Pandemic drives broadest economic collapse in 150 years

The coronavirus pandemic inflicted a “swift and massive shock” that has caused the broadest collapse of the global economy since 1870 despite unprecedented government support, the World Bank said on Monday.

The world economy is expected to contract by 5.2 per cent this year − the worst recession in 80 years − but the sheer number of countries suffering economic losses means the scale of the downturn is worse than any recession in 150 years, the World Bank said in its latest Global Economic Prospects report.

“This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges,” said World Bank Group Vice President for Equitable Growth, Finance and Institutions Ceyla Pazarbasioglu.

The depth of the crisis will drive 70 to 100 people into extreme poverty − worse than the prior estimate of 60 million, she told reporters.

And while the Washington-based development lender projects a rebound for 2021, there is a risk a second wave of outbreaks could undermine the recovery and turn the economic crisis into a financial one that will see a “wave of defaults.” Economists have been struggling to measure the impact of the crisis they have likened to a global natural disaster, but the sheer size of the impact across so many sectors and countries has made it hard to calculate, and made predictions about any recovery highly uncertain.

Under the worst-case scenario, the global recession could mean a contraction of eight per cent, according to the report.

But Pazarbasioglu cautioned: “Given this uncertainty, further downgrades to the outlook are very likely.” Although China is nearly alone in seeing modest growth this year, the depth of the slowdown in the world’s second-largest economy will hinder recovery prospects in developing nations, especially commodity exporters, the World Bank warned. While China will see GDP rise just one per cent, the World Bank said, the rest of the forecasts are grim: US -6.1 per cent, eurozone -9.1 per cent, Japan -6.1 per cent, Brazil -8 per cent, Mexico -7.5 per cent and India -3.2 per cent.

And things could get worse, meaning the forecasts will be revised even lower, the bank warned.

Though dramatic, the current forecast falls short of the Great Depression, which saw a global contraction of 14.5 per cent from 1930 to 1932, while the post-war downturn in 1945-1946 was 13.8 per cent, according to the World Bank.

Still, amid the still unfolding pandemic there remain some “exceptionally high” risks to the outlook, particularly if the of the disease lingers or rebounds, causing authorities to reimpose restrictions that could make the downturn as bad as eight per cent.

“Disruptions to activity would weaken businesses’ ability to remain in operation and service their debt,” the report cautioned. That, in turn, could raise interest rates for higher-risk borrowers. “With debt levels already at historic highs, this could lead to cascading defaults and financial crises across many economies,” it said.

But even if the 4.2 per cent global recovery projected for 2021 materializes, “in many countries, deep recessions triggered by COVID-19 will likely weigh on potential output for years to come.” Meanwhile,  European Central Bank President Christine Lagarde defended on Monday the aggressive stimulus measures taken by the ECB in response to the coronavirus pandemic, saying they are proportionate to the risk faced by the eurozone.

The ECB’s massive purchases of government bonds have come under fire from Germany’s constitutional court, which has given it three months to justify them or lose the national Bundesbank as the main buyer in its flagship debt-buying scheme. Lagarde did not mention the court’s ruling in her address to the European Parliament but emphasised that the ECB took into account “proportionality” when making decisions and carried out a “cost-benefit analysis” − two keywords from the verdict.

“Our crisis-related measures are temporary, targeted and proportionate... to the severe risks to our mandate that we are facing,” Lagarde told EU lawmakers.

The ECB expanded its Pandemic Emergency Purchase Programme (PEPP) to 1.35 trillion euros ($1.53 trillion )last week and extended it at least until June 2021.

While the German court ruling refers to a different ECB bond-purchase scheme, Markus Kerber, one of the co-plaintiffs in the case, told Reuters on Friday that PEPP may fall foul of a ban on bankrolling governments.

Agencies