The World Bank lays out a rather stark prediction in its June 2020 Global Growth Prospects report. But before we dive in to that, let’s first consider how unusual it is to have a synchronized global economy like we do right now. There have been any number of times when the world’s many economies are all moving up together. That data can vary depending on what kind of growth number you want to consider.
However, since 1871 there have only been 14 times where the global economy has gone into contraction, as measured by a majority of the world’s economies entering into recession together. The Covid-19 pandemic has caused the latest instance, with over 90% of the world’s economies now in recession territory.
What is even more interesting is the argument over the shape of recovery as we discussed last week, or as we’ll frame it today this question of deeper vs longer. We expect the global recession we are currently in will be deep. The World Bank is forecasting a 5.2% contraction in global GDP for 2020. How bad is that and what is GDP anyway?
GDP – gross domestic product – is the favorite indicator economists use to track growth. It is the sum total of services and products produced in a given economy and we typically look at it on a yearly basis as a percentage change. Most years GDP is positive, often ranging in the 3% to 4% range globally. So, a negative 5.2% is pretty bad. In fact, it’s a number we haven’t seen since the end of World War II.
This chart shows per capita GDP for the world’s economy, and you’ll see there are only a few instances that are worse than the situation we are looking at today. Those happened during world wars and global pandemics. Keep in mind that, although this is a global forecast, each of the world’s economies will experience this downturn differently. The advanced world economies will actually contract even more than the global average, possibly closer to 7%, and developing economies may be looking at contractions on average in the 2.5% range. This is because developing countries are growing much faster to begin with.
So, what about the rebound? We believe that most of this decline in GDP has already happened in the first and second quarters of this year. And as we gradually get to the business of opening back up, albeit with fits and starts, the second and third quarters should show positive growth numbers. Hopefully, strong positive growth will deliver a sharp rebound. But the pandemic is clearly not over and much rides on the re-opening process.
The report describes an optimistic scenario where growth returns fairly quickly with a forecast of 4.2% GDP in 2021. A more pessimistic scenario, where the virus causes secondary shutdowns in numerous countries and prevents a return to growth, predicts a contraction of over 8% in 2020 that might take multiple years before seeing recovery.
Policies matter and world leaders are being encouraged to think both in the short-term with a focus on continued stimulus and strengthened health care systems to deal with the current conditions, and longer-term to construct the framework for reforms that will lead to a sustainable and growing global economy. But for now, when you hear “we are all in this together,” remember we really do live in a synchronized world.
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