The coronavirus pandemic and the ensuing economic crisis are evolving rapidly in scope and severity. To guide economic policy-makers in the months and years ahead, we need a better understanding of what is happening and what is specific about this crisis. Only twelve weeks into the outbreak, and five weeks since the publication of ODI’s vulnerability analysis, we identified the following economic lessons and challenges to take forward.
What we can learn from the pandemic
1. The economic costs will be considerable
It is clear the cost of the crisis will exceed earlier predictions by the G20/IMF or ODI’s analysis (projecting a 0.1% and 0.5% decline in yearly GDP respectively) and will probably reach at least 1.5% or $1 trillion worldwide.
This would technically mean a global recession (world growth less than 2.5%) with all major regions affected. Analysis suggests Africa’s GDP would be hit by at least $25 billion.
2. The crisis combines demand and supply shocks
Restrictions on people, workers and firms have led to a parallel decline in demand in sectors like travel and entertainment, but also in manufacturing.
Global supply chains are seeing disruption in the supply of components, such as machinery or fabrics from Italy or China, where exports dropped by a fifth in January and February (subscription required). It matters how countries are integrated into such value chains and how diversified these are – those integrated most will be hit hardest.
3. The crisis has spread to the financial sector
Stock markets have declined rapidly, wiping away gains made over the last year in days. Bad loan portfolios will increase and it will become more difficult to issue and roll over corporate and sovereign bonds.
This period of volatility has already seen $42 billion (subscription required) withdrawn from emerging markets as investors seek safety in established markets and currencies. In Nigeria, the fall in oil and stock prices has widened bond spreads and put pressure on the Naira. Global foreign direct investment may also be a sixth lower this year.
4. We are all in it together
This crisis is a leveller that affects the health and wealth of the middle classes, the poorest, and politicians alike.
Low-income countries will be affected through different mechanisms, like downturns in tourism and air transport (African airlines stand to lose $400m), reductions in oil and commodity prices (the halving of oil prices since the start of 2020 will reduce net exports from sub-Saharan Africa by $30 billion), or supply chain disruption (lower fabric imports from China threaten over 100,000 jobs in Cambodia).
But different countries and sectors have distinct economic vulnerabilities, including varied levels of exposure and resilience, which are not deterministic. Those dependent on commodities will always remain more volatile until they have a more diverse production spread.
5. Policy responses matter but differ markedly
There is much debate regarding how countries’ responses differ in terms of health resources, speed and strictness, in addition to fiscal measures. Some like Germany or India have enacted export bans and Cambodia has reduced taxes on garment firms.
Challenges shaping the prospects of low-income countries
1. The global economic recovery in the short- to medium-term
The economic consequences of coronavirus will no longer follow a V-shaped growth pattern, a sharp downturn followed by a sharp upturn. Growth is now likely to be U-shaped, a longer downturn, as news of the Chinese slowdown is compounded by similar news in Japan, Italy, and probably the US and elsewhere in the future.
There is now a real possibility of L-shaped growth, slower growth for some time in 2020 and 2021, if deglobalisation accelerates and the real crisis in supply and demand spills over to financial markets.
2. Coordination of the G20’s actions
The G20 successfully restored confidence in the wake of the 2008-2009 global financial crisis, and a similar rainbow stimulus is required now. Measures should include integrated fiscal and monetary policies, as well as targeted employment measures that take into account the poorest people and countries. Delays might mean a sharper and deeper ‘V’ or deeper and longer ‘U’.
3. How countries emerge from the crisis long-term
Different countries and economic activities will be affected in different ways. How diversified a country’s value chains and production systems are as the global economy comes out of this crisis, alongside their adoption of digital technologies, will be important.
4. The speed and quality of support measures will make a difference
Bridge finance will help airlines, hotels and people overcome a sharp but short recession, but targeted structural change can move a country into a new niche sector and make use of opportunities in services trade. Countries that can engineer this transformation fast will have an advantage.
5. Financing the health sector and the provision of vaccines
In the future, we will need to consider more closely how we finance global public goods such as heath sector response systems, vaccine development or other global challenges like climate change. This needs additional aid as well as non-aid, like developed country research and development budgets, to target finance at the weakest links.
