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

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The swift and massive shock of the coronavirus pandemic and shutdown measures to contain it have plunged the global economy into a severe contraction. According to World Bank forecasts, the global economy will shrink by 5.2% this year. That would represent the deepest recession since the Second World War, with the largest fraction of economies experiencing declines in per capita output since 1870, the World Bank says in its June 2020 Global Economic Prospects.

Economic activity among advanced economies is anticipated to shrink 7% in 2020 as domestic demand and supply, trade, and finance have been severely disrupted. Emerging market and developing economies (EMDEs) are expected to shrink by 2.5% this year, their first contraction as a group in at least sixty years. Per capita incomes are expected to decline by 3.6%, which will tip millions of people into extreme poverty this year.

The blow is hitting hardest in countries where the pandemic has been the most severe and where there is heavy reliance on global trade, tourism, commodity exports, and external financing. While the magnitude of disruption will vary from region to region, 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 capital development.

“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.”

Under the baseline forecast—which assumes that the pandemic recedes sufficiently to allow the lifting of domestic mitigation measures by mid-year in advanced economies and a bit later in EMDEs, that 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% in 2021, as advanced economies grow 3.9% and EMDEs bounce back by 4.6%. However, the outlook is highly uncertain and downside risks are predominant, including the possibility of a more protracted pandemic, financial upheaval, and retreat from global trade and supply linkages. A downside scenario could lead the global economy to shrink by as much as 8% this year, followed by a sluggish recovery in 2021 of just over 1%, with output in EMDEs contracting by almost 5% this year.

The U.S. economy is forecast to contract 6.1% this year, reflecting the disruptions associated with pandemic-control measures. Euro Area output is expected to shrink 9.1% in 2020 as widespread outbreaks took a heavy toll on activity. Japan’s economy is anticipated to shrink 6.1% as preventive measures have slowed economic activity.

“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,” said World Bank Prospects Group Director Ayhan Kose. “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.”

Analytical sections in this edition of Global Economic Prospects address key aspects of this historic economic shock:

How deep will the COVID-19 recession be? An investigation of 183 economies over the period 1870-2021 offers a historical perspective on global recessions.

Scenarios of possible growth outcomes: Near-term growth projections are subject to an unusual degree of uncertainty; alternative scenarios are examined.

How does informality aggravate the impact of the pandemic? The health and economic consequences of the pandemic are likely to be worse in countries with widespread informality.  

The outlook for low-income countries: The pandemic is taking a heavy human and economic toll on the poorest countries.

Regional macroeconomic implications: Each region is faced with its own vulnerabilities to the pandemic and the associated downturn.

Impact on global value chains: Disruptions to global value chains can amplify the shocks of the pandemic on trade, production, and financial markets.

Lasting scars of the pandemic: Deep recessions are likely to do long-term damage to investment, erode human capital through unemployment, and catalyze a retreat from global trade and supply linkages.

The implications of cheap oil: Low oil prices that are the result of an unprecedented drop in demand are unlikely to buffer the effects of the pandemic but may provide some support during a recovery.

The pandemic highlights the urgent need for health and economic policy action, including global cooperation, to cushion its consequences, protect vulnerable populations, and strengthen countries’ capacities to prevent and deal with similar events in the future. It is critically important for emerging market and developing economies, which are particularly vulnerable, to strengthen public health systems, address challenges posed by informality and limited safety nets, and enact reforms to generate strong and sustainable growth once the crisis passes.

Emerging market and developing economies with available fiscal space and affordable financing conditions could consider additional stimulus if the effects of the pandemic persist. This should be accompanied by measures to help credibly restore medium-term fiscal sustainability, including those that strengthen fiscal frameworks, increase domestic revenue mobilization and spending efficiency, and raise fiscal and debt transparency. The transparency of all government financial commitments, debt-like instruments and investments is a key step in creating an attractive investment climate and could make substantial progress this year.

Download the June 2020 Global Economic Prospects report.

Regional Outlooks:

East Asia and Pacific: Growth in the region is projected to fall to 0.5% in 2020, the lowest rate since 1967, reflecting disruptions caused by the pandemic. For more, see regional overview.

Europe and Central Asia: The regional economy is forecast to contract by 4.7%, with recessions in nearly all countries. For more, see regional overview.

Latin America and the Caribbean: The shocks stemming from the pandemic will cause regional economic activity to plunge by 7.2% in 2020.For more, see regional overview

Middle East and North Africa: Economic activity in the Middle East and North Africa is forecast to contract by 4.2% as a result of the pandemic and oil market developments. For more, see regional overview

South Asia: Economic activity in the region is projected to contract by 2.7% in 2020 as pandemic mitigation measures hinder consumption and services activity and as uncertainty about the course of the pandemic chills private investment. For more, see regional overview.

Sub-Saharan Africa: Economic activity in the region is on course to contract by 2.8% in 2020, the deepest on record. For more, see regional overview.

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Azerbaijan Can Accelerate Its Green Economic Transformation

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A report launch and policy dialogue organized by the World Bank jointly with the Republic of Azerbaijan National Coordination Council on Sustainable Development, the Ministry of Economy, and the United Nations reviewed the findings and recommendations of a recent World Bank report on how Azerbaijan can accelerate its transition towards a green and sustainable economic model.

Prepared as part of a country environmental assessment study carried out in close collaboration with the government of Azerbaijan and in consultation with a broad set of national and international stakeholders, the report: Azerbaijan: Towards Green Growth (executive summary in Azerbaijani) explores the long-run growth prospects and policy options to help the country pivot away from the economic model primarily based on fossil fuel exports.

The report’s recommendations provide a blueprint on how the country can accelerate towards a green economic transition and the goals of its national development strategy under the recently adopted Azerbaijan’s 2030: National Priorities for Socio-Economic Development  and the Strategy of Socio-Economic Development in 2022-2026. Both strategies place green growth and a clean environment among five key priorities for the country’s development up to 2030.

The December 7, 2022 session represented a coordinated and sustained joint effort among the Government of Azerbaijan policy makers, leading experts, the private sector, civil society, and development partners as part of a broader policy dialogue on sustainable development goals (SDG). It followed the 1st SDG Dialogue on Green Transformation in Azerbaijan, held on November 2, 2022 jointly organized by the National Coordination Council for Sustainable Development, the Ministry of Economy of the Republic of Azerbaijan, and World Bank, the United Nations, 

“Global transition towards a low-emissions economic model offers opportunities for Azerbaijan to be globally and regionally competitive. To make the best of it, Azerbaijan needs to focus on decarbonizing and diversifying the economy, bolstering innovation, and natural and human capital development,” noted Sarah Michael, World Bank Country Manager for Azerbaijan.  “Greening of a number of existing sectors, developing new green ones and increasing climate action can diversify Azerbaijan’s economy and address environmental challenges while reducing greenhouse emissions and associated risks and vulnerabilities.”

The government of Azerbaijan recognizes that the global green transition creates new opportunities for the country to overcome the limits of its fossil fuel-dependent growth model. It has prioritized an agenda that aims to pivot the country towards a greener, more sustainable, and resilient economy while meeting international commitments. These commitments include the United Nations’ 2030 Agenda for Sustainable Development and pledges to reduce GHG emissions set in its Nationally Determined Contributions (NDC) under the Paris Agreement.

“Building on 30-years of partnership with the government of Azerbaijan, the World Bank supports the country’s green aspirations. A Country Climate and Development Report, currently under development by the World Bank jointly with Azerbaijan, will help identify concrete near-, medium-, and long-term actions to promote the low-carbon transition, reduce GHG emissions, and boost climate adaptation,” said Sebastian Molineus, World Bank Regional Director for the South Caucasus. “Beginning now and with the help of public resources and revenues from fossil fuel exports, Azerbaijan can chart a new course towards a greener and cleaner future and the World Bank stands ready to support Azerbaijan on this path.”

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Digitalization Advances Financial Inclusion for Women and Micro Business Owners but More Is Needed

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The World Economic Forum launched today the ASEAN Digital Generation Report 2022, the sixth edition of the report since 2017. This year’s report examines digital financial services, gaps in access and where businesses, governments and civil society organizations need to improve financial inclusion.

The report builds on insights from a survey of more than 90,000 respondents from Indonesia, Malaysia, Philippines, Singapore, Thailand and Viet Nam. Some 70% of respondents were aged between 16 and 35, 52% were women, and a third (27,000) were micro-, small- and medium-sized enterprises (MSMEs).

Produced in collaboration with Sea Limited, a global consumer internet company founded in Singapore, the report indicates that usage of digital financial services is increasing across the region. Digital payment apps were most widely used after social media, with 84% of survey respondents having used digital payments. Respondents stressed the importance of better access to financial services for daily personal and business needs, from cash flows and savings to a safety net for business expansion.

Digitalization offers the potential to improve access to finance, promoting inclusivity for underserved groups such as women, rural dwellers and micro business entrepreneurs. Accessing digital financial services has become common practice among the majority of surveyed rural dwellers. MSMEs, particularly micro businesses, are getting more loans from fintech, as well as complementing loans from banks. In addition, one woman in five respondents who needed loans borrowed through fintech and online services, making them an important source of formal borrowing.

Access to finance remains an issue

Access to finance is not uniform among ASEAN’s digital generation. Among those who sought credit support, nearly half could not access formal sources of lending. Some 28% of those who needed loans did not get any and almost a fifth had to rely on family and friends, cooperatives and other informal lenders.

Women also had less access to financial services compared to men. For instance, only 22% of women who needed loans actually received credit from commercial banks, compared to 28% of men. There were also fewer women (19%) using advanced financial products – namely credit, investment and insurance – compared to men (24%). However, the survey indicated that women were adopting digital finance apps (65%) more than men (59%).

The report found that possession of financial management skills is correlated with access to financial products, particularly more advanced ones such as insurance, loans and investment.

Obstacles for ASEAN’s digital generation

Complex financial language used in financial services contracts constitutes a serious barrier for ASEAN’s digital generation. Respondents cited cumbersome processes or unfriendly interfaces (particularly for digital payments and lending services), fear of hidden costs and ambiguous contract terms (particularly for saving/investment and lending services).

The survey also looked into concerns that cut across various financial services and found security and fraud to be common themes. This underscores safety as a basic requirement for any form of financial service.

As ASEAN has been promoting ASEAN intra and international trade, the report examines the relationship between access to financial services and cross-border trade opportunities. The data indicates there is a gap in cross-border payments where only 33% of the respondents have used international payments. Some 42% of MSME entrepreneurs reported that inability to receive and/or send payment internationally has hampered their ability to buy or sell products from and to overseas.

The identified obstacles were consistent in all six countries surveyed. As such, multistakeholder and regional joint actions are needed to enhance digital financial inclusion in the region.

“Digital literacy and financial literacy are both critical not only to raise financial inclusion but also to enabling ASEAN’s digital generation to navigate financial services safely and seamlessly,” said Santitarn Sathirathai, Group Chief Economist at Sea, a Singapore-based global consumer internet company. “We have seen from the survey how digitalization can promote more inclusivity in finance for underserved groups such as rural dwellers and micro businesses. Raising digital and financial literacy can help to further increase access to financial services. And we also found that different groups have different learning needs. These call for multistakeholder actions to design targeted approaches in financial literacy education.”

“The future of ASEAN’s digital economy can be even brighter with collaboration from all relevant stakeholders to address identified challenges in a timely and coordinated manner. We sincerely hope that insights revealed in this report will inform impactful actions towards an inclusive future for ASEAN’s economy and people,” added Joo-Ok Lee, Head of the Regional Agenda, Asia-Pacific, World Economic Forum.

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Small Business, Big Problem: New Report Says 67% of SMEs Worldwide Are Fighting for Survival

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Small- and medium-sized enterprises (SMEs) and mid-sized companies are the backbone of the global economy. They create close to 70% of jobs and GDP worldwide. But, amid warnings of a global recession, research from the World Economic Forum and the National University of Singapore Business School indicates that 67% of executives from SMEs cite survival and expansion as their main challenge.

They mention low margins, the challenge of scaling the business and expanding to new markets, and clients/consumers as the main pressure points.

The report, Future Readiness of SMEs and Mid-Sized Companies: A Year On, looks at companies emerging from the pandemic. It builds on analysis of over 200 peer-reviewed articles and the quantitative and qualitative surveying of about 800 leaders and executives from SMEs and mid-sized companies. Business leaders also cite talent acquisition and retention (48%), culture and values (34%), funding and access to capital (24%), as well as non-favourable business policy environments (22%) as their biggest challenge.

The report also identifies pragmatic ways for smaller companies to embed future readiness into corporate strategies and highlights sustainability and digital transformation as two overlooked challenges. It focuses on how smaller companies can boost their resilience through stronger business frameworks. It also highlights how their high level of agility can benefit the development and implementation of:

– A strategic approach to talent management

– A staged approach to digital transformation

– Specific sustainability measures depending on the company’s level of maturity in this space

While smaller companies can increase their future readiness, the wider policy environment – such as the infrastructure for digital trade and finance – has a direct and important impact on their ability to thrive. It is, therefore, key for policy-makers, investors and other stakeholders to do what is in their capabilities to contribute to building the future readiness of this segment of the economy.

“The business community is stepping up to tackle the biggest issues facing the world. SMEs and mid-sized companies are key enablers in this pursuit. This report sheds light on some key opportunity spaces for SMEs and mid-sized to do exactly that,” said Børge Brende, President, World Economic Forum.

Rashimah Rajah, Professor at the National University of Singapore and co-lead author of the report, added: “SMEs and mid-sized companies have unique strengths in their ability to pivot their business models to be more future ready and, by hiring and developing the right talent, they can mobilize positive internal and external change faster than larger companies. However, to fully realize their potential, they also need the support of policy-makers in recognizing their credentials as well as in rewarding sustainability initiatives.”

The report was developed in collaboration with the National University of Singapore Business School, as well as with expert contributions from UnternehmerTUM, Aston Business School, TBS Education, the Aspen Institute, Asia Global Institute and the International Chamber of Commerce.

The World Economic Forum will be leveraging the insights generated in this report to further support SMEs and mid-sized companies in their future-readiness journey. This will be done through the creation of additional resources including the continuous development of the Forum’s self-assessment and benchmarking tool on future readiness, as well as the creation of a space for informal peer-to-peer learning between companies as well as meet-ups with key experts.

With some of the key insights of the report coming from the New Champions Community, the Forum aims to amplify the voices of purpose-driven mid-sized businesses. This community and its more than 100 members share and learn from best practices, proven innovations and support new partnerships for the common good in the mid-sized landscape.

The Forum is now accepting applications from forward-looking mid-sized companies that are pioneering new business models, emerging technologies and sustainable growth strategies.

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