'Swift and massive shock'

EDITORIAL: The coronavirus pandemic has indeed delivered a "swift and massive shock" to the global economy, as World Bank Group Vice President Ceyla Pazarbasioglu so rightly put it, and already caused the widest collapse since at least the recession of 1870. Till very recently, the present downturn was dubbed the worst since the Great Depression of the 1930s, by all sorts of IFIs (International Financial Institutions) including the World Bank, which shows how fast growth statistics are deteriorating even though the coronavirus has been a truly global problem for just over a quarter. The most recent estimates see the world economy contracting by 5.2 percent this year, which is indeed the worst in 80 years, but the unprecedented scale of the crisis and the sheer number of countries with suddenly shrinking economies makes this the single worst economic disaster in a good 150 years. All this is quite sobering since at the present rate about 70-100 million people are going to be pushed into extreme poverty, which is much worse than the earlier estimate of 60 million people put forward just a few weeks ago. And there's no telling what might happen if this trend continues for a few more quarters or even years.

The World Bank seems a little upbeat about next year though, projecting a modest rebound, but the optimism is not without caution about a possible second wave of outbreaks that could quickly undermine any sort of recovery and add a financial side to the economic nightmare. That means a "wave of defaults" as more and more businesses are unable to service their debt and stay above water, with the unintended consequence of causing a sharp rise in the interest rate for other 'high risk' borrowers. A lot about this particular crisis is so unprecedented and unpredictable that even the most complicated calculations are guesstimates at best. Markets usually 'factor in' the worst case scenario, which enables policymakers to make plans accordingly. That is precisely what happened in the global financial crisis about a dozen years ago. The hit to the international financial system was nothing short of monumental, but it was still quantifiable, and all that was left was for governments and central banks to arrange bailout packages and structure complex investment vehicles to spend their way back to growth. It took a while, but things got back on track and the global economy was enjoying a nice bull run in the years before the coronavirus came.

Yet the economic trauma from this particular crisis will not even begin to recede till there is a laboratory breakthrough and a reliable vaccine is developed. And since nobody has yet got any idea how long that crucial process might take, markets are simply unable to discount the worst case scenario, making it impossible to tell accurately just where the bottom might lie. All this uncertainty, plus the fact that almost all countries except China are expected to post zero or negative growth this year, makes it all the more difficult to put a reliable number to global growth at this time. And even China will hardly grow one percent, which could well sound the death knell for economies of commodity exporting countries in the Asia Pacific region whose growth depends largely on feeding China's gigantic economic machinery. Other major economies are expected to end the year far too deep in negative territory for things to turn around anytime soon if the virus doesn't go away. The World Bank expects the US, the EU and Japan to post growth figures of -6.1 percent, -9.1 percent and -6.1 percent, respectively, which means more rounds of individual country and global downgrades are very likely.

There's only so much comfort that anybody can take from the World Bank's analysis that the world economy has seen worse days. It contracted about 14.5 percent in the initial years (1930-32) of the Great Depression and 13.8 percent in the post-WWII downturn of 1945-46. One reason is that even though relaxation of lockdowns across the world has stimulated economies a little bit, it has also led to a faster spread of the coronavirus in most countries. And the World Health Organisation (WHO) is already warning countries like Pakistan that the reopening is not working and recommending 'intermittent' lockdowns before their healthcare systems are completely overwhelmed. Once again, if all economies can come down to zero or negative growth in a matter of months - despite all the relief packages and financial support from governments - then one can only wonder where the global economy would stand if things continue like this for much longer. It would not at all be surprising, therefore, to see the World Bank revising downward its estimates once again in the near future.