The Coronavirus pandemic has had a dramatic impact on the global economy. In fact, according to a recent study conducted by World Bank, we are likely headed into the worst recession since World War II. According to CPA Practice Advisor, gross domestic product will likely shrink by 5.2% in 2020. This includes a 2.5% decrease in the output of developing countries.
Unfortunately, this will likely send 70-100 million people in these areas into poverty after six decades of steady growth. Advanced economies are likely to drop by 7%, with European countries’ GDPs shrinking as much as 9.1%, according to World Bank. More than 90% of countries will experience a drop in their per-capita output.
The International Monetary Fund (IMF) has a slightly more optimistic estimate, having projected a 3% overall fall. This is because the IMF bases its predictions on purchasing power parity, meaning that developing economies are given more weight than they are in the market exchange rate forecasting method used by World Bank.
In addition, since COVID-19 has not yet been contained and there is a lot of uncertainty around what life will look like for the remainder of 2020, both institutions agree that the outlook of the global GDP is likely to get even worse. With economies closed or operating at limited capacity and many companies laying off or furloughing employees as a result, the world’s financial health may not recover for some time. Industries such as travel and hospitality as well as companies that rely on foreign imports are likely to be hit hardest by this economic downturn.
Of course, these estimates are not set in stone. If the pandemic lasts for longer than expected, the global economy may shrink even more, up to 8%, according to World Bank. If commerce and trade reopen sooner than expected, the damage may be limited to a 4% overall decrease. While this is of course preferable from a financial perspective, a 4% drop is still severe. For comparison, the 2009 crash was only about a 2% decline.
Luckily, there is light at the end of the tunnel! The economy is expected to rebound in 2021, growing approximately 4.2% as the pandemic subsides and life returns to normal. The earlier the virus can be contained and preventative social distancing measures can be lifted, the sooner this increase will begin.
