World — 2020 recession worse than feared, recovery highly uncertain

The COVID-19 pandemic is contributing to greater demand destruction and supply chain disruption than initially feared. The IMF now forecasts the world economy to shrink 4.9% in 2020. For the first time since World War II, both advanced and emerging economies are in recession. The IMF’s projections imply a cumulative loss to the global economy of over US$12 trillion this year and next; equivalent to the economies of Japan, Germany and India combined.

Advanced economies are projected to contract on average by 8% in 2020, reflecting sharply lower services activity. The US (-8.0%), Japan (-5.8%), UK (-10.2%), Germany (-7.8%), France (-12.5%), Italy and Spain (-12.8%) are all predicted to suffer deep recessions (Chart). Asian economies—which took more than 77% of Australia’s exports in 2018-19—will also contract but by less than in the West. China appears to have the pandemic under control and the economy returned to growth in the second quarter, registering a 3.2% year-on-year expansion in real GDP. But China’s recovery will remain weak and uneven; industrial production is rising—a trend reflected in resilient Australian resources exports—but domestic private consumption is restrained. India is a weak spot, given rising infections and longer lockdowns. COVID-19 flare-ups could hinder the rebound in confidence and demand required to support economic recovery.

As economies gradually reopen, the IMF projects world GDP growth of 5.4% in 2021. But amid rising COVID-19 cases globally and in the absence of a widely available vaccine, the recovery is highly uncertain. The global recovery will benefit from exceptional policy support—overall global fiscal support stands at nearly US$11 trillion in 2020 (about 13% of global GDP). But global public debt is expected to reach an all-time high as a proportion of GDP in 2020-21, exceeding 101% of global GDP. This exposes some sovereigns, particularly in emerging markets, to a rise in global interest rates and renewed depreciation pressure on currencies should the recent improvement in financial market sentiment reverse.

Fig 4 Real GDP