COVID-19 pushes global economy into a downward spiral

The economic slowdown across the world has picked up pace in the past three months, and the global economy is slipping into a downward spiral of recession and demand destruction. Government agencies, economists and think-tanks have been warning of a prolonged slowdown with the recovery appearing to be a moving target.

The International Monetary Fund (IMF) last week projected a deeper recession and slower recovery for the coronavirus-ravaged world economy than it anticipated two months ago. The data and a revised forecast on the global economic outlook is no solace for governments and private enterprises.

The revised forecast comes amid the mounting COVID-19 fallout, warning of record debt levels in both advanced and emerging markets, and developing economies. Global output is projected to decline by 4.9 per cent in 2020, 1.9 percentage points below the IMF’s April forecast, followed by growth at 5.4 per cent in 2021, indicating a grimmer economic outlook for recovery as the pandemic continues to ripple across the globe.

The IMF is projecting a synchronised deep downturn in 2020 for advanced economies, and emerging markets and developing economies, noting that over 95 per cent of countries are expected to have negative per capita income growth this year.

Demand destruction

At the core of the deepening global slowdown lies the alarming demand destruction caused by the pandemic. As livelihoods are being destroyed, monetary and fiscal policy solutions are increasingly less effective in preventing the aggregate demand from shrinking further.

Economists fear more waves of infections could reverse increased mobility and spending, and rapidly tighten financial conditions, trigger sovereign debt distresses, and ultimately restrict governments’ ability to spend.

Public debt this year is projected to reach the highest level in recorded history in relation to GDP. A fiscal lockdown forced by a potential debt crisis is a surefire recipe for a negative multiplier effect on growth as more businesses will be forced to close down, resulting in more job losses, depressing demand further.

Is there a way out? The answer lies in how soon the world can find a vaccine or an effective medication to save lives. While the world is optimistic, in the medium term, the infections are likely to spike further.

In the short-run, the crisis calls for greater global coordination in medical research and economic policy in propping up demand. Amidst such a crisis, governments across the world should avoid geopolitical and trade tensions that could further damage the already fragile global economic prospects.