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Economic uncertainties continue to constrain global economic growth. Late last month, the International Monetary Fund (IMF) further downgraded the global economic growth projection - a contraction by 4.9 per cent in 2020, some 1.9 percentage point below the April quarter forecast. Also, the recovery in 2021 would be slower than projected in the April forecast and during the same year Global GDP would be down by 4 per cent relative to its level in 2019 so long as there is no second wave of Covid-19 infections. The IMF further warned that a cumulative hit to the global economy would be of US$12 trillion over 2020-2021.
The IMF further indicated that for the first time ever nearly all regions of the world are expected to experience negative growth in 2020. Emerging markets and developing economies excluding China are expected to take a bigger hit to GDP growth than advanced economies in 2020-21.The growth forecast for this region is to be -3 per cent this year, 2 percentage points below the April forecast. This is truly a global crisis which translates into a risk of slowing down or even reversing the process of poverty reduction that has been witnessed in recent years.
It further noted that the steep decline in economic activity had caused catastrophic hit to global labour market and estimates jobloss could be 300 million in the second quarter of this year. The impact of the crisis, in particular, is acutely felt by low skilled workers who do not have the option to work from home. According the International Labour Organisation (ILO) close to 80 per cent of about 2 billion workers in the informal sector have been affected. This will negatively impact on low-income households leading to further significantly widening income inequality.
The crisis is now exposing existing glaring inequalities. The covid-19 has affected poorer sections of the population more severely, therefore they mostly bear the brunt of economic consequences of the pandemic. At the same time these low skilled workers do not have the option to work from home exposing the digital divide at a time when the digitisation process of the global economy is accelerating.
The report while recognising monetary and fiscal actions have been effective in helping prevent a massive wave of bankruptcies and unemployment but at a huge cost where fiscal actions now amount to about US$10.7 trillion; and monetary policy measures amount to over US$6 trillion. This is a response like no other to a crisis before. Of particular concern is the debt financed spending under the current situation but it is a necessary step in the right direction to mitigate the economic consequences of the pandemic.
Also, the latest report issued by the Organisation for Economic Cooperation and Development (OECD) in June dismissed any possibility of "V" shaped recovery for developed economies from the consequences of restrictions imposed as a result of Covid-19. The OECD covers 33 economies. Its Chief economist Laurence Boon commented that economic activity had collapsed across the OECD during the shut down by 20 to 30 per cent in some countries and this was an extraordinary shock.
Developing economies also have been shaken by falling commodity prices , large capital outflows and plummeting remittances. It is estimated that migrant remittances have declined by almost a quarter during the pandemic globally. Migrant remittances constitute 9 per cent of Bangladesh GDP and most of these remittances come from the US, Gulf States, the UK and a few other European countries. All these countries are now in various stages of lockdown negatively impacting on their economic activity. Gulf states in particular are hit by falling oil prices. More alarmingly it is estimated that the number of people currently living with acute hunger could double by the end of 2020 raising the fear that the Covid-19 pandemic could be turning into a hunger epidemic.
The OECD report projects two scenarios; one in which the virus recedes and remains under control and the other where a second wave erupts later this year. Under those circumstances economic activity does not and can not return to normal. The report further adds that in a "single hit" scenario global GDP is projected to decline by 6 per cent this year and in a "double hit", the contraction will be 7.1 per cent this year.
The OECD report also pointed out the hardest hit areas in terms of employment and these include tourism, leisure and entertainment. But there has been a notable decline in spending on consumer durables, investment spending. Also, trade volume has been contracting. These obviously have impact of on the transport sector as reflected in particular in the decline in global air freight traffic.
There is also increasing disconnect between the real economy and financial markets. Equity markets in many instances rallied back close to the pre-pandemic level exposing this disconnect from the real economy. Given the uncertainties about economic outlook resulting from Covid-19, investors' confidence is shaken. With borders closed to stem the spread of the virus, also come further restrictions on trade and investment flows. This situation will continue until the virus outbreak is contained. However, government measures around the world have been successful in many countries to flattening the curve of the virus, but that also has caused a freeze in economic growth as well as income inequality.
With rising debt levels, both corporate and household and increasing business insolvencies could put the banking system under severe stress feeding into a financial crisis. Furthermore, pre-existing financial weaknesses are also being exposed by the pandemic. There is a growing concern shared by financial market analysts that there is potential for a financial crisis emerging unless the Covid-19 pandemic crisis is brought under control.
Given the uncertainty when the economy will operate normally, an accommodative monetary policy along with supportive fiscal measures are needed. The US Federal Reserve has already signalled to keep interest rates at zero to the end of 2022. The reason for such extraordinary measure which goes far beyond what it did for the Global Financial Crisis (GFC) of 2007-08, is to be considered necessary to keep the economy moving. Also, most countries around the world have introduced a series of fiscal and monetary measures to contain and mitigate the impact of the Covid-19 outbreak.
A developing economy like Bangladesh depends on international trade in goods and services and the flow of investment capital to maintain its growth momentum. The current disruption to existing international trade patterns and finance is not only due to the pandemic but also caused by the US-China trade and technology disputes, the US-EU trade disputes, Brexit and tensions arising out of other global geo-political factors. These factors are adversely impacting on business and consumer confidence which can work against achieving desired economic outcomes.
The economic and social consequences of the pandemic for the impoverished masses in Bangladesh can be quite devastating. As of July 9, in Bangladesh, 175,494 Covid-19 cases were reported with 84,544 deaths and only 907,784 tests were conducted (FE, July 10). Due to the poor and inadequate healthcare system along with inadequate testing and reporting, the scope of the pandemic's spread is likely to be much greater than official figures indicate.
Many analysts apprehend a post Covid-19 world that will be poorer and more disorderly. More alarmingly, they also think that the this will engender a time of instability comparable to the Great Depression leading to the World War II. A recent report of the UNICEF indicates that the lives and future of children across South Asia of which Bangladesh is a part, are being torn apart. The report further adds that due to the pandemic crisis, the number of children in poverty could rise by 120 million to more than 360 million within six months in the region These are formidable challenges not only for the South Asian region but also for all developing countries including Bangladesh.
In this very uncertain global economic and political environment, it is very critical that their potential impact on the Bangladesh economy is minimised through sound economic policies and disciplined public finance management. In particular, debt financed spending should be well targeted and ensured to be transparent and fair. In this critical time in the country's history, this will require appropriate fiscal and monetary measures which will help efficient resource allocation, investment and productivity gains along with well targeted public spending and a streamlined taxation regime.