With what has been an unexpectedly difficult year, characterized by extreme uncertainties, predicting that global output will reach pre-pandemic levels in the coming year is a very long shot. As this will only be possible when policy makers extraordinarily get everything right, a far from certain prospect.
According to a report by UNCTAD, the deep global recession experienced this year will be followed by a technical bounce (as lockdown eases) and an initial recovery, but a full V-shaped recovery is unlikely to occur, even assuming that a second lockdown is avoided.
This notwithstanding, there are reasons to be worried about the pace of recovery next year, the report notes. A plethora of issues are going to feature in the coming year, including the rising risks of new waves of the COVID-19 disease, high uncertainty about the direction of economic policy and the absence of timely multilateral support commensurate with the current challenging circumstances, particularly in developing countries thereby leading to a more lasting damage from the COVID-19 shock.
“Next year will likely see a rebound. However, it will be uneven within and across countries and uncertainty will persist. Unemployment will be in an upward trend, more and more companies will be facing the threat of bankruptcy; supply chains will be fragile; confidence will be shaken; demand will be weak,” said Secretary-General of UNCTAD, Mukhisha Kituyi.
“Debt levels across the world, in both the public and private sectors, will have risen significantly from the historically high levels registered before the crisis. In this condition, the wrong policy steps – and ignoring the experience of the last decade – could trigger further shocks which would not only derail recovery but could usher in a lost decade,” he added.
According to UNCTAD simulations, as long as policy response this year is properly targeted and continues into 2021, world output will finish 2020 with a contraction of 4.3 percent and expand by 4.1 percent next year. Compared with mid-2020 outlook projected by the IMF which predicted a 4.9 percent contraction in 2020 and a 5.5 percent expansion in 2021, UNCTAD’s figures show a less severe contraction in 2020 but a much weaker recovery in 2021.
More so, the growth recovery in 2021 will coincide with rising unemployment, which is likely to reach double digits in some advanced economies. The economic fallout from the pandemic has already led to massive income losses of firms and families, and will continue to have a negative impact on savings and income, thus raising private debt levels.
Recall that, after the 2008/2009 Global Financial crisis, the necessary increase in government deficits and debt to fight the crisis were prematurely aborted by fiscal consolidation. According to UNCTAD’s economists, a similar instance is likely to happen as soon as mid-2021 in many countries, which in turn would slow down the return to full economic recovery or even reverse it. Even sooner than anticipated, for instance, the governor of the Central Bank of Ghana recently called on the government to develop a new medium-term macroeconomic framework to return the economy unto a path of fiscal consolidation.
Meanwhile, on a regional basis, UNCTAD expects North America to recover by 2.8 percent in 2021. For Latin America and the Carribean, a recovery of 3 percent is expected in 2021, Europe including Russia Federation and Turkey will expand by 3.5 percent. In East and West Asia, a 7.4 percent and 3.6 percent expansion is expected respectively and for Africa, an expansion of 3.5 percent is expected in 2021.
The fragile state of the world economy going into 2021 should be a wake-up call for policymakers everywhere. UNCTAD anticipates that, if not, there is a high likelihood that world output will not follow the V-shaped pattern that many are hoping for or even the stunted V that is a likely outcome. And that a prolonged recession or U-shaped recovery, a double-dip recession (W-shaped) or a permanent loss of potential output (L-shaped) are all possible trajectories.
According to the Secretary-General of UNCTAD, Mukhisha Kituyi, “building a better world is a matter of conviction and collective action. The lives of future generations and of the planet itself will depend on the choices we all take over the coming months.”
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