COVID-19 to Plunge Global Economy into Worst Recession since World War II -World Bank

According to the World Bank the swift and massive global shock of Covid-19 and the measures to contain it have plunged the world economy into a severe contraction.

According to World Bank forecasts, the global economy is set to shrink by 5.2 percent this year representing the deepest recession since the Second World War, with the largest fraction of economies experiencing the largest declines in per capita output since 1870, according to their June 2020 Global Economic Prospects. Download here for depressing reading.

Economic activity between advanced economies is anticipated to shrink 7 percent in 2020 with domestic demand and supply, trade, and finance severely disrupted.

Emerging markets and developing economies (EMDEs) are expected to shrink by 2.5 percent this year, their largest collective decline for sixty years,  with per capita incomes expected to decline by 3.6 percent – tipping millions into extreme poverty.

The hardest blow is hitting countries worst affected by the pandemic and where there is heavy reliance on global trade, tourism, commodity exports, and external financing.

While the situation in each country will be different, all EMDEs have vulnerabilities that are magnified by external shocks. Moreover, interruptions in schooling and primary healthcare access are likely to have lasting impacts on human development.

“This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges. Our first order of business is to address the global health and economic emergency. Beyond that, the global community must unite to find ways to rebuild as robust a recovery as possible to prevent more people from falling into poverty and unemployment.”

said World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu. 

In a best case scenario, assuming the pandemic recedes sufficiently to allow the lifting of some mitigation measures by mid-year in advanced economies and a bit later in EMDEs; adverse global spillovers ease during the second half of the year; and that dislocations in financial markets are not long-lasting — global growth is forecast to rebound to 4.2 percent in 2021, as advanced economies grow 3.9 percent and EMDEs bounce back by 4.6 percent.

However, the outlook is massively uncertain given the inability of nations to cooperate and the downside risks are potentially huge; including the possibility of a more protracted pandemic, financial upheaval, and retreat from global trade and supply linkages.

A worst-case scenario could lead the global economy to shrink by as much as 8 percent this year, followed by a sluggish recovery in 2021 of just over 1 percent, with output in EMDEs contracting by almost 5 percent this year.

The U.S. economy is forecast to contract 6.1 percent this year, reflecting the the lack of coordinated pandemic-control measures.

Euro Area output is expected to shrink 9.1 percent in 2020 as widespread outbreaks took a heavy toll. Japan’s economy is anticipated to shrink 6.1 percent.

“The COVID-19 recession is singular in many respects and is likely to be the deepest one in advanced economies since the Second World War and the first output contraction in emerging and developing economies in at least the past six decades. The current episode has already seen by far the fastest and steepest downgrades in global growth forecasts on record. If the past is any guide, there may be further growth downgrades in store, implying that policymakers may need to be ready to employ additional measures to support activity.”

said World Bank Prospects Group Director Ayhan Kose.

Corona Virus Economic Impact – ADB releases their forecast

The Asian Development Bank has released their predictions for the economic impact of Covid-19. Here’s how the numbers break down.

Comparative economic forecasts

The latest available economic data for the PRC compared to countries in East Asia.

Trade conflict effects

Based on the working paper The Impact of Trade Conflict on Developing Asia, this tool estimates the effects of tariffs on gross domestic product, exports, and employment across Asia and the Pacific countries following the growing trade battle between the United States and People’s Republic of China.

China will extend debt repayment to poor countries battling Covid-19

Caixin is reporting that China has suspended debt repayments for 77 developing countries and regions as part of the G-20 debt relief initiative to help impoverished countries weather economic difficulties amid the coronavirus pandemic, a senior Chinese diplomat said on Sunday.

The measures were announced by Chinese Vice Foreign Minister Ma Zhaoxu in Beijing.

Ma offered no details nor beneficiaries, the amount involved or terms of repayment.

The announcement came after G-20 agreed in April to freeze debt service payments until the end of the year for the world’s poorest countries battling Covid-19.

In May, President Xi Jinping also pledged $2 billion in aid and donations over the next two years to relevant countries and organizations combatting the pandemic.

According to the vice foreign minister the pledged aid included a USD50 million donation to the World Health Organization (WHO).

Wang Zhigang, minister of science and technology, also said during the same press conference that China will make its Covid-19 vaccine “a global public good” when it is ready. 

China’s top epidemiologist Zhong Nanshan said on Saturday during a livestreaming event that he believed the long-awaited coronavirus vaccine could be available for emergency use as early as this fall or by the end of the year. In total, six candidate vaccines are undergoing clinical trials in China.

Lao – Landlocked to Land-linked

Lao-China Railway Could boost aggregate income by 21% according a recently released World Bank report. Part of China’s grand Belt and Road Initiative(BRI), the railway connecting Lao and later Thailand, Malaysia and Singapore to the ambitious BRI if the right reforms are undertaken by the Lao Government.

The 414km long stretch of the high-speed rail-network connecting the capital, Vientianeand Boten at the border with China could provide Lao with a land link to global and regional supply chains – making the country more attractive to investors and hence growth.

But for this to happen, the government is faced undertaking bold, and sweeping policy reforms to facilitate trade, improve connectivity and simplify rules around doing business. These reforms would make the country attractive as an investment destination and link it to major production and consumption bases – like China and the Association of South East Asian Nations (ASEAN) – allowing firms to access global value chains.

The report goes on to say that “With efficient logistics services, Lao PDR could develop into a logistics hub, while targeted investments in agriculture and tourism could result in new export opportunities.”

At present, the production costs of USD5.9bn (a bit more than a third of Lao’ GDP) are to be shared 30/70 with China paying the lion’s share. But the high costs presents major risks for a country as economically challenged as Laos.

Forty percent of construction will be funded through equity, with one-third provided by the Lao Government (partially funded through loans from the Export-Import Bank of China) and the remaining two-thirds funded by China. This 60 percent will be funded by loans from the Lao-China Railway Company, a State- Owned Enterprise with 30 percent Lao and 70 percent Chinese ownership.

Success of the project will depend on China switching it’s current maritime cargo strategy to SE Asia and moving to rail. Most cargo destined for SE Asia is shipped and trade between China and Lao represents less than 2% of all China-ASEAN trades.

In 2019, China’s trade volume with ASEAN climbed by 14 percent to 4.43 trillion yuan. The EU remained China’s single largest trading partner with 4.86 trillion yuan in bilateral trade and an eight percent year-on-year growth rate (the U.S. has relegated to the third place on the list of China’s top trading partners with bilateral trade contracting more than 10 percent to around 3.73 trillion yuan).

(Source Eurostat)

The report estimates transit trade through the Laos railway corridor could reach an estimated 3.9 million tonnes per year by 2030, given a shift of 1.5m tonnes from the maritime transport sector.

Lao’s tourism industry could benefit greatly from an increase in demand for passenger rail traffic, which is expected to account for the majority of train traffic by 2030.

If Lao implements necessary logistics and trade reforms, the railway could attract traffic that is currently using maritime and air transport routes and significantly reduce land transport prices by 40-50 percent between Vientiane and Kunming, China and by 32 percent between Kunming and the Port of Laem Chabang in Thailand once the Lao-China railway starts to operate in December 2021.

With Factory Deflation Deepening, external demand wavering does China’s first real recession loom?

China’s Producer Price index, that measures the average changes in prices received by domestic producers for their output, fell at its sharpest rate in four years indicating a global slowdown in demand for Chinese goods, according to figures released last week.

That same data showed an unexpected growth in exports in April – perhaps helped by low oil prices – but also showed a stronger than unexpected decline in imports signaling weaker domestic demand.

Producer Prices in China decreased to 96.90 points in April from 98.50 points in March of 2020.

For China this is uncharted territory. It is the first time the NBS has released quarterly negative growth figures since they were first published in the 1990s. The January to March quarter was clearly a supply driven event as China closed down huge sectors of its economy to combat the lethal Coronavirus.

These figures, with the explosion of virus transmission and control measures beyond China’s border, the swelling ranks of unemployed in the US coupled with Washington’s increasingly belligerent stance toward Beijing could be signs of a potentially external demand driven recession could be looming.

China Producer Prices Change

The dire economic impact of the Corona-Virus has prompted the Vice-Premier, Li Keqiang, to to make the unprecedented measure to forgo issuing an annual GDP target.

Some analysts believe the rate at which the PPI are falling will give Beijing room to loosen fiscal measures to stimulate demand. But without the true cost of the epidemic yet known it is difficult to predict how those measures will work. However, with inflation fears diminishing now could be a good time for the BoC to cut borrowing rates.