World Bank forecasts worst global recession since Second World War
Steve Ward, News Editor
11 Jun 2020, 3:35 p.m.
The World Bank has made further dire predictions for the global economy in 2020 and beyond, in a newly published report.
The World Bank Group’s 2020 Global Economic Prospects report, published on June 8th, makes for concerning reading. The Group, which works towards sustainable solutions to reduce poverty in developing countries, believes Covid-19 will plunge the world into the worst recession since World War II.
It predicts the global economy as a whole will shrink this year by 5.2%. Of this, advanced economies share the largest fall of 7%, whilst emerging and developing economies may shrink by 2.5%. Overall, average per capita incomes could fall by as much as 3.6%. Specifically, by the end of this year it foresees the US economy contracting by 6.7%, the Eurozone by 9.1%, and Japan by 6.1%.
Further estimating the impact of coronavirus into 2021 is far more difficult, while some countries are seeing lockdown measures successfully reduce the spread of the virus, medical experts are warning of second peaks as lockdown measures ease.
The World Bank’s report believes that with a favourable united international response to the crisis, 2021 could see growth rebound to 4.2%. This would comprise 3.9% from advanced economies and 4.6% from emerging economies.
However, it warned that without a united global response they forecast the global economy could grow by a mere 1%. “This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges” said World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu. “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.”
Much of the 2020 Global Economic Prospects report concentrates on the effect of oil prices. Unlike gold commodities, oil prices have dipped severely during the current crisis. This is based on earlier over-production that has been exacerbated by the current massive fall in demand caused by the Covid-19 lockdowns.
Many economists see low oil prices as a stimulus to production and growth. The report, however, shows that historically low oil prices have led to falling economic growth. This is the result of lost income to oil producers and their service industries.
The predictions of the World Bank Group are reinforced by the OECD (Organisation for Economic Co-operation and Development) in their own June Economic Outlook update.
This, too, sees an effective united global response as key to minimising the economic damage of the pandemic. It warns the crisis could be the worst since the Great Depression of the 1930s. In the update, Laurence Boone – OECD Chief Economist – says, 'Extraordinary policies will be required to walk the tightrope towards recovery.' He further states, 'The recovery will not gain steam without more confidence, which will not fully recover without global cooperation.'
Like the World Bank Group, the OECD Update predictions are based on two possible scenarios. One is based on effective international action, a 'single hit scenario'. The other 'double-hit scenario' is based on less effective measures.
Sadly, overall, Laurence Boone sees a growing lack of international cooperation. He states, 'The pandemic has accelerated the shift from “great integration” to “great fragmentation”. Additional trade and investment restrictions have sprung up.'
The OECD foresees the UK suffering a 2020 fall in GDP of between approximately 11.5% and 14%, the worst of any major economy. The lower of the two assumes that current lockdown measures have been enough to stop any second wave of infections, while the larger contraction assumes that infections will rise again, and restrictions will be reintroduced or remain long term.
France, Spain and Italy were forecast to perform very slightly better than the UK but remaining in deep recession all the same, while the Eurozone could fall between 8.5% and 11.5%. Canada, Germany and the US fare better but still expect GDP to fall between 6.25% and 9.5%.
Despite such dire predictions, the stock markets continue to rally as some investors hope for a bounce back as people return to work in the coming weeks. If the OECD and the World Bank are correct however, a more risk averse investment strategy will likely prove more successful in the coming months, and given the surge in demand for precious metals many investors are wary of a false start for the stock market.