World faces broadest economic collapse in 150 years

The coronavirus pandemic inflicted a "swift and massive shock" that has caused the broadest collapse of the global economy since 1870 despite unprecedented government support, the World Bank says.

The world economy is expected to contract by 5.2% this year - the worst recession in 80 years - but the sheer number of countries suffering economic losses means the scale of the downturn is worse than any recession in 150 years, the World Bank said in its latest Global Economic Prospects report.

Namibia’s economic growth for 2020 is forecast at -4.8% in the report, better than the -6.6% finance minister Iipumbu Shiimi projected in his budget speech recently.

"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.

The depth of the crisis will drive 70 to 100 million people into extreme poverty - worse than the prior estimate of 60 million, she told reporters.

And while the Washington-based development lender projects a rebound for 2021, there is a risk a second wave of outbreaks could undermine the recovery and turn the economic crisis into a financial one that will see a "wave of defaults."

Economists have been struggling to measure the impact of the crisis they have likened to a global natural disaster, but the sheer size of the impact across so many sectors and countries has made it hard to calculate, and made predictions about any recovery highly uncertain.

Under the worst-case scenario, the global recession could mean a contraction of 8%, according to the report.

But Pazarbasioglu cautioned: "Given this uncertainty, further downgrades to the outlook are very likely."

World outlook

Although China is nearly alone in seeing modest growth this year, the depth of the slowdown in the world's second-largest economy will hinder recovery prospects in developing nations, especially commodity exporters, the World Bank warned.

While China will see GDP rise just 1%, the World Bank said, the rest of the forecasts are grim: US -6.1%, eurozone -9.1%, Japan -6.1%, Brazil -8%t, Mexico -7.5% and India -3.2%.

And things could get worse, meaning the forecasts will be revised even lower, the bank warned.

Though dramatic, the current forecast falls short of the Great Depression, which saw a global contraction of 14.5% from 1930 to 1932, while the post-war downturn in 1945-1946 was 13.8%, according to the World Bank.

Still, amid the still unfolding pandemic there remain some "exceptionally high" risks to the outlook, particularly if the of the disease lingers or rebounds, causing authorities to reimpose restrictions that could make the downturn as bad as 8%.

"Disruptions to activity would weaken businesses' ability to remain in operation and service their debt," the report cautioned.

That, in turn, could raise interest rates for higher-risk borrowers. "With debt levels already at historic highs, this could lead to cascading defaults and financial crises across many economies," it said.

But even if the 4.2% global recovery projected for 2021 materialises, "in many countries, deep recessions triggered by Covid-19 will likely weigh on potential output for years to come."

Sub-Saharan Africa

“Sub-Saharan Africa has been ravaged by the Covid-19 pandemic this year, likely leading to the sharpest contraction in activity on record,” the World Bank says.

In addition to its heavy toll on health and safety, efforts to contain the spread of the virus—such as travel restrictions, border closures, and national lockdowns—have disrupted the functioning of domestic economies. In addition, sharply lower growth in major trading partners, as well as a collapse in commodity prices, have weighed heavily on exports.

Although growth is projected to recover in 2021, the region is especially vulnerable to a larger and longer lasting downturn given the weakness of its health care systems, constrained fiscal policy space, and its limited capacity to effectively implement social distancing measures, the report warns.

At projected growth of -4.8% in 2020, Namibia falls way below the estimated average growth of -0.3 for the region, excluding Nigeria, South Africa and Angola.

Debt

The World Bank says Sub-Saharan Africa is also at risk of debt distress given high levels of debt and sharply higher borrowing costs.

Fiscal deficits in the region are projected to deteriorate sharply this year—doubling on average to roughly 5% of gross domestic product (GDP), the institution says.

Here to Namibia exceeds the regional average by far. The latest budget documents show government overall deficit for 2020/21 will be about 12.49% of GDP.

“Larger deficits reflect increased public spending to help limit the transmission and economic consequences of the virus, sharp falls in revenue as mitigation and other control measures have dampened activity, higher interest payments, and in some instances, the impact of weaker exports on government revenues,” the World Bank says.

Covid-19 is also expected to markedly increase the vulnerability of the region to debt distress, the institution says.

Regional government debt had already risen to 60% of GDP, on average, in 2019—almost double the level in 2013. The composition of debt had also become riskier, with a greater share owed to non-concessional lenders at a higher cost.

“These strains will be compounded by the increased borrowing required to fund larger deficits. In addition, borrowing costs across the region have risen sharply given heightened risk aversion, placing further pressure on fiscal capacity.

“Significantly larger, and more expensive, government debt burdens than last year mean that the risk of sovereign debt defaults has increased, and may rise further if the projected recovery in activity were to disappoint,” the World Bank says.

Other risks

Risks are firmly to the downside, the Bank says.

“Given the underlying vulnerability of the region, a longer lasting and more severe pandemic would trigger an even deeper recession in the region and have devastating effects on the health and well-being of the region’s population.”

It would also have long lasting effects on development and growth, as has been the case during previous epidemics, the World Bank continues.

“Even if the current pandemic is successfully contained, a second wave of infections could erupt within the region, especially if the easing of current measures to mitigate the spread of the virus is not guided by the evolution of the pandemic,” it adds.

Severely constrained government resources, as well as restrictions due to social-distancing measures, could lead to a loss of critical public services during the pandemic and further weigh on activity, the World Bank says.

These include provision of water, electricity, and normal health care services.

There are also growing concerns that the Covid-19 pandemic may cause a food security crisis in the region.

“Border closures and other trade restrictive policies, such as export bans for domestic stockpiling, are disrupting trading in food and agricultural products. Shortages could also induce food price spikes that may further exacerbate poverty.”

According to the World Bank, there is also a risk that violence and social unrest may erupt as a result of the pandemic, weighing further on mitigation efforts and activity.

“Moreover, rising unemployment, falling incomes, and potential shortages of essential items such as food could likely lead to social unrest and instability in several countries that may continue to weigh on activity even after the pandemic has faded,” the World Bank says. – Own report and Nampa/AFP