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COVID-19 likely to cost economy $1 trillion during 2020

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Apart from the tragic human consequences of the COVID-19 coronavirus epidemic, the economic uncertainty it has sparked will likely cost the global economy $1 trillion in 2020, the UN’s trade and development agency, UNCTAD, said on Monday.

“We envisage a slowdown in the global economy to under two per cent for this year, and that will probably cost in the order of $1 trillion, compared with what people were forecasting back in September,” said Richard Kozul-Wright, Director, Division on Globalization and Development Strategies at UNCTAD.

Launching the UNCTAD report as world financial markets tumbled over concerns about supply-chain interruptions from China, and oil price uncertainty among major producers, Mr. Kozul-Wright warned that few countries were likely to be left unscathed by the outbreak’s financial ramifications.

Doomsday scenario

One “Doomsday scenario” in which the world economy grew at only 0.5 per cent, would involve “a $2 trillion hit” to gross domestic product, he said, adding that collapsing oil prices had been “a contributing factor to that growing sense of unease and panic”.

While it was difficult to predict how the international financial markets will react to COVID-19’s impacts “what they do suggest is a world that is extremely anxious”, he said.

“There’s a degree of anxiety now that’s well beyond the health scares which are very serious and concerning.”

Spend now, to avoid meltdown later

To counter these fears, “Governments need to spend at this point in time to prevent the kind of meltdown that could be even more damaging than the one that is likely to take place over the course of the year”, Mr. Kozul-Wright insisted.

Asked about how different countries might react to the crisis including China – where the virus first emerged in December – and the United States, the senior UN economist said that the Chinese Government would likely introduce significant “expansionary measures” – shorthand for increasing spending or tax cuts.

“It will almost certainly do that,” he said. “Will the US Government in an election year, which is where we are…also need to respond in a way other than simply cutting taxes and reducing interest rates? I suspect it will do.”

Turning to Europe and the Eurozone, Mr. Kozul-Wright noted that its economy had already been performing “extremely badly towards the end of 2019”.

Europe facing recession

It was “almost certain to go into recession over the coming months; and the Germany economy is particularly fragile, but the Italian economy and other parts of the European periphery are also facing very serious stresses right now as a consequence of trends over (the last few) days.”

Describing many parts of the Latin American region as similarly vulnerable, he added that Argentina in particular “will be struggling as a consequence of the knock-on effects of this crisis”.

Commodity-rich countries face hit from stronger dollar

So-called Least Developed Countries, whose economies are driven by the sale of raw materials, will not be spared either.

“Heavily-indebted developing countries, particularly commodity exporters, face a particular threat”, thanks to weaker export returns linked to a stronger US dollar, Mr. Kozul-Wright maintained. “The likelihood of a stronger dollar as investors seek safe-havens for their money, and the almost certain rise in commodity prices as the global economy slows down, means that commodity exporters are particularly vulnerable.”

“Ultimately,” Mr. Kozul-Wright added, “a series of dedicated policy responses and institutional reforms are needed to prevent a localized health scare in a food market in Central China from turning into a global economic meltdown”.

Threat of pandemic ‘very real’: Tedros

Although the threat of COVID-19 becoming an official pandemic “has become very real”, the world is “not at  the mercy of the virus”, said the World Health Organization (WHO) head, Tedros Adhanom Ghebreyesus, briefing journalists in Geneva on Monday.

He said it was important not to let grim milestones such as passing the infection rate of 100,000 worldwide, sap resolve to contain the disease, stressing that 93 per cent of deaths so far have been in just four countries.

It would be “the first pandemic in history that could be controlled. The bottom line is, we are not at the mercy of the virus”, he added.  

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Call for Closer Policy Collaboration on Artificial Intelligence

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A recent APEC Business Advisory Council (ABAC) report revealed that artificial intelligence (AI) has a role to play in mitigating both the short and long-term effects of the COVID-19 pandemic on APEC economies.

From automated health diagnostics in hospitals to smart recruitment processes in organizations, the report, titled Artificial Intelligence in APEC, finds that this technology is creating new, previously unforeseen jobs, products and services that will contribute to the post-COVID-19 economic recovery.

“As we release this report, APEC economies are facing the twin threats of a global pandemic and an economic crisis that will leave its mark on our communities for years to come,” said Dato’ Rohana Tan Sri Mahmood, Chair of the 2020 APEC Business Advisory Council.

“How APEC economies address the accelerated rise of the digital economy and leverage new technologies like AI is one of the most pressing issues of our time,” she added.

The report also examines how AI is being adopted and applied across the region and makes key recommendations calling for closer policy collaboration between business and governments.

Of the surveyed APEC economies, the report found that most already have plans, policies or programs devoted to driving or supporting AI ecosystems. In fact, the report highlights some of the AI-related innovation already underway across the region, including finding ways to help patients suffering from locked-in syndrome to communicate with the world by a team of engineers at a university in the Philippines.

Another notable innovation will benefit the farming industry. A Japanese corporation is trying to improve the efficiency of farming by automatically aggregating and analyzing sensor data and satellite images to provide farmers with farm management recommendations. In addition, a group from New Zealand developed AI-powered crocodile-spotting drones to keep swimmers safe in Australian rivers, among others.

“AI technologies have the potential to significantly impact businesses and communities across our economies,” Dato’ Rohana explained. “We believe that APEC can serve as an effective forum for member economies to collaborate on ways to maximize the benefits of AI and promote inclusive growth while ensuring its use in a responsible and ethical manner,” she added.

According to the report, recognizing this technology and all its capabilities is a central component of an economy’s forward-looking policy for growth, productivity and job creation, highlighting that the potential of AI extends beyond economic benefits and includes tools to address complex issues such as poverty, inequality, climate change, healthcare and ways to cope with effects of the pandemic.

As AI becomes more widely accepted, adopted and used for innovation, the report suggests that APEC policymakers will need to draft new policies, revise existing ones, confront new questions, address new needs and reassess its impact.

“With the cooperation of the public and private sector, a coordinated future of AI will increase the Asia-Pacific region’s competitiveness and further facilitate regional integration,” the report notes.

Artificial intelligence, already well on its way to transforming the Asia-Pacific, drives social and economic growth across all key sectors. However, the pandemic, and the ensuing focus on economic recovery, brings a renewed sense of urgency to discussions around AI usage. 

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Global Economic Outlook 2021: Rebound will drive growth at record speed

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The global economy is projected to grow in 2021 by around 5% in market exchange rates – the fastest rate recorded in the 21st century – returning the global economy in aggregate to pre- pandemic levels of output by the end of 2021 or early 2022.

The predictions published today in PwC’s Global Economy Watch for 2021 – From the Great Lockdown to the Great Rebound – highlight key themes for 2021 linked to a wider reset for economies, skills and society. 

Growth will return, but be uneven and be contingent on a successful and speedy deployment of vaccines and continued accommodative fiscal, monetary and financial conditions in the larger economies of the world.  Another key theme will be how the push for recovery and growth could synchronize green infrastructure investment, creating a turning point in the fight against climate change. 

Growth will return but be uneven 

Despite projected expansion of 5% in market exchange rates this year, the predictions caution that the next three-to-six months will continue to be challenging, particularly for the Northern Hemisphere countries going through the winter months as they could be forced to further localised or full economy-wide lockdowns (as recently displayed in the UK). 

Output in some advanced economies, for example, could contract in Q1 and growth overall is more likely to pick up in the second half of the year, when it is expected that large advanced economies will  have vaccinated at least two thirds of their population.

Barret Kupelian, senior economist at PwC, said:“While it’s good news that the global economy in aggregate is likely to be back to its pre-crisis levels of output by the end of 2021 or early 2022, a distinguishing feature of the Great Rebound is that it will be uneven across different countries, sectors and income levels. For example, the Chinese economy is already bigger than its pre-pandemic size, but other advanced economies ‒‒ particularly heavily service based economies like the UK, France and Spain or those focused on exporting capital goods, such as Germany and Japan ‒‒ are unlikely to recover to their pre-crisis levels by the end of 2021.”

In economies such as the UK, France, Spain and Germany, growing but lower levels of output are projected to push up unemployment rates, with most of the jobs affected likely to be those at the bottom end of the earnings distribution, thus exacerbating income inequalities. 

Barret Kupelian, senior economist at PwC, added: “Once the virus is under control, policymakers’ attention will need to focus on laying the foundations for sustainable and inclusive growth with particular focus on creating jobs and pushing the green economy agenda. Business leaders need to plan now both in terms of growth and investment, including upskilling of their existing workforce as a key aspect.”

A synchronised push for green infrastructure 

The environment will be an important focus for 2021 and is already being positioned as an opportunity for accelerating the business and policy transition to net zero. Significant investment and policy shifts related to the Paris Climate Agreement are expected in 2021 in the major trading blocks including the US, China and the EU. 

Green bonds, which are used to directly finance environmental projects, currently make up less than 5% of the global fixed income market. In 2021, total green bond issuance will increase by over 40% to top half a trillion US dollars for the first time. In addition, investor appetite for Environmental, Social and Governance (ESG) funds will continue to increase and could account for up to 57% of total European mutual funds by 2025. 

Globally, the analysis points to electricity production from renewables continuing to gather momentum, with solar photovoltaic (PV) capacity likely to grow at rapid rates on the back of growing capacity in the EU, India and China. If current trends continue, solar PV capacity is on course to surpass natural gas in 2023 and coal in 2024 in the global electricity sector.

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Global Economy to Expand by 4% in 2021

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The global economy is expected to expand 4% in 2021, assuming an initial COVID-19 vaccine rollout becomes widespread throughout the year. A recovery, however, will likely be subdued, unless policy makers move decisively to tame the pandemic and implement investment-enhancing reforms, the World Bank says in its January 2021 Global Economic Prospects.

Although the global economy is growing again after a 4.3% contraction in 2020, the pandemic has caused a heavy toll of deaths and illness, plunged millions into poverty, and may depress economic activity and incomes for a prolonged period. Top near-term policy priorities are controlling the spread of COVID-19 and ensuring rapid and widespread vaccine deployment. To support economic recovery, authorities also need to facilitate a re-investment cycle aimed at sustainable growth that is less dependent on government debt.

“While the global economy appears to have entered a subdued recovery, policymakers face formidable challenges—in public health, debt management, budget policies, central banking and structural reforms—as they try to ensure that this still fragile global recovery gains traction and sets a foundation for robust growth,” said World Bank Group President David Malpass. “To overcome the impacts of the pandemic and counter the investment headwind, there needs to be a major push to improve business environments, increase labor and product market flexibility, and strengthen transparency and governance.”

The collapse in global economic activity in 2020 is estimated to have been slightly less severe than previously projected, mainly due to shallower contractions in advanced economies and a more robust recovery in China. In contrast, disruptions to activity in the majority of other emerging market and developing economies were more acute than expected.

“Financial fragilities in many of these countries, as the growth shock impacts vulnerable household and business balance sheets, will also need to be addressed,” Vice President and World Bank Group Chief Economist Carmen Reinhart said.

The near-term outlook remains highly uncertain, and different growth outcomes are still possible, as a section of the report details. A downside scenario in which infections continue to rise and the rollout of a vaccine is delayed could limit the global expansion to 1.6% in 2021. Meanwhile, in an upside scenario with successful pandemic control and a faster vaccination process, global growth could accelerate to nearly 5 percent.

In advanced economies, a nascent rebound stalled in the third quarter following a resurgence of infections, pointing to a slow and challenging recovery. U.S. GDP is forecast to expand 3.5% in 2021, after an estimated 3.6% contraction in 2020. In the euro area, output is anticipated to grow 3.6% this year, following a 7.4% decline in 2020. Activity in Japan, which shrank by 5.3% in the year just ended, is forecast to grow by 2.5% in 2021.

Aggregate GDP in emerging market and developing economies, including China, is expected to grow 5% in 2021, after a contraction of 2.6% in 2020. China’s economy is expected to expand by 7.9% this year following 2% growth last year. Excluding China, emerging market and developing economies are forecast to expand 3.4% in 2021 after a contraction of 5% in 2020. Among low-income economies, activity is projected to increase 3.3% in 2021, after a contraction of 0.9% in 2020.

Analytical sections of the latest Global Economic Prospects report examine how the pandemic has amplified risks around debt accumulation; how it could hold back growth over the long term absent concerted reform efforts; and what risks are associated with the use of asset purchase programs as a monetary policy tool in emerging market and developing economies.

“The pandemic has greatly exacerbated debt risks in emerging market and developing economies; weak growth prospects will likely further increase debt burdens and erode borrowers’ ability to service debt,” World Bank Acting Vice President for Equitable Growth and Financial Institutions Ayhan Kose said. “The global community needs to act rapidly and forcefully to make sure the recent debt accumulation does not end with a string of debt crises. The developing world cannot afford another lost decade.”

As severe crises did in the past, the pandemic is expected to leave long lasting adverse effects on global activity. It is likely to worsen the slowdown in global growth projected over the next decade due to underinvestment, underemployment, and labor force declines in many advanced economies. If history is any guide, the global economy is heading for a decade of growth disappointments unless policy makers put in place comprehensive reforms to improve the fundamental drivers of equitable and sustainable economic growth.  

Policymakers need to continue to sustain the recovery, gradually shifting from income support to growth-enhancing policies. In the longer run, in emerging market and developing economies, policies to improve health and education services, digital infrastructure, climate resilience, and business and governance practices will help mitigate the economic damage caused by the pandemic, reduce poverty and advance shared prosperity. In the context of weak fiscal positions and elevated debt, institutional reforms to spur organic growth are particularly important. In the past, the growth dividends from reform efforts were recognized by investors in upgrades to their long-term growth expectations and increased investment flows.

Central banks in some emerging market and developing economies have employed asset purchase programs in response to pandemic-induced financial market pressures, in many cases for the first time. When targeted to market failures, these programs appear to have helped stabilize financial markets during the initial stages of the crisis. However, in economies where asset purchases continue to expand and are perceived to finance fiscal deficits, these programs may erode central bank operational independence, risk currency weakness that de-anchors inflation expectations, and increase worries about debt sustainability.

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