplification through and epidemics? confidence and financial market disruptions. These • What were the economic costs associated with studies have found initial GDP losses that fall in a previous pandemics and what do model-based range of 1-8 percent. However, these estimates simulations suggest about the costs of generally do not account for containment measures pandemics of different severity? of the scale used during the COVID-19 pandemic, which could significantly increase the economic • What are the expected economic costs of costs. Other major economic shocks, such as COVID-19, based on existing studies? financial or currency crises, have been associated with persistently negative effects on growth, Channels of economic impact suggesting that there may be long-term scarring effects from COVID-19. The macroeconomic impacts of disease outbreaks (epidemics or pandemics) stem from effects on Introduction aggregate demand and aggregate supply. Demand- side channels capture the effects on consumption, SARS-CoV-2 (COVID-19) is the latest in a long investment, trade, and travel, while supply series of global disease outbreaks. In just the past channels capture workforce and supply-chain century, the world has experienced four influenza disruptions and the rising costs of doing business.1 pandemics: H1N1 in 1918-19 (Spanish flu), H2N2 in 1957-58 (Asian flu), H3N2 in 1968-69 Demand channels (Hong Kong flu), and H1N1 in 2009-10 (swine flu). HIV/AIDS, which appeared in the early Avoidance, fear, and uncertainty. Infectious 1980s, was also eventually classified as a pandemic. disease outbreaks can have a substantial impact on In addition, the world has suffered from numerous demand as governments, consumers, and firms other disease outbreaks, such as SARS-Cov (Severe 1 In addition, the supply-side effects can trigger large falls in Note: This annex was prepared by Gene Kindberg-Hanlon, Yoki income which are then magnified by credit constraints and firm Okawa, and Dana Vorisek. failures, reducing demand (Guerrieri et al. 2020). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 161 FIGURE A.3.1.1 Economic impact of pandemics Model simulations of pandemics of varying severities find that output can be reduced by 2-8 percent in moderate to severe scenarios. The models account for a range of channels affecting the economy, such as work absenteeism, reduced consumption, credit constraints, and financial volatility, but generally do not consider aggressive measures of the sort widely used to contain the COVID-19 pandemic. For this reason, the economic impact of COVID-19 tend to be larger in simulated severe scenarios in recent studies. A. Impact on GDP from simulated flu B. Estimated impact on GDP from C. Estimated number of deaths pandemics COVID-19 Source: Cobos et al. (2016); Dawood et al. (2012); Simonsen (1999); Spreeuwenberg, Kroneman, and Paget (2018); WHO (2018); World Bank. A. Blue bars show the median of reported GDP shrinkage. Orange lines represent the range of the median estimates of influenza pandemics on first-year (peak impact in all cases) GDP growth from models in McKibbin and Sidorenko (2006); Burns, Mensbrugghe, Timmer (2006); Verikios et al. (2011); and McKibbin and Fernando (2020). In “mild” scenarios, the mortality rate is 2.2 per 10,000 population. In “moderate” scenarios, the mortality rate is 20-50 per 10,000 population. In “severe” scenarios, the mortality rate is 90-110 per 100,000 people. B. Blue bars show the median reported GDP shrinkage. Orange line represents the range of the simulated impacts of COVID-19 on first-year GDP growth from Baker et al. (2020b); Breisinger et al. (2020); IMF (2020); McKibbin and Fernando (2020); and World Bank (2020b). Baseline estimates from IMF (2020) are changes in forecasts in April 2020 from January 2020. Baker et al. (2020b) and Breisinger et al. (2020) are estimates for only the United States and Egypt, respectively. C. Number of cumulative daily infections from first day when infections exceeded 100. Data for COVID-19 is as of May 22, 2020. Click here to download data and charts. take actions to limit contagion. In some cases, this labor productivity in the short run, while loss of effect may be magnified by uncertainty. SARS, for schooling and job experience, as well as mortality, example, triggered a substantial reduction in can have persistent effects. In past pandemics, travel, consumption, services exports (including illness and absences to care for family members tourism), and even investment, despite causing reduced labor supply more than mortality just 800 deaths. Consumer spending patterns have (Kilbourne 2004; McKibbin and Sidorenko shifted dramatically during the COVID-19 2006).2 pandemic. In the United States, the magnitude of changes in spending has been linked to both the Business closures and supply chain disruptions. severity of local outbreaks, which creates Business costs are likely to increase during a heightened avoidance of contagion risk, and to pandemic as measures are taken to protect controls imposed at the city and state level, which employees and the general population, and halt many normal activities (Baker, Farrokhina et closures can exact an even greater toll. Empirical al. 2020). Heightened uncertainty may also be assessments of disease outbreaks have found that reflected in financial market stress. The market high-exposure service sectors, such as travel, volatility from COVID-19 has been severe. Risk accommodation, and food services, are hardest hit spreads on borrowing costs have widened sharply. during pandemics, even when few restrictions or Many EMDEs have experienced capital flight. closures were imposed (Joo et al. 2019; Siu and Previous infectious disease outbreaks have had Wong 2004). Manufacturing can be deeply qualitatively similar effects on financial markets affected by supply chain disruptions. In some (Ma, Rogers, and Zhou 2020). CGE-based estimates of the economic costs of pandemics, rising business costs in affected sectors Supply channels Labor force effects. Illness and preventive 2 In addition, over the long term, the loss of human capital due to measures to reduce contagion during infectious fatalities during the outbreak can result in long-term output losses (Fan, Jamison, and Summers 2018). disease outbreaks reduce available labor supply and 162 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 TABLE A.3.1.1 Estimated mortality and infection rates of impacts of pandemics for lower-income pandemics during the past century households. Because low-income workers typically have limited savings to buffer income shocks, and Spanish Asian Hong Kong Swine COVID-19 because telecommuting is not an option for many flu flu flu flu low-paid service jobs, these workers may be forced Period 1918-19 1957-58 1968-69 2009-10 2020 to work in environments where the risk of Deaths (% of global 1.0-5.7 0.03-0.05 0.02-0.03 0.001-0.004 0.004 infection is high. population) Cross-country spillovers. Simulations have shown Infections (% of global 28 42-55 30-57 24 0.07 that global trade would fall by as much as 14 population) percent in a medium-scale outbreak of avian flu, even if viral cases were limited to South and East Source: Cobos et al. (2016); Johnson and Mueller (2002); Johns Hopkins University Coronavirus Resource Center; Simonsen (1999); Taubenberger and Morens (2006). Asia (Bloom, de Wits, and Carangal-San Jose Note: COVID-19 infections and deaths are as of May 22, 2020. 2006). During the SARS outbreak, the high dependence of Hong Kong SAR, China on tourism and services exports was found to have are responsible for the majority of economic losses magnified GDP losses (Siu and Wong 2004). (Lee and McKibbin 2003; McKibbin and Disruption to global value chains provides an Sidorenko 2006). additional channel that can increase the economic cost of pandemics and epidemics. The impact of Amplifying and dampening factors COVID-19 on global trade has been a major Several factors affect the magnitude of economic concern in part because countries that collectively losses from disease outbreaks. account for the majority of global manufacturing production and exports (China, Germany, Italy, Demographic profiles. Large-scale infectious Korea, and the United States) have also disease outbreaks tend to strike some age segments experienced some of the largest outbreaks more than others. For example, the case fatality (Baldwin and Tomiura 2020). rate during the Spanish flu was highest for young adults, while during the Asian flu, school-aged Macroeconomic policy response. Fiscal and children and young adults experienced the largest monetary policy support can blunt the adverse elevation in mortality relative to the baseline economic impacts of disease outbreaks and (Gagnon et al. 2013; Viboud et al. 2016). Early aggressive mitigation measures. With much of the experience with COVID-19 shows a dispro- global economy under lockdown during the portionally higher frequency of death for the COVID-19 pandemic, such support has been elderly suggesting that the loss of life may be essential to offset drastic interruptions to the severe for countries and regions with a high share normal income, credit, and spending patterns of older people (Farzanegan, Feizi and Gholipour among businesses and households. The 2020; Sornette et al 2020; Verity et al. 2020).3 effectiveness of policy support depends on the credibility of the measures, and the extent of pre- Health care systems and social safety nets. Low- existing vulnerabilities such as high debt levels and and lower-middle-income economies may suffer large external financing needs, and structural particularly high loss of life from disease outbreaks issues. For example, fiscal multipliers are typically as a result of low-quality health care systems and lower in economies with high debt (Huidrom et poor access to water and sanitation services al. 2019). The effectiveness of fiscal policy also (Corburn et al. 2020; Farzanegan, Feizi, and depends critically on a well-functioning social Gholipour 2020; McKibbin and Sidorenko 2006). security system, and could be complicated by high Weak social safety nets can magnify the economic levels of informality (Box 1.4; Loayza and Pennings 2020). Monetary policy easing also may 3 The U.S. Department of Health and Human Services (2020) be less effective in economies with large informal estimates that the case fatality rate for patients ages 20-44 is less than sectors and low financial inclusion (Alberola-Ila one-tenth of the rate for patients ages 65-74. and Urrutia 2019). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 163 Estimates of economic losses Mild pandemics. These are defined to have mortality rates of less than 20 per 10,000 people.5 The literature has studied the economic impacts of Historical examples are the Hong Kong flu, with disease outbreaks using both model-based about 2 deaths per 10,000; and the Asian flu, with simulations and empirical analysis of historical about 4 deaths per 10,000. In model simulations, pandemics. their impact reduces GDP by 0.7-0.8 percent in both advanced economies and EMDEs in the first • Computable general equilibrium (CGE) year (Figure 1.1; McKibbin and Sidorenko 2006). models. Several global CGE models have been applied to estimate losses of simulated Intermediate pandemics. These are defined to pandemics (Lee and McKibbin 2004; have mortality rates of 20-50 per 10,000 McKibbin and Fernando 2020; McKibbin population. Model simulations suggest, during the and Sidorenko 2006; Verikios 2011). These first year, reductions of 1.6-3.5 percent of GDP in models offer rich sectoral disaggregation that EMDEs, and 2.0-4.6 percent of GDP in advanced allows the consideration of differential effects economies (Burns, van der Mensbrugghe, and across industries, estimation of trade Timmer 2006; Verikios et al. 2011).6 Relative to spillovers, and endogenous policy responses. mild pandemics, modeled intermediate pandemics show larger losses from reduced labor supply, • Empirical estimates of historical episodes. negative shocks to consumption, financial market Estimates of the impact of actual pandemics disruption, and increases in business costs (Table have the advantage of taking account of the A.3.1.2). actual losses experienced (Barro, Ursua, and Weng 2020; Correia, Luck, and Verner, Severe pandemics. These are defined to have more 2020; Keogh-Brown and Smith 2008; Siu and than 50 deaths per 10,000 population. In model Wong 2004). However, they are often unable simulations, pandemics on this scale reduce GDP to distinguish the effects of the pandemic by 3.6-7.0 percent in EMDEs, and 3.0-8.0 from other factors. percent of GDP in advanced economies (McKibbin and Sidorenko 2006; Burns, van der Simulated outbreaks Mensbrugghe, and Timmer 2006). Studies of simulated pandemics typically use Historical outbreaks mortality rates to classify the severity of the event (Table A.3.1.2).4 Simulations with higher Historical analysis of the economic costs of mortality rates tend to generate larger economic previous pandemics and epidemics is complicated losses. Containment and mitigation measures, by lack of data and the simultaneous presence of including social distancing and restriction of other shocks. For example, the Spanish flu movements, are largely absent from the literature overlapped with World War I, while the swine flu on simulated pandemics. However, a study of the pandemic broke out during the global financial United Kingdom reports that a three-week school crisis. Empirical investigations of these episodes closure in response to a simulated influenza suggest that the results of the model-based outbreak reduces GDP by about 0.5 percentage simulations are in the right range (Table A.3.1.3). point in the first year, in addition to the 0.8-1.7 Thus, the Spanish flu is estimated to have lowered percent loss of output directly attributable to GDP by about 6 percent during 1918-19, with infections (Smith, Keogh-Brown, and Barnett 2011). 5 Here and in the subsequent two paragraphs, the 10,000 figure refers to the whole population, rather than just the infected population. 6 Pandemics can also be differentiated into those with high 4 Mortality rates are more variable than infection rates. Estimates mortality but low infection rates and vice versa. A pandemic with a put the mortality rate of the Spanish flu at more than 500 times that moderate case fatality rate but high contagion could generate of the 2009 swine flu pandemic, and the infection rate only 1.5 times economic losses many times higher than a pandemic with a high larger. fatality but low contagion (Verikios et al. 2011). 164 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 more cyclical economic sectors, such as economies (McKibbin and Fernando 2020). This manufacturing, experiencing output reductions of would be comparable to the estimated 6 percent up to 18 percent (Barro, Ursua, and Weng 2020; global economic losses due to Spanish flu (Barro, Correia, Luck, and Verner 2020). In contrast, Ursua, and Weng 2020). Maliszewska, Mattoo, estimates for more moderate episodes of influenza, and van der Mensbrgghe (2020) estimate losses of such as the Asian flu, which killed approximately 1 2.5-4.0 percent in EMDEs, and 1.8-3.8 percent of million people globally, show GDP losses that are GDP in advanced economies. This results from a largely indistinguishable from normal growth fall in employment, lower consumption, rising volatility (Henderson et al. 2009). SARS is trade costs, and reduced travel and tourism. estimated to have reduced output by 1-4 percent However, these studies do not factor in the full in some of the worst affected economies in the stringency of the controls that were later imposed second quarter of 2003, with less clear impacts on globally. growth during the whole of 2003 (Siu and Wong 2004). Several studies have attempted to separate the losses of output that preventive controls may COVID-19: Short and long-term losses impose from those of a hypothetical COVID-19 outbreak with no such restrictions. Restrictions on Several studies have published initial estimates of retail, travel, and other services industries could the possible economic losses from the COVID-19 reduce output by 25 percent in OECD economies pandemic (Table A.3.1.4). Some take account of during their enforcement (OECD 2020a). Were the economic impacts of the stringent these restrictions to remain in place over three containment and mitigation measures, which months in 2020, this would imply a 6 percent could make the economic impacts of this reduction in annual GDP, equivalent to estimates pandemic much more severe relative to past of lost output in severe simulated pandemics episodes (Boissay and Rungcharoenkitkul 2020).7 (without explicit containment measures) and empirical estimates of losses from Spanish flu. Short-term economic losses Other estimates suggest that growth will be The existing estimates of the economic approximately 5-8 percentage points lower in consequences of COVID-19 have a wide range, advanced economies and EMDEs in 2020 due to reflecting the large uncertainty surrounding the effects of COVID-19 and associated contagiousness, the eventual infection and fatality containment measures. The impact on growth rates, the stringency and duration of policies to would be an additional 3 percentage points if the reduce virus transmission, and other factors duration of containment measures is extended to (Figure A.3.1.1). The first estimates showed small increase the number of lost working days by 50 economic losses. Subsequent estimates were percent (IMF 2020). higher, as the pervasiveness and severity of the A developing strand of the literature models the disease, and the containment and mitigation economic impact of imposing “optimal” measures, became more apparent.8 containment measures to limit the spread of One study puts output losses from the COVID- COVID-19. In a model of the United States, 19 pandemic at 2-6 percent of GDP in EMDEs in consumption falls by 22 percent under optimal the first year, and 2-8 percent in advanced containment measures, compared to just 7 percent if only the effect on labor supply owing to illness and mortality and consumer behavior is 7 Keogh-Brown et al. (2010) estimate that extending a four-week considered (Eichenbaum, Rebelo, and Trabandt school closure to 15 weeks alongside increased levels of prophylactic 2020).9 Another model-based approach applied to absenteeism might double economic losses in a medium-scale pandemic but only reduce the rate of infection by 2-15 percent. the United States finds that targeting containment 8 For example, ADB (2020) initially estimated a “worst-case scenario” of 0.4 percent of global GDP. A similar scenario with 9 The “optimal” containment measures are assumed to reduce moderate global contagion modeled by the OECD (2020c) estimated that world GDP would be reduced by around 1.5 percent relative to deaths as a share of the initial population from 0.4 percent to 0.26 baseline. percent. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 165 measures to older age groups results in a 10 Human capital implications. Schools and percent reduction in output over one year, universities have been closed across the world as compared to a 24 percent loss of output with part of the policy response to slow the spread of universally-applied lockdown measures (Acemoglu COVID-19 (UNESCO 2020). The associated et al. 2020). Age-targeted containment measures learning disruptions, although partially may be particularly effective at limiting output compensated by home schooling and remote losses in EMDEs, which have a smaller share of teaching, are likely to have the most adverse effects their population in vulnerable age groups (Alon et for disadvantaged students, including on health al. 2020). and safety (World Bank 2020d). School closures may cause lasting setbacks to human capital Medium- and long-term impacts accumulation and earnings potential (Psacharopoulos et al. 2020; Wang et al. 2020). Scarring effects and offsetting policy. Most Missed learning opportunities can have larger analysis of the economic costs of pandemics and impacts for low-income families, who often have epidemics focuses on short-term impacts. limited ability to support learning at home (Van However, severe economic contractions of the Lancker and Parolin 2020). Evidence from the magnitude expected in 2020 have historically cast Ebola epidemic in West Africa in 2014 suggests long shadows, typically lowering potential growth that school closures were associated with higher for four to five years (Box Lasting damage of dropout rates and wider gender gaps in recessions; Martin, Munyan, and Wilson 2015; educational attainment (UNDP 2015). Large World Bank 2018). This can result from reduced declines in household income are also associated investment, credit constraints, and slower with increased school dropout rates in EMDEs adoption of new technologies (Anzoategui et al. (Glick, Sahn, and Walker 2016). In addition, 2019; Queralto 2019).10 History suggests that closure of workplaces will deprive many people of good policy may reduce the adverse effects of opportunities to improve skills and productivity severe contractions. Regions implementing through apprenticeships and on-the-job learning. significant containment measures during the Spanish flu are found to have experienced faster Poverty implications. The COVID-19 pandemic rates of growth than other regions in the five years could have severe effects for the poor through following the pandemic (Brainerd and Siegler multiple channels, including greater vulnerability 2003; Correia, Luck, and Verner 2020). to declines in labor and non-labor income, Debt and insolvency risk. The negative shock increased risk of infection and mortality, and from COVID-19 is occurring at a time of lower availability of essential items due to market heightened vulnerabilities in sovereign and private disruptions hit the poor particularly hard (Barnett- sector debt. Historically, episodes of rapidly FAO et al. 2020; Howell and Mobarak 2020; accumulating debt are associated with an increased World Bank 2020d). Although the social likelihood of a financial crisis (Kose et al. 2020). assistance measures that have been implemented The unprecedented scale of the current fiscal by many countries may soften the impacts on stimulus will stretch public sector balance sheets households, they do not fully offset the income even further in many EMDEs, and in some losses from shutdowns. Moreover, the poorest advanced economies. Private sectors may members of society have little capacity to manage experience a wave of insolvencies, posing a threat negative income shocks. Less than 20 percent of to banking systems in various jurisdictions. One of workers are covered by social insurance or the lasting effects of the COVID-19 induced assistance programs in low-income countries recession may be increased financial fragility. (LICs), in part due to their large informal sectors (World Bank 2019b). All this suggests that recent progress on the reduction of poverty and inequality will likely be lost (Sumner, Hoy, and 10 Downward pressure on real rates of return following a pandemic may be particularly persistent, lasting for about 40 years Ortiz-Juarez 2020). (Jordá, Singh, and Taylor 2020). 166 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 Structural changes in production, consumer could lead to changes in the structure of behavior, and work patterns. The fragility of the production on a much larger scale than those global trading system, highlighted by disruptions which past recessions have triggered. Certain in global value chains, and by shortages of restrictions, and adjustments in consumer essential goods in many countries during the behavior, to reduce the risk of infection may prove COVID-19 outbreak, may lead governments and highly persistent (Smith et al. 2014). For example, firms to reassess the benefits of low-cost, off-shore the experience with widespread remote working sourcing. Onshoring efforts will have costs, may permanently change the nature of workplaces. however. Domestically, resources may be diverted Avoidance of crowds may mean that established into capital-intensive import-substitution. Aside business models of popular entertainment are no from this, efforts to avoid viral contamination may longer viable. It may take the travel industry years linger long after the pandemic dissipates. This to recoup the tourist losses it has suffered in 2020. TABLE A.3.1.2 Economic impacts of simulated influenza pandemics Paper Total Channels and shocks Containment Time horizon Method Peak GDP Peak GDP mortality measures loss loss in (per and policy in advanced EMDEs 10,000 response economies (percent) people) (percent) McKibbin and 2.2-22 - Illness: the labor force is reduced by 1.15% No explicit 1 year DSGE/CGE 0.7-7.1 0.7-6.3 Sidorenko - Mortality: 0.02-2.2% of the labor force is containment (2006) killed by influenza or policy - Tourism and trade reductions measures - Financial market disruption - Business costs rise, with the largest increase in sectors requiring more social interaction - Costs shocks for the most affected sectors - Demographics and health care quality affect the illness and mortality rates across economies Burns, 108 - Illness and mortality No explicit 1 year DSGE/CGE 3.0 3.6 Mensbrugghe, - Reduction of 20% in travel, transport, and containment or and Timmer restaurant consumption for 1 year policy measures (2006) Smith, Keogh- - Illness: 35% of working labor force is School closures CGE United - Brown, and infected and prophylactic 1 year Kingdom: 0.3- Barnett (2011) - Case fatality rate of 0.06-0.35% absenteeism 0.6 considering considered in disease only; alternate 3.4-4.3 with scenarios school closures and prophylactic absenteeism Verikios et al. 20 - Illness and mortality - unspecified School closures Multi-year. CGE 3.9 2.4 (2011) - School closures add 75% to lost working Losses largely days unwound after - Reduction of tourism and travel of 70% one year Note: Losses are reported relative to a baseline level of GDP or growth rate, which are approximately equivalent. Median of the first year GDP loss in advanced economies or EMDEs are reported, except Burns, Mensbrugghe, and Timmer (2006), which only reports aggregated GDP impact. “High-income countries” in Burns, Mensbrugghe, Timmer (2006) are presented in the tables as advanced economies and “low and middle-income countries” are presented as EMDEs. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 167 TABLE A.3.1.3 Estimates of economic impacts of historical pandemics and epidemics Event Study Estimation technique Geographical Estimate of immediate Estimate of subsequent coverage impact impact Spanish flu Brainerd and Growth regressions controlling United States n/a +0.2 percentage points Siegler (2003) for the death toll from flu and (state by state) per year growth for 10 other factors as explanatory years following the variables in 1918 for per capita pandemic growth over the subsequent 10 years Spanish flu Karlsson, Nilsson, Growth regressions exploiting Sweden No discernable effect on aggregate and Pichler regional differences in influenza earnings or GDP per capita but a large (2014) incidence and mortality rates increase in poverty rates during 1918-19 Spanish flu Barro, Ursua, and Growth regressions controlling 43 advanced GDP reduced by 6%, consumption Weng (2020) for country-specific factors, war- economies and reduced by 8% related deaths, and influenza- EMDEs related deaths to assess the influenza-specific fall in GDP Spanish flu Correia, Luck, Exploits state and city influenza United States Manufacturing output reduced by 18% Regions with longer- and Verner deaths to assess the specific and employment by 23% by 1919 lasting public health (2020) effects on manufacturing output interventions (46 days and employment longer) experienced a 6% rise in manufacturing employment and a 7% rise in output following the pandemic Asian flu Henderson et al. Event study of industrial Canada 1% fall in industrial production at the (2009) production time of the outbreak SARS Lee and McKibbin CGE modeling exercise Asia-Pacific Reduction in 2003 GDP: (2004) calibrated following the SARS Hong Kong SAR, China -2.6% epidemic China -1.1% Singapore -0.5% SARS Siu and Wong Event study of the effects of Hong Kong Initial 15% decline in year-on-year retail (2004) SARS using sectoral, trade, and SAR, China sales growth during the peak of the tourism data outbreak; tourist arrivals decline 10% at peak; unemployment rate increases by more than one percentage point at peak; tourist arrivals and consumption subsequently recover to pre-SARS levels but no indication that lost growth is recovered SARS Keogh-Brown and Event study examining a range 16 economies, One-quarter losses: Smith (2008) of aggregate and sectoral primarily in China -3% indicators Asia Hong Kong SAR, China -4.75% Canada -1% Singapore -1% Losses are concentrated in travel, leisure activities, and tourism; results do not specify whether quarterly impacts are recovered in subsequent quarters SARS Kholodilin and VAR using monthly data on Eight major News of SARS outbreak reduced Rietha (2020) industrial production and index economies industrial production by 2% in China and of news about flu-like disease 10% in Republic of Korea during the peak of the episode MERS Joo et al. (2019) Event study of tourism, travel, Republic of Permanent losses in affected sectors accommodation, and food Korea equivalent to -0.2% of GDP sectors during 2015 168 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 TABLE A.3.1.4 Preliminary estimates of economic impacts of COVID-19 Paper Total Channels and shocks Containment measures and Time Method Peak GDP Peak GDP mortality policy response horizon loss in loss in (per advanced EMDEs 10,000 economies (percent) people) (percent) IMF (2020) Not - Labor supply falls by 5-8% globally in 2020 - Containment measures 2 years Baseline 7.7 – 101 5.4-81 specified - Financial market disruption and credit implemented in 2020Q2 and WEO tightening in 2020, fading in 2021. Downside withdrawn in 2020Q3; more forecast scenario assumes an additional 75 basis severe case restrictions last and semi- point rise in sovereign credit spreads in 50% longer structural EMDEs and an additional 50 basis point rise - Unconventional monetary DSGE in advanced economies policy is implemented in model - Commodity prices sharply fall in 2020. Oil advanced economies, prices remain around 15% below baseline in alongside fiscal measures 2021 Maliszewska, Not -Illness and mortality reduce labor input by - Effect of containment 1 year CGE 1.8-3.8 2.5-4.0 Mattoo, and specified 3% in year 1 embedded in assumptions van der -Trade costs increase by 25% across all about labor input and Mensbrugghe goods and services consumption reduction (2020); World -Tourism fall implemented with a 50% Bank (2020c) increase in costs -Demand “reallocated” away from high-risk service sectors McKibbin and 20-90 -Illness and mortality: -0.4 to -4.6% fall in - No explicit containment 1 year DSGE/ 2.0-8.0 1.6-6.0 Fernando labor supply measures (year of CGE (2020) -Consumer behavior: initial -0.8 to -4.5% fall - 0.2-2.7% positive shock to shock); in total consumption, including targeted government expenditure reversion tourism and trade reductions - Endogenous fiscal and to -Financial market disruption: 1.1-2.9 monetary response to shocks baseline percentage point increase in equity risk after 1 premium year -Costs of doing business: 25-50% increase, varying by sector -Demographics and health care quality indexes vary mortality rates across economies WTO (2020) - Illness and mortality reduce labor supply -Work from home for 3 months 2 years CGE 4.8-11.1 in year 1 by 1-4% in year 1 to 1 year and school closures (global) -Tourism declines 20-80% over 3-6 months for 3 months -Retail activity declines 5-20% over 3-9 months -Manufacturing falls by a maximum of 80% for 3 months and 40% for 6 months -Trade costs increase: 22.5% rise in cost of services transport and specialized equipment transport over 6-18 months, 70% rise in air cargo costs over 6-18 months Baker et al. Not -Based on U.S. stock return and volatility n/a VAR 3-20 (2020b) specified from February 24 to March 31 (United States)2 Banco de Not -Spillovers from weak global economy - 8-12 weeks of containment 2 years, Hybrid 8.5-14.1 España specified -Weak domestic demand due to measures, reducing domestic with macro (Spain) (2020) containment demand strong model - Discretionary fiscal policy to support the rebound economy in year 2 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 3 169 TABLE A.3.1.4 Preliminary estimates of economic impacts of COVID-19 (continued) Paper Total Channels and shocks Containment Time horizon Method Peak GDP Peak GDP mortality measures and policy loss in loss in (per response advanced EMDEs 10,000 economies (percent) people) (percent) - Zero internal tourism during crisis Social Breisinger et al. Not - 10-15% reduction in 2.1-4.8 n/a 1 year accounting (2020) specified remittance and Suez Canal (Egypt) matrix revenue - Shocks last 3-6 months - Illness and mortality - 0-35 weeks of - Changing consumer demand lockdown Çakmaklı et al. - 18-23% decline in exports DSGE/CGE/ 4.5-11.0 0.2-96 - Only selected 1 year (2020) due to weaker external SIR (Turkey) industries are active demand for final goods and during full lockdown intermediate goods - Labor supply reduced - Household consumption Duan et al. by 10-50% in Q1 and 0.6-1.7 0.24 declines 5-10% in Q1 1 year CGE (2020) rebounded in Q2 (China) -Illness and mortality -Consumer behavior – - Optimal containment Eichenbaum, consumption falls by 7% measures at their peak 2 years – effects 4.7-14.5 Rebelo, and DSGE/CGE/ without containment measures during the year restrict largely dissipate in (United Trabandt 20-30 SIR in year 1; consumption falls by 76% of the population year 2 States)3 (2020) 22% with containment from working measures Note: Losses are reported relative to a baseline level of GDP or growth rate, which are approximately equivalent. Median of the first year GDP loss in advanced economies/EMDEs are reported. 1. Calculated as the deviation of the forecast in the IMF’s April 2020 World Economic Outlook relative to its January 2020 World Economic Outlook Update. Upper bound is calculated under the scenario such that containment measures last 50 percent longer than baseline. Upper bound numbers are rounded to nearest integer. 2. 90 percent confidence interval of year-on-year change on quarterly GDP in the worst quarter. 3. Indicates a GDP impact based on the study’s cited consumption impact of 7 percent without containment and 22 percent with containment, and assuming that consumption accounts for two-thirds of GDP. 170 CH A PTER 3 GLOB A L EC ONOMI C PROSPE C T S I JUNE 2020 ANNEX 3.2 Bayesian vector interest rates, and the EMBI are also assumed to be initially exogenous to growth in each of the autoregression model EMDE regions under consideration, but not A Bayesian vector autoregression model (BVAR) is exogenous to fluctuations in growth of the three employed, in reduced form, to capture past major economies. This is consistent with the three empirical relationships through multiple channels. major economies, and in particular China, These channels operated historically, including accounting for a major proportion of global during previous global synchronized downturns. demand for oil (Baffes, Kabundi, and Nagle Spillovers are estimated using the BVAR model 2020). It is also consistent with research including, in this Cholesky ordering, the GDP- suggesting that monetary policy in the United weighted average of GDP growth in China, the States is a key driver of global financial conditions, Euro Area, and the United States; oil prices in part reflected by the EMBI, which can (unweighted average of Brent, WTI, and Dubai subsequently drive macroeconomic developments prices); a measure of global interest rates (GDP- in EMDE regions (Miranda-Agrippino and Rey weighted average of up to 122 central bank policy 2020). rates) ; a measure of EMDE sovereign borrowing Impulse response functions (IRFs) are estimated costs Q.P. Morgan's EMBI Emerging Market to account for the impact of shocks from growth Bond Index); and GDP-weighted average GDP in the three major economies to each EMDE growth of groups of EMDEs. GDP-weighted aggregate. Due to the identification of the VAR, averages are at 2010 market exchange rates and these shocks also contemporaneously affect oil prices. These variables correspond to those used in prices, interest rates, and the EMBI, allowing VAR-based estimations of spillovers across additional spillovers through commodity and economies and in standard small open economy financial channels to EMDE aggregates. DSGE models that have been used to examine the transmission of shocks across economies (Huidrom et al. 2020). The sample includes quarterly data for 1998-2019. ANNEX 3.3 EMDE vulnerability index The VAR is estimated using four lags, as is standard in quarterly VARs, and using Normal- Methodology. For each country, six vulnerability Wishart priors, taking the form: sub-indexes are calculated that capture the main 4 challenges EMDEs are facing in the current Yt = C +  BiYt −i + t pandemic: health, financial, fiscal, trade, tourism, i =1 and poverty. where Yt 1s an m x 1 vector of endogenous • The financial vulnerability index is compiled variables, C is an m x 1 vector of constants, Bi 1s an from current account and fiscal balances m x m vector of coefficients for each lag of Y , and (percent of GDP); government, corporate, ϵt 1s an m x 1 vector of reduced-form error terms. and external debt (percent of GDP); the share of short-term external debt; and the share of The BVAR is identified using an assumption on foreign-currency-denominated government the exogeneity of the variables with respect to one another in the first quarter following an economic and corporate debt. shock (using a Cholesky decomposition of the • The fiscal vulnerability index is compiled from error variance-covariance matrix). In particular, government debt and fiscal balances (in the identification assumes that a shock to all three percent of GDP) and the share of foreign- major economies' (China's, Euro Area's and U.S.) currency government debt. GDP growth combined is initially exogenous to changes in the other variables, such that they can • The trade vulnerability index is compiled from only affect growth in the three major economies the share of trade in GDP; the share of with a lag of at least one quarter. Oil prices, global commodity exports in total goods exports; the GLOBAL ECONOMIC PROSPECTS I JUNE 20 20 CHAPTER 3 171 share of external value added in domestic ANNEX 3.4 Long-term exports (backward global value chain integration); and the share of domestic value implications of recessions: in foreign exports (forward global value chain Data and methodology integration). Definitions and data. Potential growth is defined • The tourism vulnerability index is derived as in Kilic Celik, Kose, and Ohnsorge (2020) and from tourism revenues as a share of GDP. World Bank (2018) and is based on a production function approach. Annual data is available for up • The health vulnerability index is derived from to 95 EMDEs for 1982-2018. Recessions are the number of beds, nurses and doctors per defined as years of negative output growth, as in 1000 people; the DALY; and health Huidrom, Kose, and Ohnsorge (2016). expenditures as percent of GDP. Depending on data availability for potential • The poverty vulnerability index is derived from growth estimates, this definition yields up to 65 the share of the informal economy in GDP, recession events in 32 advanced economies and up the share of adults with access to emergency to 203 recession events in 75 EMDEs during funds, the share of firms with accounts, and 1982-2018. Hence, outright output contractions the share of firms with bank loans. are rare, at about 6 percent of the country-year pairs in the sample. The indicators are aggregated in three steps. First, Financial crises are defined as having an economic for each indicator, its percentile in the full panel is crisis in the form of systematic banking crises, calculated. Second, for each sub-index, a country- currency crises, or sovereign debt crises as specific sub-index is calculated as the unweighted identified in Laeven and Valencia (2018). During average of all indicators within the sub-index. A 1982-2018, there have been 42 financial crises in sub-index with a value above 50 therefore 26 advanced economies and 27 4 financial crises in indicates that, on average, indicators in this sub- 87 EMDEs in the regression sample-almost 7 index score worse than the median in their largest percent of country-year pairs in the sample. available sample of data. Third, country-specific sub-indexes are aggregated into GDP-weighted Oil price plunges are defined as periods when the averages (at 2010 market exchange rates and average of Brent, WTI, and Dubai oil prices prices) of EMDE sub-indexes. declined by 30 percent or more over a seven- month period. Before 2020, there were six such oil Data. Fiscal indicators are drawn from the price plunges: two supply-driven plunges, when International Monetary Fund's World Economic OPEC agreements were abandoned (1986, 2014- Outlook and the International Institute of Finance. 15) and four demand-driven plunges when the Financial indicators are drawn from the global economy went into a downturn or an International Monetary Fund's World Economic outright recession (1990-91, 1998, 2001, 2008). Outlook, the International Institute of Finance, and the World Bank's External Debt Hub. Trade Methodology. A local projection model (LPM) is indicators are drawn from the OECD's TiVA used to assess and quantify the effects of recessions database and the World Bank's WITS. The on potential and actual growth and output levels tourism indicator is drawn from the World Qorda 2005). Impulse response functions show Tourism Association. The health indicators are the duration, smoothness, and recovery of drawn from the World Bank's World Development potential output levels after the onset of an event. Indicators and the World Health Organization. yi ,t + h − yi ,t −1 = α i + βh eventi ,t The poverty indicators are drawn from World (1) +  p =1 γ p eventi ,t + h − p h −1 Bank (2019d) and the World Bank's Findex database (World Bank 2017). The database is an +ρh eventi ,t −1 + δ dyi ,t −1 + εi ,t unbalanced sample of 197 countries, of which 154 EMDEs, for 1960-2019. where y is log potential output level, dy is potential growth and βh is the main coefficient of 172 CHAPTER 3 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 the interest. The equation controls for country- Acevedo, S. M., M. Mrkaic, N. Novta, E. Pugacheva, specific effects (αi) and persistence of the shock by and P. Topalova. 2018. “The Effects of Weather Shocks including the lagged shock in a forward bias on Economic Activity: What Are the Channels of Impact?” IMF Working Paper 18/144, International correction (Teulings and Zubanov 2014). Monetary Fund, Washington, DC. Five shocks are considered: recessions, financial ADB (Asian Development Bank). 2020. “The crises, oil price plunges, a combination of Economic Impact of the COVID-19 Outbreak on recessions and financial crises, and a combination Developing Asia.” ADB Brief 128, Asian Development of recessions and oil price plunges. The final event Bank, Manila. is estimated for the subsample of 26 energy- Ahmed, S., R. Correa, D. A. Dias, N. Gornemann, J. exporting countries, including 24 energy- Hoek, A. Jain, E. Liu, and A. Wong. 2019. “Global exporting EMDEs. 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CHAPTER 4 Adding Fuel to the Fire: Cheap Oil during the Pandemic G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 183 The outbreak of COVID-19 and the wide-ranging measures needed to slow its advance have precipitated an unprecedented collapse in oil demand, a surge in oil inventories, and, in March, the steepest one-month decline in oil prices on record. In the context of the current restrictions on a broad swath of economic activity, low oil prices are unlikely to do much to buffer the effects of the pandemic, but they may provide some initial support for a recovery once these restrictions begin to be lifted. Like other countries, energy-exporting emerging market and developing economies (EMDEs) face an unprecedented public health crisis, but their fiscal positions were already strained even before the recent collapse in oil revenues. To help retain access to market-based financing for fiscal support programs, these EMDEs will need to make credible commitments to a sustainable medium-term fiscal position. For some of them, current low oil prices provide an opportunity to implement energy-pricing policies that yield efficiency and fiscal gains over the medium term. Introduction By one measure, the European Brent spot price, the oil price fell by 85 percent between January Since March, oil markets have been buffeted by an 22, when the first human-to-human transmission exceptional confluence of demand and supply of COVID-19 was announced, and its trough on shocks that have culminated in an unprecedented April 21—more than at the height of the global collapse in oil prices. The COVID-19 pandemic financial crisis (70 percent from end-August to and the measures deployed to contain its spread— late-December 2008) and more than the plunge quarantines, travel restrictions, shutdowns of during the whole period of end-June 2014 to mid- non-essential activities—have caused severe January 2016 (77 percent).1 The West Texas economic dislocations. Governments have Intermediate oil price fell into negative territory responded with programs to mitigate personal on April 20.2 Since then, Brent oil prices have hardship and disruptions to economic life, and regained some ground but, at around $30 per central banks have cut policy rates and injected barrel on average in the first three weeks of May, liquidity on an extraordinary scale. Many remain less than half their January average and countries have nevertheless suffered deep around the January 2016 trough of the oil price economic contractions, with especially sharp slide of 2014-16. reductions in travel and transportation—both In the context of the current widespread and heavily oil-intensive activities. severe restrictions on economic activity to stem The collapse in energy demand came on the heels the spread of the pandemic, low oil prices are of delays of OPEC and the Russian Federation in unlikely to provide much of a buffer for the global extending a production agreement in early March. economy. Indeed, there are signs that low oil This was followed by outright production prices may even be compounding the damage increases in some OPEC countries (World Bank being done by the pandemic by weakening the 2020). A new agreement between OPEC and non balance sheets of producers. However, high levels -OPEC producers to curb production was reached of inventories suggest that oil prices may remain in early April; however, prices fell further after the low for some time, which may provide some initial announcement. Coupled with the collapse in support for the broader economic recovery once it global energy demand, global oil inventories have gets underway. risen steeply and, by June, remaining storage Against this background, this chapter examines the capacity may be limited (IEA 2020). likely implications of the 2020 oil price plunge by Oil prices have plummeted, recording their largest one-month fall on record in March (Figure 4.1). 1 Another frequently used measure, the Dated Brent spot price, fell by 72 percent over this period, on par with the declines during Note: This chapter was produced by a team led by Franziska these comparator periods for the global financial crisis and the 2014- Ohnsorge and including John Baffes, Alain Kabundi, Gene 16 price slide. Kindberg-Hanlon, Peter Nagle, and Collette Mari Wheeler, with 2 This reflected an expiring futures contract and no physical oil research assistance from Kaltrina Temaj. traded at negative prices. 184 CHAPTER 4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 4.1 Oil price decline putting it in a historical context and drawing Oil prices collapsed in the first quarter of 2020, with March featuring the lessons from the experience of emerging market single largest one-month drop on record. Meanwhile, oil inventories have and developing economy (EMDE) energy risen steeply. exporters and importers during the 2014-16 A. Spot oil prices B. Commodity price changes during plunge. Specifically, the chapter addresses the January 22-April 21, 2020 following questions: • What has been the source of the 2020 oil price collapse? • How does it compare with earlier episodes? • How will low oil prices likely affect the eventual recovery of EMDE energy exporters and importers? C. Largest one-month declines in oil D. Largest cumulative three-month prices since 1970 declines in oil prices since 1970 Contributions. This chapter adds to the literature in several ways. First, it is the first comprehensive analysis of the potential impact of the 2020 oil price plunge on EMDEs and the global economy. Second, it puts the current decline into historical context to allow an assessment of the severity of the plunge. Third, it draws policy lessons from previous episodes of sharp declines in oil prices to examine the implications of the current plunge for EMDEs. E. OECD oil inventories F. U.S. oil inventories Main findings. The chapter presents the following findings. • The steepest drop on record. The collapse in oil prices in March was the steepest one-month drop on record. A precipitous decline in oil consumption in the context of still-robust production has led to a rapid buildup in oil inventories. By June, remaining storage Source: Bloomberg; Energy Information Administration; Haver Analytics; International Energy Agency; Thomson Reuters; World Bank. capacity may be limited. Note: Oil price refers to Brent oil prices. A. January 22, 2020, is the date the first human-to-human COVID-19 transmission was announced. Last observation is May 20, 2020. Data is from Bloomberg and U.S. Energy Information • Predominantly demand-driven oil price decline. Administration. B. “Base metals” is an unweighted average for aluminum, copper, lead, nickel, tin, and zinc. The oil price plunge since late January mainly “Agriculture” shows an unweighted average for corn, rice, and wheat. “Oil price” refers to European Brent spot oil price. Figure shows the change in commodity prices between January 22, 2020, and reflected a collapse in demand arising from April 21, 2020, which was the trough in Brent prices. the pandemic and the restrictions that were C.D. Figure shows the largest declines in oil prices since 1970. Dates on the horizontal axis indicate the date in which the decline occurred. Months with consecutive declines are omitted. needed to stem its spread. Besides triggering a E. Days of demand represent the level of OECD oil inventories at the end of the quarter (government and industry) divided by average daily OECD oil demand. Last observation is 2020 Q1. global recession, these restrictions severely F. Last observation is May 15, 2020. disrupted travel and transport, which account Click here to download data and charts. for around two-thirds of oil demand. Oil demand is expected to decline by about 9 percent in 2020—an unprecedented plunge. Supply-side factors, in particular the initial delay in agreeing to limit production, added to downward pressures on oil prices. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 185 • Output losses in energy-exporting EMDEs. This fiscal revenue bases, and enhance fiscal and latest oil price plunge was preceded by six monetary policy frameworks. previous plunges over the past half-century. During past demand-driven episodes, energy Drivers of the oil price exporters and importers suffered similar initial output losses (about 0.5 percent) that were plunge unwound within three years. In supply-driven oil price plunges, however, energy importers By one measure, the European Brent spot price, did not witness robust growth pickups but crude oil prices fell by 85 percent between January energy exporters witnessed similar initial 22nd (the date the first recorded human-to-human output losses as in demand-driven plunges infection was announced) and their trough of $9 and less than one-third of these losses had per barrel on April 21st before recovering in May been unwound three years later. This lasting to less than half their January average (Figure impact of supply-driven oil price plunges may 4.1).3 The oil market has been hit by an reflect a reassessment of long-term prospects unprecedented combination of demand and for energy exporters. Energy-exporting supply shocks. The pandemic, and the restrictions EMDEs with lower debt, more flexible on business and personal activities imposed to exchange rates, and more diversified export stem its spread, have triggered a global recession, bases suffered smaller short-term output and a steep drop in the demand for oil (Chapter losses. 3). Total oil demand fell by almost 5 percent in the first quarter of 2020, and is projected to • Potential support for global growth early in a decline 20 percent in the second quarter of 2020 recovery. As long as widespread restrictions (IEA 2020). This coincided with a delay in early continue to constrain economic activity across March of OPEC and its partners (OPEC+) to the global economy, low oil prices are unlikely agree an extension of their production cuts (World to provide meaningful support to global Bank 2020). Meanwhile, petroleum inventories growth. If anything, the current episode of have risen rapidly and are expected to reach near- low oil prices holds less promise for a full capacity in June (IEA 2020). sustained boost to global growth than past episodes of low oil prices since energy Demand decline resulting from lockdowns. The exporters entered the current episode with single largest factor driving the collapse in oil eroded fiscal positions and foreign exchange prices has been the sharp reduction in oil demand buffers to support their economies, after arising from government restrictions to stem the having drawn on them to weather the spread of the pandemic. Many countries have previous oil price plunge of 2014-16. That implemented wide-ranging travel bans, sharply said, when current pandemic-related reducing the number of flights. Stay-at-home restrictions ease, excess inventories and low oil orders and a widespread shift to remote working prices could provide some initial support for have caused the number of passenger journeys to the revival of global economic activity. plummet. For example, passenger journeys in China fell by three-fifths compared to their • Need for policy action. Current low oil prices normal level in March, while subway journeys in are an opportunity to review energy-pricing New York fell by more than nine-tenths in April policies, including remaining energy subsidies. A carefully calibrated design, phasing, and communication of such reforms is critical for 3 Another frequently used measure, the Dated Brent spot price, their success. For energy exporters, this most fell by 72 percent over this period, on par with the 70 percent decline during the global financial crisis (end-August to late December 2008) recent oil price decline is yet another reminder and the 76 percent decline during end-June 2014-mid-January 2016. of the urgency to continue with reforms to In late-April, the West Texas Intermediate oil price (a U.S. oil price benchmark) contract for delivery in May temporarily fell below zero diversify their economies. These include on concerns about near-full U.S. storage capacity; however, no measures to strengthen competition, broaden physical oil was traded at negative prices. 186 CHAPTER 4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 4.2 Drivers of the 2020 oil price plunge (Figure 4.2). There has also been a reduction in Government restrictions to stem the pandemic have disproportionately the volume of shipping, both for consumers (most disrupted travel and transport, which accounts for around two-thirds of notably cruises) and container shipping for global oil consumption. Global oil consumption has fallen steeply in the first industry, as a result of shrinking global trade. The half of 2020. The pandemic has also triggered a global recession that has sharply reduced oil demand. The initial failure to agree on an extension of unprecedented reduction in transport in many the production agreement between OPEC and its partners in March countries—which accounts for around two-thirds (although agreement was achieved in April) added to price pressures. of demand for oil—has led to a sharp fall in fuel A. Change in transport demand B. Container shipping throughput volume growth consumption. Demand decline resulting from the economic downturn. The global recession currently unfolding, which is on track to be the steepest in the past eight decades, also reduces global consumption of oil.4 Declines in economic growth can lead to sharp falls in oil prices, because of the high income elasticity of demand for oil. Over the past two decades, a 1 percentage-point decline in C. Final oil consumption, by country D. Global oil demand growth income growth in the United States or China has and sector typically been associated with a 13 and 10 percent fall, respectively, in global oil prices after one year. Supply fluctuations. Oil markets have also been buffeted by production decisions by OPEC and its partners. Following several years of rapid growth in U.S. shale oil production and amid falling global oil demand, the production agreement among OPEC+ partners failed to be renewed in early March.5 This exacerbated the initial decline E. Impact of a 1 percentage point F. Contribution to largest oil price in prices and triggered a further 24 percent fall in growth decline in major economies on declines since 1970 oil prices prices the day after the announcement. In early April, OPEC and its partners announced a new agreement to cut production by a historically large 9.7 percent in May and June that would be unwound gradually. However, the size of the cuts was apparently insufficient to reassure markets that they would offset the decline in consumption, and oil prices fell further following the announcement. Source: Bloomberg; Institute of Shipping Economics and Logistics; International Energy Agency; New York Metropolitan Transportation Authority; Ministry of Transport of China; World Bank. Net effect: Oil price plunge in 2020 mostly A. “NYC subway ridership” is the sum of entries into each station in New York’s Metropolitan Transportation Authority network, which serves a population of 15.3 million people across a 5,000- demand-driven. A structural vector autoregression square-mile travel area surrounding New York City, including Long Island, southeastern New York State, and Connecticut. “China passenger journeys” include all daily passenger journeys in China. model helps decompose the oil price decline in B. Year-on-year growth. Last observation is March 2020. C. Percent of global oil consumption. 2020 into demand- and supply-driven factors D. Shaded area shows IEA estimates for year-on-year demand growth in 2020Q2. (Annex 4.1). The decomposition identifies a E. Based on a Bayesian vector autoregressive estimation. Cumulative response to a 1-percentage- point decline on oil prices on impact or after four quarters. Orange whiskers reflect the 16th-84th percentile confidence bands. The model includes U.S. growth, Euro Area growth, 10-year U.S. government bond interest rate, VIX volatility index, China’s growth, oil price, and commodity-importing or commodity-exporting EMDE growth over 2000Q1 to 2019Q2. The model has four lags. Aggregate 4 See Baffes, Kabundi, and Nagle (2020); Csereklyei, del Mar growth rates calculated using GDP weights at 2010 prices and market exchange rates. F. Chart shows the contribution to explained six-month log changes (in percent) in oil prices. Rubio Varas, and Stern (2016); Gately and Huntington (2002); and Decomposition based on structural vector autoregression estimation (Annex 4.1). For each of the World Bank (2018a). seven episodes, only the month with the deepest six-month oil price plunge is shown (consecutive 5 OPEC+ includes all OPEC countries, together with Azerbaijan, months are not shown). The gap between the total price decline and the contributions of demand and supply represents speculative demand factor. Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, Click here to download data and charts. Sudan, and South Sudan. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 187 positive supply shock—such as would have been FIGURE 4.3 Oil markets during past recessions and caused by the failure of the OPEC agreement in travel disruptions early March—as an event that lowers prices and at Travel disruptions in the aftermath of the 2001 terrorist attacks on the the same time raises both global oil output and United States contributed to a decline in oil prices. During global recessions, oil prices tended to fall, with the largest declines in the current industrial production. In contrast, a negative global recession. demand shock—such as would have been caused by travel restrictions or falling global growth—is A. Oil price B. Oil consumption growth around an event that lowers oil prices amid falling oil recessions output and industrial production. The decomposition suggests that two-thirds of the price decline in the six months ending in April 2020 has been due to falling demand.6 Comparison with previous periods of disruptions Source: Bloomberg; BP Statistical Review; Energy Information Administration; International Energy This time, the widespread economic weakness and Agency; World Bank. travel disruptions have been associated with a A. The y-axis is a price index, with “100=t” indicating prices at the start of the events. The x-axis shows the passage of time (in days). Start dates for the two events are the first trading day before a considerably steeper oil price collapse than similar major event occurred: September 10, 2001, for 9/11; and January 22, 2020, for COVID-19. Swath shows the four global recessions: 1974-75, 1981-82, 1990-91, and 2008-09. For the first two episodes in the past (Figure 4.3). For 2020 as a recessions, daily data were unavailable, so monthly percent changes were taken (assuming each month lasts 22 working days). whole, oil demand is expected to drop by an B. Dates of recessions are taken from Kose, Sugawara, and Terrones (2020). The four recessions included are: 1974-75; 1981-82; 1990-91; and 2008-09."Before" shows average annual growth rates unprecedented 9 percent—more than twice as in commodity consumption over the three years prior to the recession. "During" shows average much as during any previous global recession or annual growth rates of recession years. Note that in 1980 a global slowdown occurred with similar negative growth rates in consumption; as such the "Before" period covers 1977-79. oil-specific demand slowdown. Click here to download data and charts. Global recessions. Prior to this year’s event, there have been four global recessions over the past 70 Oil consumption also typically fell during these years: 1975, 1982, 1991, and 2009 (Kose and episodes. The largest decline in oil consumption Ohnsorge 2019; Kose, Sugawara, and Terrones occurred in 1980-82, when consumption fell by a 2020). In each of these episodes, there was a cumulative 9 percent from its peak in 1979. The contraction in real per capita global output and supply-driven spike in oil prices in 1980, around broad-based weakness in multiple indicators of the revolution in the Islamic Republic of Iran, global economic activity. contributed to the global recession in 1981-82, which further depressed oil consumption. In During these recessions, oil prices (and other contrast, the two most recent recessions saw much industrial commodity prices) fell. The sharpest smaller declines in oil demand. For the 2008-09 declines occurred during the global financial crisis, recession, this reflected the strong shift in global when oil prices fell by nearly 60 percent over three oil consumption towards China, which continued months. In most of these recessions, oil prices to grow robustly through the global financial crisis remained below pre-recession levels for several (Stocker et al. 2018). years. Travel disruptions. Measures implemented in 2020 to limit the spread of the pandemic bear 6 In contrast, other research finds that only around one-third of some similarities to the widespread travel the fall in oil prices can be attributed to demand conditions, while disruptions in the aftermath of the terrorist attacks supply factors explain most of the remainder of the fall (Groen and Nattinger 2020). Instead of industrial production as a proxy for oil on the United States on September 11, 2001. U.S. demand, these other models use asset prices which have considerably airline passenger traffic fell by 30 percent in the more resilient than real activity indicators (in part reflecting monetary immediate aftermath of the attacks, and remained policy measures). If anything, other factors, in particular the widespread anticipation of a failure in negotiations, point to an even as much as 7 percent lower after two years (Ito and greater role of demand than estimated here. Lee 2005). The attacks also resulted in a sharp 188 CHAPTER 4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 spike in uncertainty and prolonged the recession that might have triggered upturns (Cashin, following the dot-com collapse in the United Mohaddes, and Raissi 2014; Kilian 2009; States, and hence the slowdown in global activity. Peersman and Van Robays 2012). In the aftermath of the 9/11 attacks, oil prices fell • Timing. During oil price plunges, the output sharply (by one-third over the following two losses in energy exporters materialized more months), while other commodity prices were quickly than output gains in energy importers, largely unaffected. Travel disruption dispro- resulting in short-term global growth portionately affected oil consumption but slowdowns (de Michelis, Ferreira, and heightened uncertainty and slowing growth also Iacovelli, forthcoming). weighed on oil demand. However, the oil price decline was short-lived: within six months, oil • Asymmetries. Uncertainty, frictions, and prices had returned above their pre-attack levels. asymmetric monetary policy responses can Oil consumption growth averaged close to zero in create asymmetries that increase the damage the three quarters following the attacks, down to energy exporters compared with the from an average of 1.5 percent (y/y) in the benefits to energy importers.9 previous four quarters. Past oil price plunges Implications of oil price Features of past plunges. Since 1970, the global plunges for the global economy has witnessed seven oil price plunges economy when oil prices fell by 30 percent or more over a six-month period: 1985-86, 1990-91, 1998, 2001, Other things being equal, low oil prices might be 2008-09, 2014-16, and 2020. expected to help boost global growth, including by stimulating energy-intensive activities such as • Drivers. Oil price plunges in 1990-91, 1998, travel and transportation. Moreover, by 2001, and 2008-09 were one-half (1998) to dampening inflation, lower prices would also give entirely (2008-09) demand-driven, whereas central banks more room to ease monetary policy the oil price plunges of 1985-86 and 2014-16 (Baffes et al. 2015; Ratti and Vespigniani 2016).7 were four-fifths and two-thirds supply-driven, However, these effects would vary across respectively (Figure 4.2).10 countries: energy exporters in particular would • Persistence. Oil price plunges associated with suffer real income losses, which would dampen global slowdowns were short-lived (1998, consumption and investment. 2001), with oil prices regaining their pre- In practice, however, all of the oil price plunges plunge levels in less than four years. In since 1970 have been accompanied by global contrast, oil price plunges around global recessions, global slowdowns and, in some cases, recessions (1990-91, 2008-09) and largely widespread financial crises.8 Three reasons may supply-driven plunges (1985-86, 2014-16) account for this. were followed by more prolonged periods of low prices (Figure 4.4). • Sources. Many of the past oil price plunges were themselves responses to economic downturns rather than independent shocks 9 See Hamilton (2011); Hoffman (2012); Jimenez-Rodriguez and Sanchez (2005); and Jo (2014). 10 The 1990-91 plunge was almost equally demand- and supply- driven. It reflected a global recession as well as an unwinding of 7 Depending on the source of the fall in oil prices, it may also supply concerns triggered by Iraq’s invasion of Kuwait. This episode depress equity markets (Kang, Ratti, and Vespigniani 2016). differs from others in that it unwound a short-lived price spike at the 8 The long-term benefits that may have ensued go beyond the beginning of the first Gulf War whereas other episodes followed scope of this section. extended periods of price increases or price stability. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 189 • Depth. Similarly, oil price plunges associated FIGURE 4.4 Oil market developments during past oil with global slowdowns (1998, 2001) were price plunges shallower than those around global recessions The oil price plunge in 2020 is only the latest in a series of plunges since (2008-09, 1990-91) or those associated with 1970. During two of these (1985-86, 2014-16), supply remained robust or increased as did demand. During three others (2000-01, 2008-09, 1997- largely supply-driven plunges (1985-86, 2014- 98), demand dropped sharply and, in response, production was reined in. 16). The oil price plunge of 2014-16 was particularly protracted. A. Global oil price B. Global oil production Impact of past plunges. Most of these plunges were triggered by weakening global growth, which contributed to the decline in oil prices, and were followed by slow recoveries (Annex 4.2). Although virtually all episodes of significant oil price declines since 1984 have been accompanied by monetary policy loosening in advanced economies, several were accompanied or followed by financial market strains. C. Global rig count D. Oil demand growth Empirical estimates. A local projections model is estimated for 155 EMDEs, of which 36 are energy exporters, for 1970-2018 (Annex 4.3). The model estimates the response of real output, investment, and consumption to the seven oil price plunges described above over the following five years. It distinguishes between demand-driven (1998, 2001, 2008-09) and supply-driven oil price plunges (1985-86, 2014-16). Source: Baker Hughes; Energy Information Administration; International Energy Agency; World Bank. Note: Horizontal axis shows months (A-C) or years (D) from pre-plunge peak in t = 0. Plunges begin (t = 1) in March 2020, July 2014, September 2008, December 2000, November 1997, and November • Demand-driven versus supply-driven oil price 1990, and December 1985. All oil prices scaled such that 100 = pre-plunge peak. plunges. EMDE output evolved differently in D. Refers to annual growth in refined petroleum consumption, scaled such that 100 = pre-plunge growth (1989, 1996, 1999, 2007, 2013). demand-driven and supply-driven oil price Click here to download data and charts. plunges. In the first year of both supply- and demand-driven oil price plunges, EMDE output fell by about 0.5 and 0.3 percent, • Demand-driven plunges: Similar impacts on respectively (Figure 4.5). The recovery, energy exporters and importers. Demand-driven however, differed: output recovered after oil price plunges were associated with global demand-driven oil price plunges and, three recessions or slowdowns, which tended to be years later, had returned to the baseline; after associated with an initial output decline in supply-driven oil price plunges, EMDE EMDEs (0.3 percent) in the year of the output did not recover and remained below plunge that was recouped within three years. the baseline three years later.11 Output, investment, and consumption in energy exporters and other EMDEs recovered together with oil prices. 11 Based on vector autoregression models, existing studies find wide ranges of impacts. A demand-driven 30 percent oil price decline • Supply-driven plunges: Lasting impact in energy reduces output by 0-5 percent over a year or two, an oil-specific exporters. Supply-driven oil price plunges were demand decline reduces output by 0.3-4 percent over a year or two, associated with initial output losses in energy and a supply-driven oil price decline reduces output by 0-15 percent over a year or two. These studies include Aastveit, Bjørland, and exporters of somewhat larger magnitude than Thorsrud (2015); Baumeister and Hamilton (2019); Baumeister and those associated with demand-driven plunges Peersman (2013); Cashin, Mohaddes, and Raissi (2014); Killian (0.5 percent in the first year). Almost three (2009); Kilian and Murphy (2014); Mohaddes and Raissi (2019); and Peersman and Robays (2012). quarters of these output losses persisted into 190 CHAPTER 4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 4.5 Macroeconomic developments in EMDEs the third year. Three years after the shock, during past oil price plunges investment and consumption in energy The global economy has witnessed seven oil price plunges since 1970. exporters were still 1.4 and 0.6 percent, Supply-driven oil price plunges have been followed by lasting contractions respectively, below baseline levels. These in EMDE output as a result of steep output losses in energy exporters that were not offset by output gains in energy importers. Demand-driven lasting losses may have reflected a reassessment plunges were followed by shorter-lived output contractions. Those energy of long-term growth prospects of energy exporters with higher debt and fixed exchange rates witnessed greater exporters in supply-driven oil price drops. output losses. Meanwhile, growth gains in energy importers A. Cumulative impulse response of B. Cumulative impulse response of were gradual and delayed (de Michalis, output, by type of oil price plunge output to demand-driven oil price Ferreira, and Iacovelli forthcoming). plunges • Policies mattered. Energy-exporters tend to be particularly hard-hit by supply-driven oil price plunges, but even in those plunges, energy- exporting EMDEs with flexible exchange rates, lower debt, and more diversified export bases suffered smaller output losses than those with fixed exchange rates, higher debt, and less diversified export bases.12 C. Cumulative impulse response of D. Supply-driven oil price plunges: The 2014-16 oil price plunge output to supply-driven oil price Cumulative investment and plunges consumption responses in energy- exporting EMDEs In late 2014, the 50 percent decline in oil prices between June and November 2014 was expected to lift global GDP by around 0.3-0.7 percent (Arezki and Blanchard 2014). The cheaper cost of a critical input into global production was expected to raise global activity, and the transfer of income and wealth from energy-exporting economies with higher savings rates to energy- importing economies, with higher propensities to spend, was also expected to boost global demand E. Demand-driven oil price plunges: F. Supply-driven oil price plunges: (Baffes et al. 2015; World Bank 2015a). While Cumulative output responses of Cumulative output responses of energy-exporting EMDEs energy-exporting EMDEs lower oil prices were expected to depress investment in the oil industry, this was expected to be more than offset by the boost to consumption and energy-intensive sectors (transportation, manufacturing, and agriculture). However, the expected “shot in the arm” to global growth was slow to materialize. Instead, in 2016, global growth slowed to a near-post-crisis low of 2.6 percent. Global growth only picked up in Source: Haver Analytics; International Monetary Fund; World Bank. Note: Cumulative impulse responses of real output (A, B, C, E, F), real investment (D), and 2017-18 once considerable policy stimulus was consumption (D) in EMDEs (A, B, C) or in energy-exporting EMDEs (D, E, F) in response to an oil price plunge, based on a local projections model estimated for 155 EMDEs, of which 36 are energy put in place in major economies. The exporters (oil, gas, or coal), for 1970-2018 (Annex 4.3). Numbers on the horizontal axes indicate years since the oil price plunge, which occurs at t=0. Oil price plunges of more than 30 percent over disappointing short-term growth trajectory seven months occurred in 1985-86 (supply-driven), 1990-91 (demand-driven), 1998 (demand-driven), reflected several factors. 2001 (demand-driven), 2008-09 (demand-driven), and 2014-16 (supply-driven). E.F. Output declines in the year following the oil price plunge. High (low) debt is government debt above (below) 30 percent of GDP for upper-middle and lower-middle income economies and 70 percent of GDP for high-income economies. Fixed exchange rates are as defined in IMF’s Annual 12 In demand-driven plunges, similar patterns emerged but Report on Exchange Arrangements and Restrictions. Click here to download data and charts. differences were less pronounced and there was wide heterogeneity between countries. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 191 Output and investment slump in energy FIGURE 4.6 Impact of 2014-16 oil price plunge on energy exporters. The impact of the oil price plunge of exporters 2014-16 on commodity exporters was severe. The oil price plunge of 2014-16 forced many energy exporters into Growth slowed in more than 70 percent of procyclical fiscal and monetary tightening. Market intervention to support currencies caused a substantial decline in foreign exchange reserves. energy-exporting EMDEs in 2015 and 2016, with Those with more flexible exchange rates and greater export diversification many facing declining consumption and had milder output losses. investment (Figure 4.6). Since energy-exporting countries are generally less diversified than other A. Cumulative output increase for B. Share of energy-exporting EMDEs commodity exporters, they are particularly energy-exporting EMDEs, 2014-16 with increasing/decreasing growth vulnerable to oil price declines (Aslam et al. 2016). • Fiscal policy tightening in energy exporters. Many EMDE energy exporters, relying heavily on hydrocarbon revenues, were forced to tighten fiscal policies to realign spending with revenues, despite rising economic slack and diminishing long-term growth prospects.13 Some were able to at least partially mitigate exchange rate and fiscal pressures by drawing C. Foreign exchange reserves and D. Change in fiscal balance in energy on sovereign wealth funds (World Bank nominal effective exchange rate exporters, 2014-16 appreciation of energy exporters, 2015a). 2014-16 • Monetary policy tightening in energy exporters. Fiscal policy tightening was often compounded by monetary policy tightening, and exchange rate market intervention to support currencies or currency pegs. As foreign reserves eroded, several countries eventually adopted more flexible exchange rate regimes as part of the adjustment to low oil prices. A small number of countries with Source: Bank for International Settlements; Haver Analytics; International Monetary Fund; United Nations Conference on Trade and Development (UNCTAD); World Bank. severe liquidity pressures resorted to A.C.D. Unweighted averages. Whiskers indicate minimum-maximum ranges. A. “Above average concentration” and “below average concentration” groups are defined by countries unconventional measures (Sommer et al. above or below the sample average for export concentration in 2016. Concentration index measures 2016). the degree of product concentration, where values closer to 1 indicate a country’s exports are highly concentrated on a few products. The average for the sample is 0.6, where 1 is the most concentrated. Exchange rate classification is based on the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions database, in which countries are ranked 0 (no separate legal tender) to 10 Adverse spillovers from the slowdown in energy (free float). “Pegged” refers to countries with either a hard or soft peg, which is denoted by a ranking exporters. Headwinds in Russia and the Gulf of 1 to 6, while “floating” denotes those with rankings of 7 to 10 and includes countries with horizontal bands and other managed arrangements. Sample includes 34 (exchange rate) or 34 (concentration) Cooperation Council (GCC) economies reduced energy-exporting EMDEs. B. Aggregate growth rates calculated using GDP weights at 2010 prices and market exchange rates. within-region flows of trade, remittances, foreign Increasing/decreasing growth are changes of at least 0.1 percentage point from the previous year. Countries with a slower pace of contraction from one year to the next are included in the increasing direct investment, and official grants (World Bank growth category. 2015a, 2016c). Energy-exporting low-income C. Nominal effective exchange rate and foreign reserve levels indexed to 100 in January 2014. Change in official reserve assets from 2014 to 2016. Last observation is December 2016. countries (Chad, South Sudan) were hit D. Sample includes 28 oil-exporting EMDEs (excludes Albania, Brunei Darussalam, Ghana, Libya, Myanmar, South Sudan, and Turkmenistan). Change in overall fiscal balance is measured from 2014- particularly hard, as the effect of the oil price 16. “Above average” and “below average” oil revenue groups are defined by countries above or below the sample average of oil revenues as a share of GDP based on 2014 data. shock was exacerbated by conflict and Click here to download data and charts. deteriorating security conditions. 13 See Danforth, Medas, and Salins (2016) and World Bank (2016a, 2016b, 2017a). The effects of the price shock were also exacerbated by idiosyncratic factors, including sanctions on Russia and conflict and geopolitical tensions in the Middle East and North Africa region. 192 CHAPTER 4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 4.7 Impact of 2014-16 oil price plunge on the 2014; Caldara, Cavallo, and Iacoviello 2019). largest energy importers This reflects less oil-intensive energy mixes, The oil price plunge of 2014-16 provided limited boost to activity in China, less energy-intensive consumption, and energy which tends to use more coal than oil for energy generation. In the United price controls that limit the pass-through of States, the shale oil industry slowed sharply. world prices to domestic retail prices. In addition, many countries seized the A. Consumption of fuels, 2018 B. Contribution of mining investment to U.S. GDP growth and U.S. industrial opportunity to lower energy subsidies (Box production growth 4.1). While this improved fiscal and external positions, it dampened the benefit to activity in energy-importing EMDEs. • Policy tightening in energy-importing EMDEs. A number of non-oil commodity exporters and commodity importers raised monetary policy rates during 2015–16 to stem currency depreciation. Others reacted to above-target Source: BP Statistical Review; Federal Reserve Bank of St. Louis; U.S. Bureau of Economic inflation. In some cases, fiscal deteriorations Analysis; World Bank. amid slow growth reduced government A. Oil consumption is measured in million tonnes; other fuels in million tonnes of oil equivalent. Renewables are based on gross generation from renewable sources including wind, geothermal, revenues and required spending cuts. solar, biomass, and waste, but not accounting for cross-border electricity supply. B. Mining investment is real private fixed investment of nonresidential structures for mining exploration, shafts, and wells. • Investment in the United States. In the United Click here to download data and charts. States, the boost to private consumption from lower oil prices was partly offset in the short run by a sharper-than-expected contraction in • Stalled recovery in energy-importing EMDEs capital spending in the energy sector and advanced economies. Growth also slowed (Baumeister and Kilian 2016a). This in most energy-importing economies in investment is highly price elastic (Bjørnland, 2015-16 (Figure 4.7). Nordvik, and Rohrer 2017; Cakir Melek 2018; Newell and Prest 2019): mining • China’s energy mix and rebalancing needs. investment halved in the two years that China is the second-largest oil importer in the followed the mid-2014 oil price plunge, world, but the share of oil in its overall energy lowering growth by 0.2 percentage point in consumption is the lowest among G20 both 2015 and 2016. economies. Regulated fuel costs and a low energy and transportation weight in consumer The 2020 oil price plunge baskets limit real income gains for consumers from lower oil prices (World Bank 2015a). Low oil prices are likely to provide, at best, The oil price plunge also coincided with a temporary initial support to growth once policy-guided near halving of investment restrictions to economic activity are lifted and growth, which tends to be resource-intensive, until excess inventories are unwound. In the very to ease growth to a more sustainable level.14 short term, restrictions to stem the pandemic are likely to close off the main channel for low oil • Lower sensitivity of other energy-importing prices to benefit growth, by limiting transport and EMDEs to oil shocks. Activity in energy- other energy-intensive activities. However, even importing EMDEs is less responsive to oil once these restrictions are lifted and energy price shocks than that in major advanced demand recovers, the current demand-driven oil economies (Aastveit, Bjørnland, and Thorsrud price plunge is likely to be associated with deep and lasting output losses. More than in previous demand-driven oil price plunges, the adverse 14 See Huidrom, Kose, and Ohnsorge (2017); Kang and Liao impacts on energy exporters—regardless of (2016); and World Bank (2016a). whether they are advanced economies or G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 193 BOX 4.1 Reforms after the 2014-16 oil price plunge The 2014-16 oil price plunge triggered significant reforms. In energy exporters, the main focus was on encouraging diversification and putting public finances on a sounder footing. Both energy exporters and importers cut energy subsidies. Current low oil prices may provide a window of opportunity to put in place mechanisms that permanently eliminate energy subsidies. The 2014-16 oil price plunge forced many energy Saudi Arabia’s fiscal non-oil revenues improved from 7.7 exporters into procyclical fiscal tightening that deepened percent of GDP in 2016 to 10 percent of GDP in 2019. their downturns. Many energy exporters recognized an Nigeria identified several sectors to promote greater urgent need to render both their economies and their diversification of export earnings and government revenues public finances more resilient, and embarked on reforms (Nigeria Ministry of Budget and National Planning 2017). to encourage diversification, strengthen non-oil revenues, Kazakhstan’s “100 Concrete Steps” program, adopted in and cut poorly targeted subsidies (Stocker et al. 2018; 2015, aimed to diversify the economy and improve Figure 4.1.1). Energy-importing EMDEs also seized the competitiveness and transparency. By the start of 2020, opportunity of low oil prices to cut energy subsidies. This Kazakhstan has completed more than half of these 100 box examines these reforms in greater detail, answering the steps, including efforts to improve governance. However, following two questions: efforts to boost industrialization have encountered challenges, while plans to increase private land ownership • Which reforms did EMDE energy exporters embark have been delayed. on? Efforts to encourage diversification have continued and • Which reforms did EMDE energy importers embark include: reducing labor market rigidities (for example, on? Saudi Arabia, Oman, Qatar), supporting foreign and private investment (for example, Saudi Arabia), expanding Reforms in energy exporters infrastructure investment (for example, Malaysia), improving the business environment (for example, Algeria, Energy exporters initiated economic diversification Brunei Darussalam, the GCC countries, Kazakhstan, programs, energy subsidy reforms, and measures to Nigeria, Russia), expanding deeper trade integration strengthen non-energy government revenues. within the Eurasian Economic Union (for example, Russia), and strategic investment plans in renewables Diversification programs. Before the current plunge in oil energy (Azerbaijan, the GCC countries). However, in prices, hydrocarbon sector activity represented more than some cases, the structural reform agenda has faced one-third of GDP in a number of countries in Central legislative or implementation delays (for example, Algeria, Asia, Sub-Saharan Africa, and, in particular, the Middle Kazakhstan). East. Oil production represented the majority of government revenue and exports in most energy-exporting Energy subsidy reform. The sharp reduction in EMDEs in 2013. This suggests an untapped potential for government revenues among energy-exporting EMDEs led greater diversification of exports and government revenues, to an increased emphasis on reducing energy subsidies to which would bolster long-term growth prospects and restore fiscal space, discourage wasteful energy improve these economies’ resilience to external shocks consumption, and reallocate spending to programs that (Hesse 2008; IMF 2016; Lederman and Maloney 2007). better target the poor (IMF 2017b). Between mid-2014 and end-2016, more than half of energy-exporting Following the 2014-16 oil price collapse, several large EMDEs reformed energy subsidies, including countries in energy-exporting EMDEs laid out medium- to long-term the Middle East and North Africa, Sub-Saharan Africa, plans to reduce their reliance on the energy sector. As part East Asia, Latin America, and Central Asia.1 A number of of Saudi Arabia’s 2016 Vision 2030 plan, the National energy exporters have also reduced utility subsidies Transformation Program targeted an increase in non-oil commodity exports and non-oil government revenues (Kingdom of Saudi Arabia 2016; World Bank 2016c). 1 Energy subsidies were reformed between mid-2014 and late 2017 in Algeria, Bahrain, Cameroon, Ecuador, Gabon, Ghana, the Islamic Republic of Iran, Iraq, Kazakhstan, Kuwait, Malaysia, Nigeria, Oman, Note: This box was prepared by Collette Mari Wheeler, with Qatar, Saudi Arabia, Sudan, Trinidad and Tobago, Turkmenistan, the research assistance from Kaltrina Temaj. United Arab Emirates, and Yemen. Reforms in Angola, Indonesia, and Nigeria, were, however, not sustained once oil prices rose. 194 CHAPTER 4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 4.1 Reforms after the 2014-16 oil price plunge (continued) although, during the COVID-19 pandemic, subsidies were Egypt, Mexico).2 In response to the COVID-19 raised again in some countries (for example, Gabon, pandemic, some governments have provided fuel price Indonesia, Oman, Saudi Arabia, United Arab Emirates). discounts to some sectors (for example, Egypt) or increased subsidies to vulnerable households (for example, In some cases, subsidy reform was a significant break from Guatemala, Montenegro, Ukraine). past policy (Krane and Hung 2016; World Bank 2017b). Encouragingly, the design and implementation of recent Other reforms. Other reforms have aimed to raise energy subsidy reforms have been superior to past efforts, revenues, with some countries increasing taxes on energy which were poorly phased and hampered by insufficient or energy-dependent sectors such as transportation (for communication to the public about the rationale for example, Bangladesh, China, Egypt, Mozambique, reform (Asamoah, Hanedar, and Shang 2017; Clements et Rwanda, South Africa, Vietnam; IEA 2015; IMF 2016; al. 2013). In many cases, recent reforms have also helpfully Kojima 2016). These steps also included measures to avoid included measures to mitigate the impact on the poor and energy subsidies reemerging if oil prices rebound— to strengthen social safety nets (for example, Algeria, automatic pricing mechanisms or full energy price Angola, Saudi Arabia). More recently, Nigeria announced liberalization have been common (for example, China, plans to eliminate energy subsidies. However, revenue- Côte d’Ivoire, India, Jordan, Madagascar, Mozambique, enhancing energy price reforms have remained absent in Mexico, Thailand, Ukraine; Asamoah, Hanedar, and some countries (for example, Cameroon). Shang 2017; Beylis and Cunha 2017).3 Fiscal reforms. Several countries have implemented tax reforms to compensate for the loss of government revenues Conclusion and to insulate themselves from future oil price Remaining challenges. Some of these policies have yet to fluctuations (World Bank 2018c). This has included the bear fruit. Notwithstanding fiscal and energy subsidy introduction of taxes on goods and services or value-added reforms in energy exporters, fiscal break-even prices—the taxes (for example, Bahrain, Malaysia, Saudi Arabia, the oil prices at which government budgets are balanced—in United Arab Emirates), as well as raising existing VAT or almost all energy-exporting EMDEs exceed current prices, excise tax rates (Bahrain, Colombia, Oman, Saudi Arabia, often by considerable margins. Energy subsidies still United Arab Emirates). Russia has implemented a fiscal represented an average of 4 percent of GDP as of 2018 rule that targets a primary deficit of 0.5 percent of GDP at among energy-exporting EMDEs, many of which the benchmark oil price of $40 per barrel (in 2017 U.S. implemented reforms 2014-16 (Figure 4.1.1). In 2019, dollars). Any excess fiscal resources that are generated from the share of commodity exports in total goods exports higher oil prices are saved in the National Welfare Fund. remained as high now as in 2013, before the last oil price The assets from this fund have already helped Russia plunge. The recent oil price plunge may provide further support its economy and extend benefits to vulnerable momentum to proceed with planned reforms and deepen households during the recent pandemic. However them once the immediate health crisis subsides. Energy implementation of fiscal reforms has stalled in some cases importers, in contrast, should take advantage of lower (for example, Kuwait, Oman, Qatar), while exemptions energy prices to lower subsidies—which averaged over 2.5 have limited revenue growth in some others (Malaysia). percent of GDP in 2018—and utilize these resources to finance urgent health care needs. In energy exporters and Reforms in energy importers importers alike, there is an opportunity to put in place Energy subsidy reform. Like energy-exporting EMDEs, reforms now that are non-binding in the short term but energy-importing EMDEs took advantage of declining oil address long-standing inefficiencies and fiscal costs in the prices to begin dismantling energy subsidies, which tend to long term. disproportionately benefit those with higher incomes. In addition, they can crowd out public investment and encourage more intensive use of fossil fuels (Arze del 2 Mexico has a diversified export base and, hence, is classified as an Granado, Coady, and Gillingham 2012). Several countries energy importer. have implemented such reforms in response to the 2014- 3 In Mozambique, the elimination of fuel subsidies, the introduction 16 oil price plunge (for example, China, the Arab Republic of an automatic fuel price adjustment, and increased tariffs on electricity of Egypt, Mexico, Morocco, Tunisia), but slippages in and public transportation, contributed to the 2 percentage points of GDP implementation have occurred in some cases (for example, narrowing of the primary fiscal balance between 2016 and 2018. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 195 BOX 4.1 Reforms after the 2014-16 oil price plunge (continued) FIGURE 4.1.1 Reforms since 2014 Energy exporters have implemented reforms to strengthen business climates and reduce energy subsides, but current oil prices remain below fiscal and external break-even prices in most energy exporters. A. Number of reforms in energy exporters B. Energy subsidies C. Fiscal and external breakeven prices for selected energy exporters, 2020 Sources: International Energy Agency; International Monetary Fund; World Bank Doing Business. A. Sample includes 35 energy-exporting EMDEs. B. Sample includes 25 energy-exporting EMDEs and 14 energy-importing EMDEs. C. Breakeven prices refer to the oil price at which either the fiscal balance or the current account balance is zero in 2020. Dashed line indicates the average of daily Brent oil prices from May 1, 2020, to May 20, 2020. Click here to download data and charts. Fiscal space generated by subsidy reforms. Replacing • Entrenching reform. Reforms formally embedded in energy subsidies with expanded and better-targeted social legislation may be more likely to be enforced and safety nets, coupled with structural reforms, can improve sustained once oil prices rise again. fiscal positions while supporting low-income households.4 Policies to reduce subsidies can help promote growth • Transparency. Reforms are more likely to be sustained because fiscal savings generated by lower subsidies can if price setting can be de-politicized (Inchauste and fund productivity-enhancing education and infrastructure. Victor 2017). This can be achieved with a transparent For example, in Egypt, fiscal savings from the energy formula for setting energy prices. subsidy reforms were redirected towards social spending (ESMAP 2017b). These policies can also foster low-carbon • Frequent price adjustments. A formula with more transition and promote green energy (Monasterolo and frequent price adjustments can help avoid larger and Raberto 2019; Mundaca 2017). For energy-exporting more disruptive price changes, especially once oil EMDEs, eliminating costly energy subsidies could help prices return to more normal levels. offset the collapse in revenue from oil extraction given that oil prices are well below their fiscal breakeven points. • Tax design for price stability. A transparent formula for frequent price adjustments can be accompanied by Increasing the chances of success of subsidy reform. combination of fixed and variable taxes that can Energy subsidy reform raises formidable political-economy smooth price volatility, such as in the case of Chile. challenges (Inchauste and Victor 2017). The different prongs of reforms, however, need to be carefully sequenced • Supporting reforms. Subsidy cuts that are accompanied and communicated to avoid delays, social unrest or by cuts in the cost of other household public services, reversals, as has been the experience in some client such as school or public transport fees, or increases in countries (for example, Ecuador; Worley, Pasquier, and other social benefits can help build public support for Canpolat 2018). Reforms may prove more lasting if a few reform. In India, for example, the removal of price principles are observed in their implementation. controls was accompanied by targeted cash transfers and in Brazil by targeted assistance to low-income households for energy conservation (Deichmann and 4 For details, see Coady et al. (2017, 2019); Guénette (2020); Stocker Zhang 2013). Such supporting reforms need to be et al. (2018); and World Bank (2014, 2015a, 2015b). accompanied by improved capacity to implement benefit programs (Inchauste and Victor 2017). 196 CHAPTER 4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 BOX 4.1 Reforms after the 2014-16 oil price plunge (continued) • Public awareness. Awareness campaign can highlight competition and the potential for new entrants signifi- the benefits of subsidy reforms, in terms of giving cantly lowered their markups. greater room for higher-priority spending, and thus raise public support for reform (El-Katiri and Fattouh Energy pricing reform. Even in EMDEs where energy 2017). subsidies have been eliminated, the current low oil prices provide an opportunity to introduce carbon pricing and Role of competition, legal and regulatory frameworks. other energy taxation that will discourage inefficient Improving the macroeconomic framework and competi- consumption as global oil prices rise again. As a cost- tive environment can be more effective in improving the effective instrument for meeting climate targets, 57 financial positions of both consumers and producers than initiatives (including 28 emission trading systems) were energy subsidies. Carefully designed and properly enforced implemented at the national and subnational level in antitrust laws and consumer protection legislation are 2019, covering about 20 percent of global green-house gas essential components of institutional frameworks that emissions (World Bank 2019a). Existing carbon pricing is support market mechanisms. A sound legal and regulatory considered insufficient to meet climate targets, so framework favoring competitive markets provides a more policymakers should seize the current opportunity of effective response to many of the problems that subsidies exceptionally low energy prices to put in place pricing attempt to address. For example, the removal of price formulas now that encourage more energy-efficient growth controls and barriers to entry in the transportation sector once the recovery gathers momentum (World Bank significantly increased competition and lowered trans- 2019a). Finally, support measures for energy-intensive portation costs in Rwanda (Teravaninthorn and Raballand industries during the current pandemic could be made 2009). Even in the case where incumbent firms contingent on improvements in fuel efficiency. maintained outsized market shares, the presence of EMDEs—may outweigh benefits to activity in Coincidence with other shocks. The public health energy importers.15 Adverse effects are likely to be crisis, unprecedented capital outflows from compounded by new headwinds, including EMDEs, and a collapse in global trade and tour- elevated macro-financial vulnerabilities that were ism have put financial and economic pressures on less relevant in previous oil price plunges, or even energy exporters and importers alike (Figure 4.8). a second wave of infections. That said, there might be a short window early in the recovery when still- • Public health crisis. The number of confirmed high inventories depress prices and support infections has soared in energy-exporting activity. EMDEs, as well as energy-importing EMDEs, and the effect of the sharp loss in consumer Implications of the demand-driven nature of oil and investor confidence may linger long after price plunge. In contrast to the oil price plunge of the pandemic has subsided. 2014-16, the 2020 episode has been mainly driven by a collapse in energy demand resulting from • Trade collapse. Global manufacturing activity, restrictions to stem the spread of the pandemic tourism, and trade have plunged amid and the global recession (Figure 4.1). Once the closures of non-essential services, shops, global recovery is underway, and excess inventories factories, and public spaces; stay-at-home are unwound, oil prices would be expected to orders travel restrictions; and a high degree of increase again in tandem with global growth. risk aversion of consumers (Chapter 1). • Tightening financial conditions. Flight to safety 15 The 2014-16 oil price plunge is a reminder that this will also has resulted in a sharp tightening of financial be a challenge, although to a lesser extent, in energy importing conditions in EMDEs (Chapter 1). Global economies with sizable energy sectors. equity markets have fallen sharply, with G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 197 extreme volatility. EMDE currencies have FIGURE 4.8 Pandemic and mitigation measures in EMDE weakened substantially against the U.S. dollar energy exporters despite foreign exchange market interventions The pandemic is spreading in energy-exporting and energy-importing by central banks. Yield spreads on EMDE EMDEs. In response, governments have imposed restrictions that curtail bond issues have risen steeply. economic activity. The impact on informal activity may be particularly adverse. Obstacles to policy effectiveness in EMDEs. A. Number of reported infections in B. Number of COVID-19-related Many central banks and governments have EMDEs fatalities in EMDEs engaged in large-scale monetary and fiscal stimulus to support their economies amid the pandemic (Chapter 1). However, these may not reach the most vulnerable groups. This is of particular concern for economies with widespread informality. Large sections of their population do not have bank accounts, which would usually provide a means for delivering direct cash support quickly. By the same token, many people are outside the formal social benefit and tax system, C. Stringency of mitigation measures D. Share of informal economy in EMDEs and would not benefit from tax deferments and cuts, or from higher regular social benefits (Chapter 3). Macro-financial vulnerabilities in energy exporters. During the oil price plunge of 2014-16, energy exporters with highly concentrated export and revenues bases, weak fiscal positions, and fixed exchange rates witnessed considerably steeper growth slowdowns. In today’s context, these Source: European Centre for Disease Prevention and Control (ECDC); OurWorldInData.org; Oxford effects are likely to be more pronounced since COVID-19 Government Response Tracker; World Bank. A.B. Daily data. Last observation May 21, 2020. there has been limited progress in export C. The Oxford COVID-19 Government Response Tracker collects publicly available information on 11 indicators of government response including school closures, public events cancellations, and public diversification, and fiscal positions are weaker than information campaigns, as well as fiscal and monetary measures and emergency investment in health care. The index ranges between 0 and 100 where higher indicates more stringent measures. they were before the 2014-16 oil price plunge. Aggregate growth rates calculated using GDP weight at 2010 prices and market exchange rates. To correct for data gaps, data is extended with the most recent observation. Sample includes 121 EMDEs, of which 33 are energy exporters. In 2014-16, growth in energy exporters with a D. 2016 data used for share of GDP; 2014 data used for share of employment. higher degree of economic diversification (for Click here to download data and charts. example, Bahrain, Ghana, Malaysia, Qatar), and a floating exchange rate regime (for example, EMDEs that lacked the necessary buffers (Husain Albania, Russia), recovered more quickly from the et al. 2015; World Bank 2015b). Energy- fall in oil prices than in those with low exporting EMDEs with higher reliance on oil- diversification and fixed exchange rates. Fiscal related revenues faced a more pronounced balances also fared better in energy-exporting deterioration in fiscal balances than in those EMDEs with more flexible exchange rate regimes, economies that managed to diversify government in part because real exchange rate depreciation revenue away from oil before 2014. mitigated revenue declines and spurred needed adjustment within the private sector. Growth Energy exporters remain highly reliant on remained stronger in energy exporters with larger commodity exports and have more precarious foreign reserves and low historical inflation fiscal positions (Figure 4.9). In 2019, the energy volatility (Grigoli, Herman, and Swiston 2017; sector continued to account for 12 percent of World Bank 2016a). The need for fiscal government revenues in the average energy- adjustment was greater in energy-exporting exporting EMDE. Government debt in energy- 198 CHAPTER 4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 FIGURE 4.9 EMDE energy exporters’ vulnerabilities: exporting EMDEs had risen to 50 percent of GDP 2014-16 and 2019 in 2019 from 27 percent of GDP in 2013, and the Today’s energy-exporting EMDEs are typically no less reliant on energy fiscal balance has turned from near-balance in exports than in 2013, and have more precarious fiscal positions. 2013 to a deficit of 2.7 percent of GDP in 2019 (IMF 2017a; World Bank 2017a). As a result, A. Resource sector activity in energy-exporting EMDEs B. Export concentration even after the public health crisis subsides, the need to shore up public finances is likely to weigh on their recovery. Conclusions The the restrictions imposed to stem the pandemic and the global recession triggered by the outbreak of the COVID-19 pandemic have been accompanied by an unprecedented collapse in oil C. Share of energy revenues in D. Commodity export share of energy demand and prices. Unfortunately, the price government revenues of exporters decline is unlikely to provide much of an energy-exporting EMDEs immediate buffer for global growth, because of the impact of mitigation measures that are constraining energy-intensive activities and because energy-exporting EMDEs have less fiscal and monetary policy room to counter the impact on their economies. That said, there might be a short window early in a recovery when still-high inventories depress prices and support activity. Currently, responding to the health emergency E. Government and corporate debt of F. Fiscal balance of energy exporters and its impact on economic activity remains the energy exporters immediate priority. 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 safeguarded if financing shrinks, as well as lower- Sources: Haver Analytics; International Monetary Fund; United Nations Conference on Trade and Development (UNCTAD); World Bank. priority, poorly targeted, or inefficient spending A.C. EAP=East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and the programs that can be delayed or suspended. Caribbean, MNA = Middle East and North Africa, and SSA = Sub-Saharan Africa. A. Regional aggregates are medians. Sample includes 34 energy-exporting EMDEs. Chart shows Additional liquidity could be injected in resource rents in percent of GDP. B. Orange diamonds denote the median and blue bars represent the interquartile range of individual economies with low and stable inflation to enable country groups. Sample includes 33 energy-exporting EMDEs (excludes South Sudan), 118 energy- importing EMDEs, and 35 advanced economies. Concentration index measures the degree of banks to extend credit to firms and households, product concentration, where values closer to 1 indicate a country’s exports are highly concentrated and to prevent widespread insolvency. on a few products. C. Regional aggregates are medians. Sample includes 24 energy-exporting EMDEs (Algeria, Angola, Azerbaijan, Bahrain, Bolivia, Cameroon, Chad, Colombia, Republic of Congo, Ecuador, Equatorial The economic damage of the pandemic could be Guinea, Gabon, Iran, Iraq, Kazakhstan, Kuwait, Nigeria, Oman, Qatar, Russia, Saudi Arabia, Sudan, Trinidad and Tobago, and the United Arab Emirates). long lasting, as it will take considerable time to D. Blue bars show share of commodities in total goods exports. Orange whiskers show the minimum- maximum range. repair the disruptions to labor markets, value E.F. Blue bars show unweighted averages. Orange whiskers show the interquartile range. Click here to download data and charts. chains, and balance sheets, and to restore consumers’ confidence in the safety of retail, leisure, and work spaces (Chapter 3). Economic G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 199 and financial weaknesses in energy exporters are • Elasticity restrictions. Restrictions are imposed especially likely to pose difficulties. This highlights on the short-run price elasticity of oil the importance of ensuring that necessary fiscal demand. The impact price elasticity of support during the pandemic be accompanied by demand is assumed to be non-positive; the credible commitments to restore fiscal median draw in the range -0.2 to -0.1 is used, sustainability once it subsides. For the energy in line with estimates of the elasticity since the exporters, this will require pressing ahead with the 1980s in Baumeister and Peersman (2013). reform programs that many launched after the price plunge of 2014-16 (Box 4.1). Some energy- Data. The data set uses monthly data from exporting EMDEs have successfully diversified January 1980 to April 2020. Global industrial their economies after implementing measures to production is the production-weighted average of stimulate non-energy exports, as part of a broad industrial production in 31 advanced economies program of reforms to improve the business and 47 EMDEs (unbalanced sample depending on environment, education, and skills acquisition (for availability). Data for industrial production in example, Malaysia, Mexico; Callen et al. 2014). April is estimated as the level predicted by the For the energy-importing EMDEs, the plunge in global manufacturing purchasing managers’ index. oil prices is an opportunity to revisit energy Global oil production is from the International pricing and make lasting fiscal room for higher- Energy Agency (IEA) from 1987-2020 and the priority spending to reignite long-term growth U.S. Energy Information Administration (EIA) prospects (Chapter 3). from 1980-86. Oil prices are the unweighted average of Brent, West Texas Intermediate, and Dubai crude oil prices from the World Bank’s Pink Sheet (measured in U.S. dollars). OECD inventories use IEA data from 1991-2020 and EIA ANNEX 4.1 Methodology: data from 1987-1990. In April 2020 and prior to 1987, percent changes in U.S. inventories are used Decomposition of oil price as a proxy for changes in OECD inventories (U.S. movements stocks account for around one-third of total OECD inventories). Methodology. A structural vector autoregression (SVAR) as in Kilian and Murphy (2014) is used to model global oil prices. The SVAR includes the logarithms of global oil production, global oil ANNEX 4.2 Oil price prices, global industrial production, and OECD plunges since 1970 inventories. Three shocks are identified using a combination of sign restrictions on impact Until 2020, there had been six previous oil price responses and on the impact price elasticity of oil plunges since 1970 when oil prices fell by 30 demand. percent or more over a six-month period. • Sign restrictions. A negative demand shock is 1985-86. The 1985-86 oil price slump arose from identified as a shock that lowers oil prices a supply shock as OPEC reverted to its production while lowering global industrial production target of 30 mb/d in response to rising oil supply and global oil production. A positive supply from the North Sea and Mexico and breaches of shock is identified as a shock that lowers oil OPEC production agreements (Gately, Adelman, prices while raising oil production and and Griffin 1986). The oil price plunge ushered in industrial production. A positive speculative a period of weak growth and significant debt demand shock (the residual in Figure 4.2.F) is problems in some large EMDEs as well as slow identified as one that raises oil inventories, growth in European countries, and, at the end of increases prices and oil production, and 1987, a significant downward correction in U.S. reduces industrial production. and global stock markets 200 CHAPTER 4 GLOBAL ECONOMIC PROSPECTS I JUNE 2020 1990-91. While the oil price decline of 1990-91 and Kilian 20166; World Bank 2018a). Supply satisfy the definition employed here, it differed factors accounted for about two-thirds of the oil from other oil price plunges in being a reversal of price decline (Figure 4.2; Baffes et al. 20156). 1 It a previous oil price spike triggered by the first was accompanied by a period of slowing global Gulf War. Despite monetary policy loosening, potential growth (World Bank 2018c, 20196). global growth slowed in 1992 before recovering modestly in 1993, as a recession in Europe ran its course, the recovery in the United States remained hesitant amid financial strains in the savings and loans sector, and Japan entered a period of ANNEX 4.3 Methodology: prolonged stagnation. Impact of oil price plunges 1998. The 1997 Asian financial crisis, set against a on output backdrop of a continued expansion of OPEC production until mid-1998, was accompanied by Methodology. The responses of real output, weakening oil demand and a sharp decline in oil investment, consumption, and productivity prices (Fattouh 2007). Despite low oil prices, the growth-denoted by yt-following oil price global recovery remained tepid for most of 1998, collapses are estimated using the local projections partly as a result of the failure of a large asset model ofJorda (2005). The model is given by management fund in the United States and financial stress in major emerging markets. yt + h , j = α( h ), j + β( h )  t , j +  sp=1 lq=1 γ( h ) X tl− s , j 2001. The disruptions and uncertainty caused by +  sp=1 δ( h ), s yt − s , j + u ( h )t , j the September 11 terrorist attacks in the United States intensified a growth slowdown already where h = 0, …, 5 is the forecast horizon, α(h),j is underway as the "dotcom" bubble deflated. country j fixed effects, and u(h)t,j is an error term. Sofrening global activiry and rising uncertainty The coefficient of interest β(h) captures the triggered a sharp decline in oil prices. However, dynamic multiplier effect (impulse response) of aggressive monetary policy easing by the Federal the dependent variable with respect to the event Reserve and other major central banks supported a l dummy variable Et,j X t , j represents a set of control rapid rebound in activiry. variables with coefficients y(h) . The specification 2008-09. A severe recession following the global controls for lagged dependent variables yt-s,j . The financial cns1s sent all commodity prices number of lags for each variable is denoted by p tumbling. The recovery from the global recession and varies from 1 to 3 for the estimation. While was sluggish as many countries faced a wide the supply shock is represented by a univariate variety of legacy challenges and global potential model, the demand shock controls for lagged growth slowed (Kilic, Kose, and Ohnsorge 2020; output and investment as critical macroeconomic Kose and Ohnsorge 2019). However, starting in determinants. Driscoll and Kraay (1998) standard 2009, strong demand for oil and other errors are used to address cross-sectional and serial commodities from China propelled a rebound in correlation. The model is estimated separately for their prices. all EMDEs, for energy-exporting EMDEs, and for other EMDEs, and for subgroups of EMDEs with 2014-16. Between mid-2014 and early 2015, oil fixed and floating exchange rates and with high prices fell by more than 50 percent and then and low government debt. continued to fall until their trough in early 2016. The decline was triggered by a combination of Definitions. Oil price collapses are defined as surging U.S. shale oil production, receding years in which oil prices fell by 30 percent or more geopolitical risks involving some key producers, shifts in policies by OPEC, and weakening global 1 Other estimates put the share of supply factors at just under half growth prospects (Baffes et al. 2015; Baumeister (Baumeister and Hamilton 2019). G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 CHAPTER 4 201 over a six-month period: 1985-86, 1991, 1998, Baffes, J., A. Kabundi, and P. Nagle. 2020. “The Role 2001, 2008-09, 2014-16. Largely supply-driven of Income and Substitution in Commodity Demand.” collapses occurred in 1985-86 and 2014-16 when Policy Research Working Paper 8495, World Bank, OPEC abandoned production agreements in favor Washington, DC. of raising market share; the other oil price Baffes, J., M. A. Kose, F. Ohnsorge, and M. Stocker. collapses were largely demand-driven as recessions 2015. “The Great Plunge in Oil Prices: Causes, lowered energy demand (Baffes et al. 2015). Consequences, and Policy Responses.” Policy Research Note 1, World Bank, Washington, DC. Data. Using annual data, the sample includes 155 EMDEs for 1970-2018. This includes 36 EMDEs Baumeister, C., and J. D. Hamilton. 2019. “Structural that are energy exporting (oil, gas, or coal), Interpretation of Vector Autoregressions with defined as in Table 1.2 (Chapter 1) and 120 other Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks.” American Economic EMDEs. 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Commodity Markets Outlook: Oil Corridors. Washington, DC: World Bank. Exporters: Policies and Challenges. April. Washington, DC: World Bank. World Bank. 2014. “Transitional Policies to Assist the Poor While Phasing Out Inefficient Fossil Fuel ———. 2018c. Global Economic Prospects. Broad-Based Subsidies that Encourage Wasteful Consumption.” Upturn, But For How Long? January. Washington, DC: Contribution by the World Bank to G20 Finance World Bank. Ministers and Central Bank Governors. September. World Bank, Washington, DC. ———. 2019a. State and Trends of Carbon Pricing 2019. Washington, DC: World Bank. ———. 2015a. Global Economic Prospects: Having Fiscal Space and Using It. January. Washington, DC: ———. 2019b. Global Economic Prospects. Heightened World Bank. Tensions, Subdued Investment. June. Washington, DC: World Bank. ———. 2015b. Global Economic Prospects: The Global Economy in Transition. June. Washington, DC: World ———. 2020. Commodity Markets Outlook: Bank. Implications of COVID-19 for Commodities. April. Washington, DC: World Bank. ———. 2016a. Global Economic Prospects: Divergences and Risks. June. Washington, DC: World Bank. Worley, H., S. B. Pasquier, and E. Canpolat. 2018. ———. 2016b. “Whither Oil Prices” Quarterly “Designing Communication Campaigns for Energy Economic Brief, World Bank, Washington, DC. Subsidy Reform.” Good Practice Note 10, Energy Sector Management Assistance Program, World Bank, ———. 2016c. Global Economic Prospects: Spillovers Washington, DC. STATISTICAL APPENDIX G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S TATIS TICAL APP ENDIX 207 Real GDP growth Annual estimates and forecasts1 Quarterly estimates2 (Percent change) (Percent change, year-on-year) 2017 2018 2019e 2020f 2021f 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1e World 3.3 3.0 2.4 -5.2 4.2 2.6 2.5 2.4 2.5 2.4 .. Advanced economies 2.5 2.1 1.6 -7.0 3.9 1.7 1.8 1.6 1.7 1.4 .. United States 2.4 2.9 2.3 -6.1 4.0 2.5 2.7 2.3 2.1 2.3 0.3 Euro Area 2.5 1.9 1.2 -9.1 4.5 1.2 1.4 1.2 1.3 1.0 -3.2 Japan 2.2 0.3 0.7 -6.1 2.5 -0.3 0.8 0.9 1.8 -0.7 -2.2 Emerging market and developing economies 4.5 4.3 3.5 -2.5 4.6 4.2 3.8 3.8 3.8 4.0 .. East Asia and Pacific 6.5 6.3 5.9 0.5 6.6 6.3 6.1 5.9 5.8 5.7 -5.2 Cambodia 7.0 7.5 7.1 -1.0 6.0 .. .. .. .. .. .. China 6.8 6.6 6.1 1.0 6.9 6.5 6.4 6.2 6.0 6.0 -6.8 Fiji 5.4 3.5 1.0 -4.3 1.9 .. .. .. .. .. .. Indonesia 5.1 5.2 5.0 0.0 4.8 5.2 5.1 5.1 5.0 5.0 3.0 Lao PDR 6.9 6.3 4.7 1.0 4.6 .. .. .. .. .. .. Malaysia 5.7 4.7 4.3 -3.1 6.9 4.8 4.5 4.8 4.4 3.6 0.7 Mongolia 5.3 6.9 4.8 -0.5 4.9 9.6 8.7 6.3 4.2 1.8 -10.5 Myanmar 6.2 6.8 6.3 1.5 6.0 .. .. .. .. .. .. Papua New Guinea 3.5 -0.8 6.0 -1.3 3.4 .. .. .. .. .. .. Philippines 6.9 6.3 6.0 -1.9 6.2 6.4 5.7 5.4 6.3 6.7 -0.2 Solomon Islands 3.7 3.9 2.7 -6.7 -0.3 .. .. .. .. .. .. Thailand 4.1 4.2 2.4 -5.0 4.1 3.8 2.9 2.4 2.6 1.5 -1.8 Timor-Leste -3.8 -0.8 3.4 -4.8 3.8 .. .. .. .. .. .. Vietnam 6.8 7.1 7.0 2.8 6.8 7.3 6.8 6.7 7.5 7.0 3.8 Europe and Central Asia 4.1 3.3 2.2 -4.7 3.6 1.8 1.1 1.4 2.2 3.6 .. Albania 3.8 4.1 2.2 -5.0 8.8 3.1 2.4 2.5 4.2 -0.1 .. Armenia 7.5 5.2 7.6 -2.8 4.9 .. .. .. .. .. .. Azerbaijan 0.2 1.5 2.2 -2.6 2.2 .. .. .. .. .. .. Belarus 2.5 3.1 1.2 -4.0 1.0 1.6 1.3 0.5 1.4 1.6 .. Bosnia and Herzegovina 3.2 3.7 2.6 -3.2 3.4 4.1 2.8 3.0 3.1 1.6 .. Bulgaria 3.5 3.1 3.4 -6.2 4.3 3.0 4.5 3.6 2.9 2.9 .. Croatia 3.1 2.7 2.9 -9.3 5.4 2.2 4.1 2.4 2.9 2.5 0.4 Georgia 4.8 4.8 5.1 -4.8 4.0 3.2 5.0 4.6 5.8 5.1 .. Hungary 4.3 5.1 4.9 -5.0 4.5 5.3 5.3 4.9 5.0 4.5 2.2 Kazakhstan 4.1 4.1 4.5 -3.0 2.5 4.1 3.8 4.4 4.7 5.0 .. Kosovo 4.2 3.8 4.2 -4.5 5.2 .. .. .. .. .. .. Kyrgyz Republic 4.7 3.8 4.5 -4.0 5.6 .. .. .. .. .. .. Moldova 4.7 4.3 3.6 -3.1 4.0 3.8 4.4 5.8 4.3 0.2 .. Montenegro5 4.7 5.1 3.6 -5.6 4.8 .. .. .. .. .. .. North Macedonia 1.1 2.7 3.6 -2.1 3.9 6.2 3.8 3.4 3.6 3.4 .. Poland 4.9 5.3 4.1 -4.2 2.8 4.8 4.8 4.2 4.1 3.5 1.7 Romania 7.1 4.4 4.1 -5.7 5.4 4.4 5.0 4.4 3.0 4.3 2.4 Russia 1.8 2.5 1.3 -6.0 2.7 2.8 0.4 1.1 1.5 2.1 1.6 Serbia 2.0 4.4 4.2 -2.5 4.0 3.5 2.6 2.9 4.8 6.2 5.0 Tajikistan 7.6 7.3 7.5 -2.0 3.7 .. .. .. .. .. .. Turkey 7.5 2.8 0.9 -3.8 5.0 -2.8 -2.3 -1.6 1.0 6.0 4.5 Turkmenistan 6.5 6.2 6.3 0.0 4.0 .. .. .. .. .. .. Ukraine 2.5 3.3 3.2 -3.5 3.0 3.7 2.9 4.7 3.9 1.5 -1.5 Uzbekistan 4.5 5.4 5.6 1.5 6.6 .. .. .. .. .. .. 208 S TATIS TICAL APP ENDIX G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 Real GDP growth (continued) Annual estimates and forecasts1 Quarterly estimates2 (Percent change) (Percent change, year-on-year) 2017 2018 2019e 2020f 2021f 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1e Latin America and the Caribbean 1.9 1.7 0.8 -7.2 2.8 1.1 0.6 0.6 1.0 0.8 .. Argentina 2.7 -2.5 -2.2 -7.3 2.1 -6.1 -5.8 0.0 -1.8 -1.1 .. Belize 1.9 2.1 0.3 -13.5 6.7 .. .. .. .. .. .. Bolivia 4.2 4.2 2.7 -5.9 2.2 3.3 3.1 2.6 2.2 1.1 .. Brazil 1.3 1.3 1.1 -8.0 2.2 1.2 0.6 1.1 1.2 1.7 -0.3 Chile 1.2 3.9 1.1 -4.3 3.1 3.3 1.4 1.8 3.4 -2.1 0.4 Colombia 1.4 2.5 3.3 -4.9 3.6 2.7 2.9 3.2 3.5 3.5 1.1 Costa Rica 3.9 2.7 2.1 -3.3 3.0 1.3 2.0 0.6 2.5 3.3 .. Dominica -9.5 0.5 9.6 -4.0 4.0 .. .. .. .. .. .. Dominican Republic 4.7 7.0 5.1 -0.8 2.5 6.3 5.7 3.7 5.0 5.8 .. Ecuador 2.4 1.3 0.1 -7.4 4.1 0.7 1.1 0.5 -0.3 -1.0 .. El Salvador 2.3 2.4 2.4 -5.4 3.8 1.8 2.2 1.6 2.9 2.8 .. Grenada 4.4 4.2 3.1 -9.6 6.5 .. .. .. .. .. .. Guatemala 3.0 3.1 3.6 -3.0 4.1 3.4 3.6 3.8 4.1 3.9 .. Guyana 2.1 4.1 4.7 51.1 8.1 .. .. .. .. .. .. Haiti3 1.2 1.5 -0.9 -3.5 1.0 .. .. .. .. .. .. Honduras 4.8 3.7 2.7 -5.8 3.7 4.5 3.0 1.9 3.3 2.4 .. Jamaica 2 1.0 1.9 0.7 -6.2 2.7 2.0 1.7 1.3 0.6 0.0 .. Mexico 2.1 2.2 -0.3 -7.5 3.0 1.3 1.1 -1.1 -0.4 -0.7 -1.4 Nicaragua 4.6 -4.0 -3.9 -6.3 0.7 -7.4 -9.1 -3.1 -2.9 -0.2 .. Panama 5.6 3.7 3.0 -2.0 4.2 4.2 3.1 2.9 2.7 3.3 .. Paraguay 5.0 3.4 0.0 -2.8 4.2 0.5 -2.7 -3.3 2.6 3.5 .. Peru 2.5 4.0 2.2 -12.0 7.0 4.8 2.4 1.2 3.2 1.8 -3.4 St. Lucia 2.2 1.4 1.4 -8.8 8.3 .. .. .. .. .. .. St. Vincent and the Grenadines 1.0 2.0 0.4 -5.5 4.0 .. .. .. .. .. .. Suriname 1.8 2.6 2.3 -5.0 3.0 .. .. .. .. .. .. Uruguay 2.6 1.6 0.2 -3.7 4.6 0.6 -0.5 0.1 1.1 0.2 .. Middle East and North Africa 1.1 0.9 -0.2 -4.2 2.3 3.7 2.4 1.7 1.1 0.9 .. Algeria 1.3 1.4 0.8 -6.4 1.9 .. .. .. .. .. .. Bahrain 4.3 1.8 1.8 -4.5 2.3 5.1 3.3 1.8 2.7 -0.4 .. Djibouti 5.4 8.4 7.5 1.3 9.2 .. .. .. .. .. .. Egypt3 4.2 5.3 5.6 3.0 2.1 5.5 5.6 5.7 5.6 5.6 .. Iran 3.8 -4.7 -8.2 -5.3 2.1 .. .. .. .. .. .. Iraq -2.5 -0.6 4.4 -9.7 1.9 .. .. .. .. .. .. Jordan 2.1 1.9 2.0 -3.5 2.0 1.8 2.0 1.8 1.9 2.1 .. Kuwait -4.7 1.2 0.4 -5.4 1.1 2.0 0.9 1.8 0.1 -1.1 .. Lebanon 0.9 -1.9 -5.6 -10.9 -6.3 .. .. .. .. .. .. Morocco 4.2 3.0 2.3 -4.0 3.4 .. .. .. .. .. .. Oman 0.3 1.8 0.5 -4.0 2.0 .. .. .. .. .. .. Qatar 1.6 1.5 -0.3 -3.5 3.6 0.5 0.8 -1.0 0.0 -0.6 .. Saudi Arabia -0.7 2.4 0.3 -3.8 2.5 4.3 1.7 0.5 -0.5 -0.3 .. Tunisia 1.9 2.7 1.0 -4.0 4.2 2.1 1.2 1.2 1.0 0.8 -1.5 United Arab Emirates 0.5 1.7 1.7 -4.5 1.4 .. .. .. .. .. .. West Bank and Gaza 1.4 1.2 0.9 -7.6 5.1 3.5 4.1 2.3 -0.6 -1.8 .. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S TATIS TICAL APP ENDIX 209 Real GDP growth (continued) Annual estimates and forecasts1 Quarterly estimates2 (Percent change) (Percent change, year-on-year) 2017 2018 2019e 2020f 2021f 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1e South Asia 6.5 6.5 4.7 -2.7 2.8 5.5 5.6 5.5 5.0 4.6 .. Afghanistan 2.7 1.8 2.9 -5.5 1.0 .. .. .. .. .. .. Bangladesh3 4 7.3 7.9 8.2 1.6 1.0 .. .. .. .. .. .. Bhutan3 4 6.3 3.8 3.9 1.5 1.8 .. .. .. .. .. .. India3 4 7.0 6.1 4.2 -3.2 3.1 5.6 5.7 5.2 4.4 4.1 3.1 Maldives 6.8 6.9 5.2 -13.0 8.5 .. .. .. .. .. .. Nepal3 4 8.2 6.7 7.0 1.8 2.1 .. .. .. .. .. .. Pakistan3 4 5.2 5.5 1.9 -2.6 -0.2 .. .. .. .. .. .. Sri Lanka 3.6 3.3 2.3 -3.2 0.0 1.9 3.7 1.1 2.4 2.0 .. Sub-Saharan Africa 2.6 2.6 2.2 -2.8 3.1 2.6 2.1 2.3 2.0 2.1 .. Angola -0.1 -2.0 -0.9 -4.0 3.1 .. .. .. .. .. .. Benin 5.8 6.7 6.9 3.2 6.0 .. .. .. .. .. .. Botswana 2.9 4.5 3.5 -9.1 4.2 4.2 4.3 3.0 3.0 1.6 .. Burkina Faso 6.3 6.8 5.7 2.0 5.8 .. .. .. .. .. .. Burundi 0.5 1.6 1.8 1.0 2.3 .. .. .. .. .. .. Cabo Verde 3.7 5.1 5.5 -5.5 5.0 .. .. .. .. .. .. Cameroon 3.5 4.1 3.9 -0.2 3.4 .. .. .. .. .. .. Central African Republic 4.5 3.7 3.1 0.8 3.5 .. .. .. .. .. .. Chad -3.0 2.6 3.2 -0.2 4.7 .. .. .. .. .. .. Comoros 3.8 3.4 1.9 -1.4 3.2 .. .. .. .. .. .. Congo, Dem. Rep. 3.7 5.8 4.4 -2.2 3.5 .. .. .. .. .. .. Congo, Rep. -1.8 1.6 -0.9 -6.2 -1.1 .. .. .. .. .. .. Côte d'Ivoire 7.4 6.8 6.9 2.7 8.7 .. .. .. .. .. .. Equatorial Guinea -4.7 -6.1 -6.2 -8.4 -1.6 .. .. .. .. .. .. Eritrea -10.0 13.0 3.7 -0.7 5.7 .. .. .. .. .. .. Eswatini 2.0 2.4 1.3 -2.8 2.7 .. .. .. .. .. .. Ethiopia3 10.0 7.9 9.0 3.2 3.6 .. .. .. .. .. .. Gabon 0.5 0.8 3.3 -3.2 -2.6 .. .. .. .. .. .. Gambia, The 4.8 6.6 6.0 2.5 6.5 .. .. .. .. .. .. Ghana 8.1 6.3 6.5 1.5 3.4 6.8 6.7 5.7 5.6 7.9 .. Guinea 10.3 6.2 5.6 2.1 7.9 .. .. .. .. .. .. Guinea-Bissau 5.9 3.8 4.7 -1.6 3.1 .. .. .. .. .. .. Kenya 4.8 6.3 5.4 1.5 5.2 6.5 5.5 5.3 5.2 5.5 .. Lesotho -0.4 1.5 1.4 -5.1 5.5 0.5 -3.4 -2.1 1.3 .. .. Liberia 2.5 1.2 -2.3 -2.6 4.0 .. .. .. .. .. .. Madagascar 3.9 4.6 4.8 -1.2 4.0 .. .. .. .. .. .. Malawi 4.0 3.5 4.4 2.0 3.5 .. .. .. .. .. .. Mali 5.3 4.7 5.1 0.9 4.0 .. .. .. .. .. .. Mauritania 3.0 3.6 6.3 -2.0 4.2 .. .. .. .. .. .. Mauritius 3.8 3.7 3.6 -6.8 6.4 .. .. .. .. .. .. Mozambique 3.7 3.4 2.2 1.3 3.6 3.0 2.5 2.3 2.0 2.0 .. Namibia -0.3 0.7 -1.1 -4.8 3.0 -4.2 -3.6 -2.9 -0.8 .. .. Niger 4.9 6.5 6.3 1.0 8.1 .. .. .. .. .. .. Nigeria 0.8 1.9 2.2 -3.2 1.7 2.4 2.1 2.1 2.1 2.5 2.0 Rwanda 6.1 8.6 9.4 2.0 6.9 .. .. .. .. .. .. São Tomé and Príncipe 3.9 2.7 2.4 -9.5 6.1 .. .. .. .. .. .. Senegal 7.4 6.4 5.3 1.3 4.0 .. .. .. .. .. .. Seychelles 4.3 4.1 3.8 -11.1 6.3 .. .. .. .. .. .. Sierra Leone 3.8 3.5 5.1 -2.3 4.0 .. .. .. .. .. .. 210 S TATIS TICAL APP ENDIX G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 Real GDP growth (continued) Annual estimates and forecasts1 Quarterly estimates2 (Percent change) (Percent change, year-on-year) 2017 2018 2019e 2020f 2021f 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1e Sub-Saharan Africa (continued) South Africa 1.4 0.8 0.2 -7.1 2.9 1.1 0.0 0.9 0.1 -0.5 .. South Sudan3 -6.9 -3.5 3.2 -4.3 -23.6 .. .. .. .. .. .. Sudan 4.3 -2.3 -2.6 -4.0 0.5 .. .. .. .. .. .. Tanzania 6.8 5.4 5.8 2.5 5.5 7.1 6.5 7.2 6.8 .. .. Togo 4.4 4.9 5.3 1.0 4.0 .. .. .. .. .. .. Uganda3 3.9 6.2 6.5 3.3 3.7 7.3 7.7 4.8 4.5 5.6 .. Zambia 3.4 4.0 1.7 -0.8 2.4 2.5 2.4 2.4 1.0 .. .. Zimbabwe 4.7 3.5 -8.1 -10.0 2.9 .. .. .. .. .. .. Source: World Bank and Haver Analytics. Note: e = estimate; f = forecast. 1. Aggregate growth rates calculated using GDP weights at 2010 prices and market exchange rates. 2. Quarterly estimates are based on non-seasonally-adjusted real GDP, except for advanced economies, as well as Ecuador, Poland and Tunisia. Data for Bosnia and Herzegovina are from the production approach. Quarterly data for Jamaica are gross value added. Regional averages are calculated based on data from following countries. East Asia and Pacific: China, Indonesia, Malaysia, Mongolia, Philippines, Thailand, and Vietnam. Europe and Central Asia: Albania, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Georgia, Hungary, Kazakhstan, North Macedonia, Poland, Romania, Russia, Serbia, Turkey, and Ukraine. Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, and Uruguay. Middle East and North Africa: Bahrain, Egypt, Kuwait, Jordan, Qatar, Saudi Arabia, Tunisia, and West Bank and Gaza. South Asia: India and Sri Lanka. Sub-Saharan Africa: Botswana, Ghana, Kenya, Mozambique, Nigeria, South Africa, and Uganda. 3. Annual GDP is on fiscal year basis, as per reporting practice in the country. 4. GDP data for Pakistan are based on factor cost. For Bangladesh, Bhutan, Nepal, and Pakistan, the column labeled 2019 refers to FY2018/19. For India, the column labeled 2018 refers to FY2018/19. 5. Quarterly data are preliminary. Click here to download data. G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S TATIS TICAL APP ENDIX 211 Data and Forecast Conventions The macroeconomic forecasts presented in this Aggregations. Aggregate growth for the world and report are prepared by staff of the Prospects all sub-groups of countries (such as regions and Group of the Equitable Growth, Finance and income groups) is calculated using GDP weights Institutions Vice-Presidency, in coordination with at 2010 prices and market exchange rates of staff from the Macroeconomics, Trade, and country-specific growth rates. Income groups are Investment Global Practice and from regional and defined as in the World Bank’s classification of country offices, and with input from regional country groups. Chief Economist offices. They are the result of an iterative process that incorporates data, Forecast process. The process starts with initial macroeconometric models, and judgment. assumptions about advanced-economy growth and commodity price forecasts. These are used as Data. Data used to prepare country forecasts conditioning assumptions for the first set of come from a variety of sources. National Income growth forecasts for EMDEs, which are produced Accounts (NIA), Balance of Payments (BOP), and using macroeconometric models, accounting fiscal data are from Haver Analytics; the World frameworks to ensure national account identities Development Indicators by the World Bank; the and global consistency, estimates of spillovers World Economic Outlook, Balance of Payments from major economies, and high-frequency Statistics, and International Financial Statistics by indicators. These forecasts are then evaluated to the International Monetary Fund. Population ensure consistency of treatment across similar data and forecasts are from the United Nations EMDEs. This is followed by extensive discussions World Population Prospects. Country- and with World Bank country teams, who conduct lending-group classifications are from the World continuous macroeconomic monitoring and Bank. The Prospects Group’s internal databases dialogue with country authorities and finalize include high-frequency indicators such as growth forecasts for EMDEs. The Prospects industrial production, consumer price indexes, Group prepares advanced-economy and emerging market bond indexes (EMBI), exchange commodity price forecasts. Throughout the rates, exports, imports, policy rates, and stock forecasting process, staff use macro-econometric market indexes, based on data from Bloomberg, models that allow the combination of judgement Haver Analytics, IMF Balance of Payments and consistency with model-based insights. Statistics, IMF International Financial Statistics, and J.P. Morgan. 212 S E L E C T E D TO P I C S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 Global Economic Prospects: Selected Topics, 2015-20 Growth and Business Cycles Economics of Pandemics Regional macroeconomic implications of COVID-19 Special Focus, June 2020 Lasting Scars of the COVID-19 Pandemic Chapter 3, June 2020 Adding Fuel to the Fire: Cheap Oil in the Pandemic Chapter 4, June 2020 How deep will the COVID-19 recession be? June 2020, Box 1.1 Scenarios of possible global growth outcomes June 2020, Box 1.3 How does informality aggravate the impact of COVID-19? June 2020, Box 1.4 The impact of COVID-19 on global value chains June 2020, Box SF1 How do deep recessions affect potential output? June 2020, Box 3.1 How do disasters affect productivity? June 2020, Box 3.2 Reforms after the 2014-16 oil price plunge June 2020, Box 4.1 The macroeconomic effects of pandemics and epidemics: A literature review June 2020, Annex 3.1 Informality How does informality aggravate the impact of COVID-19? June 2020, Box 1.4 Growing in the shadow: Challenges of informality January 2019, Chapter 3 Linkages between formal and informal sectors January 2019, Box 3.1 Regional dimensions of informality: An overview January 2019, Box 3.2 Casting a shadow: Productivity in formal and informal firms January 2019, Box 3.3 Under the magnifying glass: How do policies affect informality? January 2019, Box 3.4 East Asia and Pacific January 2019, Box 2.1.1 Europe and Central Asia January 2019, Box 2.2.1 Latin America and the Caribbean January 2019, Box 2.3.1 Middle East and North Africa January 2019, Box 2.4.1 South Asia January 2019, Box 2.5.1 Sub-Saharan Africa January 2019, Box 2.6.1 Inflation Low for how much longer? Inflation in low-income countries January 2020, Special Focus 2 Currency depreciation, inflation, and central bank independence June 2019, Special Focus 1.2 The great disinflation January 2019, Box 1.1 Growth prospects The macroeconomic effects of pandemics and epidemics: A literature review June 2020, Annex 3.1 How deep will the COVID-19 recession be? June 2020, Box 1.1 Lasting Scars of the COVID-19 Pandemic Chapter 3, June 2020 Regional macroeconomic implications of COVID-19 Special Focus, June 2020 Growth in low-income countries: Evolution, prospects, and policies June 2019, Special Focus 2.1 Long-term growth prospects: Downgraded no more? June 2018, Box 1.1 Global output gap Is the global economy turning the corner? January 2018, Box 1.1 Potential growth How do deep recessions affect potential output? June 2020, Box 3.1 Building solid foundations: How to promote potential growth January 2018, Chapter 3 What is potential growth? January 2018, Box 3.1 Understanding the recent productivity slowdown: Facts and explanations January 2018, Box 3.2 Moving together? Investment and potential output January 2018, Box 3.3 The long shadow of contractions over potential output January 2018, Box 3.4 Productivity and investment growth during reforms January 2018, Box 3.5 East Asia and Pacific January 2018, Box 2.1.1 Europe and Central Asia January 2018, Box 2.2.1 Latin America and the Caribbean January 2018, Box 2.3.1 Middle East and North Africa January 2018, Box 2.4.1 South Asia January 2018, Box 2.5.1 Sub-Saharan Africa January 2018, Box 2.6.1 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S E L E C T E D TO P I C S 213 Global Economic Prospects: Selected Topics, 2015-20 Growth and Business Cycles Cross-border spillovers Who catches a cold when emerging markets sneeze? January 2016, Chapter 3 Sources of the growth slowdown in BRICS January 2016, Box 3.1 Understanding cross-border growth spillovers January 2016, Box 3.2 Within-region spillovers January 2016, Box 3.3 East Asia and Pacific January 2016, Box 2.1.1 Europe and Central Asia January 2016, Box 2.2.1 Latin America and the Caribbean January 2016, Box 2.3.1 Middle East and North Africa January 2016, Box 2.4.1 South Asia January 2016, Box 2.5.1 Sub-Saharan Africa January 2016, Box 2.6.1 Productivity How do disasters affect productivity? June 2020, Box 3.2 Fading promise: How to rekindle productivity growth January 2020, Chapter 3 EMDE regional productivity trends and bottlenecks January 2020, Box 3.1 Sectoral sources of productivity growth January 2020, Box 3.2 Patterns of total factor productivity: a firm perspective January 2020, Box 3.3 Debt, financial crises, and productivity January 2020, Box 3.4 Labor productivity in East Asia and Pacific: Trends and drivers January 2020, Box 2.1.1 Labor productivity in Europe and Central Asia: Trends and drivers January 2020, Box 2.2.1 Labor productivity in Latin America and the Caribbean: Trends and drivers January 2020, Box 2.3.1 Labor productivity in Middle East and North Africa: Trends and drivers January 2020, Box 2.4.1 Labor productivity in South Asia: Trends and drivers January 2020, Box 2.5.1 Labor productivity in Sub-Saharan Africa: Trends and drivers January 2020, Box 2.6.1 Investment slowdown Investment: Weak prospects strong needs June 2019, Special Focus 11 Weak investment in uncertain times: Causes, implications and policy responses January 2017, Chapter 3 Investment-less credit booms January 2017, Box 3.1 Implications of rising uncertainty for investment in EMDEs January 2017, Box 3.2 Investment slowdown in China January 2017, Box 3.3 Interactions between public and private investment January 2017, Box 3.4 East Asia and Pacific January 2017, Box 2.1.1 Europe and Central Asia January 2017, Box 2.2.1 Latin America and the Caribbean January 2017, Box 2.3.1 Middle East and North Africa January 2017, Box 2.4.1 South Asia January 2016, Box 2.5.1 Sub-Saharan Africa January 2016, Box 2.6.1 Forecast uncertainty Scenarios of possible global growth outcomes June 2020, Box 1.3 Quantifying uncertainties in global growth forecasts June 2016, Special Focus 2 Fiscal space Having space and using it: Fiscal policy challenges and developing economies January 2015, Chapter 3 Fiscal policy in low-income countries January 2015, Box 3.1 What affects the size of fiscal multipliers? January 2015, Box 3.2 Chile’s fiscal rule—an example of success January 2015, Box 3.3 Narrow fiscal space and the risk of a debt crisis January 2015, Box 3.4 Revenue mobilization in South Asia: Policy challenges and recommendations January 2015, Box 2.3 Other topics Education demographics and global inequality January 2018, Special Focus 2 Recent developments in emerging and developing country labor markets June 2015, Box 1.3 Linkages between China and Sub-Saharan Africa June 2015, Box 2.1 What does weak growth mean for poverty in the future? January 2015, Box 1.1 What does a slowdown in China mean for Latin America and the Caribbean? January 2015, Box 2.2 214 S E L E C T E D TO P I C S G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 Global Economic Prospects: Selected Topics, 2015-20 Monetary and Exchange Rate Policies The fourth wave: Rapid debt buildup January 2020, Chapter 4 Price controls: Good intentions, bad outcomes January 2020, Special Focus 1 Low for how much longer? Inflation in low-income countries January 2020, Special Focus 2 Currency depreciation, inflation, and central bank independence June 2019, Special Focus 1.2 The great disinflation January 2019, Box 1.1 Corporate debt: Financial stability and investment implications June 2018, Special Focus 2 Recent credit surge in historical context June 2016, Special Focus 1 Peg and control? The links between exchange rate regimes and capital account policies January 2016, Chapter 4 Negative interest rates in Europe: A glance at their causes and implications June 2015, Box 1.1 Hoping for the best, preparing for the worst: Risks around U.S. rate liftoff and policy options June 2015, Special Focus 1 Countercyclical monetary policy in emerging markets: Review and evidence January 2015, Box 1.2 Fiscal Policies The fourth wave: Rapid debt buildup January 2020, Chapter 4 Debt: No free lunch June 2019, Box 1.1 Debt in low-income countries: Evolution, implications, and remedies January 2019, Chapter 4 Debt dynamics in emerging market and developing economies: Time to act? June 2017, Special Focus 1 Having fiscal space and using it: Fiscal challenges in developing economies January 2015, Chapter 3 Revenue mobilization in South Asia: Policy challenges and recommendations January 2015, Box 2.3 Fiscal policy in low-income countries January 2015, Box 3.1 What affects the size of fiscal multipliers? January 2015, Box 3.2 Chile’s fiscal rule—an example of success January 2015, Box 3.3 Narrow fiscal space and the risk of a debt crisis January 2015, Box 3.4 Commodity Markets Reforms after the 2014-16 oil price plunge June 2020, Box 4.1 Adding Fuel to the Fire: Cheap Oil in the Pandemic June 2020, Chapter 4 The role of major emerging markets in global commodity demand June 2018, Special Focus 1 The role of the EM7 in commodity production June 2018, SF1, Box SF1.1 Commodity consumption: Implications of government policies June 2018, SF1, Box SF1.2 With the benefit of hindsight: The impact of the 2014–16 oil price collapse January 2018, Special Focus 1 From commodity discovery to production: Vulnerabilities and policies in LICs January 2016, Special Focus After the commodities boom: What next for low-income countries? June 2015, Special Focus 2 Low oil prices in perspective June 2015, Box 1.2 Understanding the plunge in oil prices: Sources and implications January 2015, Chapter 4 What do we know about the impact of oil prices on output and inflation? A brief survey January 2015, Box 4.1 Globalization of Trade and Financial Flows The impact of COVID-19 on global value chains June 2020, Box SF1 Poverty impact of food price shocks and policies January 2019, Chapter 4 Arm’s-length trade: A source of post-crisis trade weakness June 2017, Special Focus 2 The U.S. economy and the world January 2017, Special Focus Potential macroeconomic implications of the Trans-Pacific Partnership Agreement January 2016, Chapter 4 Regulatory convergence in mega-regional trade agreements January 2016, Box 4.1.1 China’s integration in global supply chains: Review and implications January 2015, Box 2.1 Can remittances help promote consumption stability? January 2015, Chapter 4 What lies behind the global trade slowdown? January 2015, Chapter 4 G LO BAL EC O NO MIC P ROS P EC TS | J U NE 2020 S E L E C T E D TO P I C S 215 Prospects Group: Selected Other Publications on the Global Economy, 2015-20 Commodity Markets Outlook Column1 Food price shocks: Channels and implications April 2019, Special Focus The implications of tariffs for commodity markets October 2018, Box The changing of the guard: Shifts in industrial commodity demand October 2018, Special Focus Oil exporters: Policies and challenges April 2018, Special Focus Investment weakness in commodity exporters January 2017, Special Focus OPEC in historical context: Commodity agreements and market fundamentals October 2016, Special Focus Energy and food prices: Moving in tandem? July 2016, Special Focus Resource development in an era of cheap commodities April 2016, Special Focus Weak growth in emerging market economies: What does it imply for commodity markets? January 2016, Special Focus Understanding El Niño: What does it mean for commodity markets? October 2015, Special Focus How important are China and India in global commodity consumption? July 2015, Special Focus Anatomy of the last four oil price crashes April 2015, Special Focus Putting the recent plunge in oil prices in perspective January 2015, Special Focus Inflation in Emerging and Developing Economies Inflation: Concepts, evolution, and correlates Chapter 1 Understanding global inflation synchronization Chapter 2 Sources of inflation: Global and domestic drivers Chapter 3 Inflation expectations: Review and evidence Chapter 4 Inflation and exchange rate pass-through Chapter 5 Inflation in low-income countries Chapter 6 Poverty impact of food price shocks and policies Chapter 7 A Decade After the Global Recession: Lessons and Challenges for Emerging and Developing Economies A Decade After the Global Recession: Lessons and Challenges Chapter 1 What Happens During Global Recessions? Chapter 2 Macroeconomic Developments Chapter 3 Financial Market Developments Chapter 4 Macroeconomic and Financial Sector Policies Chapter 5 Prospects, Risks, and Vulnerabilities Chapter 6 Policy Challenges Chapter 7 The Role of the World Bank Group Chapter 8 Global Waves of Debt: Causes and Consequences Debt: Evolution, Causes, and Consequences Chapter 1 Benefits and Costs of Debt: The Dose Makes the Poison Chapter 2 Global Waves of Debt: What Goes up Must Come Down? Chapter 3 The Fourth Wave: Ripple or Tsunami? Chapter 4 Debt and Financial Crises: From Euphoria to Distress Chapter 5 Policies: Turning Mistakes into Experience Chapter 6 High-Frequency Monitoring Column1 Global Monthly newsletter ECO-AUDIT Environmental Benefits Statement The World Bank Group is committed to reducing its environmental footprint. In support of this commitment, we leverage electronic publishing options and print-on-demand technology, which is located in regional hubs worldwide. Together, these initiatives enable print runs to be lowered and shipping distances decreased, resulting in reduced paper consumption, chemical use, greenhouse gas emissions, and waste. We follow the recommended standards for paper use set by the Green Press Initiative. The majority of our books are printed on Forest Stewardship Council (FSC)-certified paper, with nearly all containing 50-100 percent recycled content. The recycled fiber in our book paper is either unbleached or bleached using totally chlorine-free (TCF), processed chlorine-free (PCF), or enhanced elemental chlorine-free (EECF) processes. More information about the Bank’s environmental philosophy can be found at http://www.worldbank.org/corporateresponsibility. T he COVID-19 pandemic has, with alarming speed, dealt a heavy blow to an already-weak global economy, which is expected to slide into its deepest recession since the second world war, despite unprecedented policy support. The global recession would be deeper if countries take longer to bring the pandemic under control, if financial stress triggers defaults, or if there are protracted effects on households and firms. Economic disruptions are likely to be more severe and protracted in emerging market and developing economies with larger domestic outbreaks and weaker medical care systems; greater exposure to international spillovers through trade, tourism, and commodity and financial markets; weaker macroeconomic frameworks; and more pervasive informality and poverty. Beyond the current steep economic contraction, the pandemic is likely to leave lasting scars on the global economy by undermining consumer and investor confidence, human capital, and global value chains. Being mostly a reflection of the recent plunge in global energy demand, low oil prices are unlikely to provide much of a boost to global growth in the near term. While policymakers’ immediate priorities are to address the health crisis and moderate the short-term economic losses, the likely long-term consequences of the pandemic highlight the need to forcefully undertake comprehensive reform programs to improve the fundamental drivers of economic growth, once the crisis abates. Global Economic Prospects is a World Bank Group Flagship Report that examines global economic developments and prospects, with a special focus on emerging market and developing economies, on a semiannual basis (in January and June). The January edition includes in-depth analyses of topical policy challenges faced by these economies, while the June edition contains shorter analytical pieces. SKU 211553