Covid-19 Impact: World Economy To Go Into Recession, Except India And China, UN Says

The UNCTAD has called for a $2.5 trillion rescue package for developing economies.

A pedestrian wearing a protective mask crosses a near-empty road during a lockdown imposed due to the coronavirus in Mumbai, India, on Wednesday, March 25, 2020. (Photographer: Dhiraj Singh/Bloomberg)
A pedestrian wearing a protective mask crosses a near-empty road during a lockdown imposed due to the coronavirus in Mumbai, India, on Wednesday, March 25, 2020. (Photographer: Dhiraj Singh/Bloomberg)

The world economy will go into recession due to the coronavirus pandemic, with the exception of India and China, according to a latest United Nations trade report.

Two-thirds of the world living in developing countries are faced with unprecedented economic damage, United Nations Conference on Trade and Development said in its new analysis, calling for a $2.5 trillion rescue package for these nations.

According to the UNCTAD analysis, commodity-rich exporting countries will face a $2-$3 trillion drop in investments from overseas in the next two years.

Advanced economies and China have put together massive government packages which, according to the G-20, will extend a $5 trillion lifeline to their economies. "This represents an unprecedented response to an unprecedented crisis, which will attenuate the extent of the shock physically, economically and psychologically," UNCTAD said.

While the full details of these stimulus packages are yet to be unpacked, an initial assessment by UNCTAD estimates that they will translate into $1-2 trillion injection of demand into major G-20 economies and a two percentage point turnaround in global output.

"Even so, the world economy will go into recession this year with a predicted loss of global income in trillions of dollars. This will spell serious trouble for developing countries, with the likely exception of China and the possible exception of India," UNCTAD said. The report, however, did not give a detailed explanation as to why and how India and China will be the exceptions.

Further, given the deteriorating global conditions, fiscal and forex constraints are bound to tighten further over the course of the year. The UNCTAD estimates a $2-$3 trillion financing gap facing developing countries over the next two years.

To mitigate Covid-19’s economic fallout, UNCTAD proposed the following steps:

  • A $1 trillion liquidity injection for those being left behind through reallocating existing special drawing rights at the International Monetary Fund.
  • A debt jubilee for distressed economies under which another $1 trillion dollars of debts owed by developing countries should be cancelled this year.
  • A $500 billion Marshall Plan for health recovery funded from some of the missing official development assistance long-promised but not delivered by development partners.

Also Read: What to Know About Recessions, as Virus Threatens One

The speed at which the economic shockwaves from the pandemic has hit developing countries is dramatic, even in comparison to the 2008 financial crisis, UNCTAD said.

"The economic fallout from the shock is ongoing and increasingly difficult to predict, but there are clear indications that things will get much worse for developing economies before they get better," UNCTAD Secretary-General Mukhisa Kituyi said.

Also Read: How the Covid-19 Recession Is Like World War II

Even as advanced economies are discovering the challenges of dealing with a growing informal workforce, amplifying their difficulties in responding to the crisis. "Advanced economies have promised to do 'whatever it takes' to stop their firms and households from taking a heavy loss of income," Richard Kozul-Wright, director of globalisation and development strategies at UNCTAD, said.

"But if G20 leaders are to stick to their commitment of 'a global response in the spirit of solidarity', there must be commensurate action for the six billion people living outside the core G20 economies,” he added.