The COVID-19 Economic Outlook

by Sean Tweedie | April 30, 2020

The COVID-19 pandemic is a crisis like no other. Firstly, the shock is large. The output loss associated with this health emergency and the related containment measures dwarfs the losses triggered by the global financial crisis of 2008 – 2009. Secondly, like war or a political crisis, there is severe uncertainty about the duration and intensity of the shock. Lastly, there is a very different role for economic policy this time round. In a ‘normal’ crisis, policymakers try to encourage economic activity by stimulating aggregate demand as quickly as possible.

This time round the crisis is to a large extent the consequence of the containment measures needed to slow the spread of the virus. This makes stimulating economic activity more challenging, and often undesirable for certain sectors. See Figure 1.

The International Monetary Fund (“IMF”) in a recent publication projected global growth of -3.0% in 2020, an outcome far worse than during the global financial crisis. This is 6 percentage points lower relative to their October 2019 – projections – an indication of just how rapidly the economic fallout from the pandemic has engulfed markets. Growth in advanced economies (which includes the United States, Euro Area, Japan, Canada and the United Kingdom) is projected at -6.1% for 2020. Several of these economies have been hit the hardest and experienced widespread outbreaks.

Growth in emerging market and developing countries (which includes South Africa, Nigeria, Brazil, Mexico, Russia and China amongst others) is expected to contract by -1.0 % in 2020. Many countries within this group have not yet imposed strict containment measures, thus this figure could be revised down further in the future. This is a baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound.


If the pandemic were to last longer than that, global output would fall by an additional 3% in 2020 relative to this already weak baseline. The IMF projects global growth to read 5.8 % in 2021 as economic activity, assisted by policy support, normalizes. A second outbreak next year would push global GDP almost 5% below the IMF’s baseline in 2021, while the combination of a longer outbreak this year and a second outbreak next year would cause the level of output to fall 8% below the 2021 baseline. See Figure 2.


There is extreme uncertainty around the global growth forecast because the economic fallout depends on uncertain factors that interact in ways that are difficult to predict. These include, for example, the pathway of the pandemic, the progress in finding a vaccine and therapies, the intensity and efficacy of containment efforts, the extent of supply disruptions and productivity losses, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioral changes (such as people avoiding shopping malls and public transportation), confidence levels, and volatile commodity prices. The response from Central Banks and governments to combat the negative impact of the pandemic has been immense. Besides strengthening health care systems, policies are needed to limit the fallout in economic activity by shielding people and firms affected by the slowdown and ensuring that the economic recovery can begin quickly once the pandemic fades. This stimulus takes the form of fiscal (tax relief, unemployment insurance, liquidity support measures such as loans and guarantees, wage subsidies etc), monetary (lowering interest rates, bond purchase programs) and other macro-financial measures (such as central bank swap lines to improve international liquidity). South Africa’s response has been swift and commendable.

They have cut interest rates by 200 basis points since the 20th of March to alleviate pressure on households and businesses, reduced the bank’s required liquidity coverage ratio from 100 to 80, increased the number of daily repo auctions to improve liquidity and government has recently pledged R500 billion in fiscal support aimed at those most affected. Unlike during other deep downturns, such actions may have a relatively limited impact on spending whilst travel restrictions and lockdowns are in place. Nevertheless, they play an important role in containing the shock and ensuring economic activity can recover when containment measures have been lifted. By limiting the rise in borrowing costs, the burden of debt is reduced which improves cash flows for households and businesses that continue to operate, helping reduce further job losses. Similarly, broadbased fiscal stimulus such as public infrastructure investment or tax relief can boost confidence, help lift aggregate demand and avert an even-deeper downturn.

These types of measures are more important in stimulating spending after the outbreak recedes and business activity picks up, hence the lagged response between implementation and an increase in global growth. We have seen some countries implement plans to return to work. The method of a phased and risk adjusted approach, such as the approach South Africa is planning to follow, is likely to be the best way to ensure economic activity resumes while limiting the further spread of the virus. Despite the commendable efforts of governments to increase fiscal support thus far, certain risks to the downside remain and are worth noting. The ri

sk of a more severe economic fallout from repeated or more widespread outbreaks remains.

Growth estimates are largely based on the expectation of a rebound in the second half of 2020. As social distancing is eased there is a greater chance of infection rates rising, prompting the re -imposition of containment measures and bringing activity to a halt while dampening confidence. A second risk is that of large swings in commodity prices. Oil prices have been hit hard due to demand shocks. A prolonged period of low oil prices will worsen public finances for many oil exporting countries. Over the past months, markets have experienced bouts of extreme volatility as well as a run to safe -haven assets. If concerns over the crisis were to increase beyond these levels, sentiment could further deteriorate and lead to more risk -off events, exposing the financial vulnerabilities of these economies. This could lead to higher spreads in high -debt countries, exchange rate volatility, pressures on Dollar funding and capital flow reversals. The last downside risk to the fiscal support efforts is that of a further natural disaster occurring, such as extreme weather conditions like floods, cold snaps or heat waves. Recently East Africa has been ravaged by swarms of locusts. A second wave, 20 times greater than the first and the largest on record, is due to coincide with the planting season in East Africa. Natural disasters such as these would put severe pressure on the already constrained resources at governments’ disposal.


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