COMMENT – Pandemic bleeds global economy, but trade upturn could provide hope

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The global economy is bleeding thanks to the COVID-19 pandemic that continues to spread and kill people in thousands across the world, hitting newer countries and sometimes reappearing for a second wave in places it was believed to have walked away from after its earlier dance of destruction.

However, there is a ray of hope as countries re-open after sustained lockdown and global trade picks up gradually with aircraft taking to skies and ships setting sail again, re-connecting supply chains severely damaged by lockdowns across economies.

The pandemic pushed economies into a “Great Lockdown”, which helped contain the spread of the virus and save lives, but also triggered the worst recession since the Great Depression, the International Monetary Fund (IMF) said in a solemn report, which forecast a deep slowdown this year and a slower recovery in 2021.

There are valid reasons for concern. Countries are reopening as the pandemic is intensifying in many emerging and developing countries, which means there is a huge uncertainty about the future in the absence of a medical solution given a vaccine is still several months away.

Global output is projected to decline by 4.9 percent in 2020, 1.9 percentage points below the April forecast, followed by a partial recovery, with growth at 5.4 percent in 2021, the IMF said in the report this week, adding that the cumulative loss to the global economy from this crisis over two years (2020–21) will be over $12 trillion.

The US economy is expected to shrink by 8 percent this year, but grow by 4.8 percent in 2021. Japan is worse off, falling 5.8 percent in 2020 and expanding by a mere 2.4 percent next year. China is the only growth engine of the world, with its economy actually seen expanding by 1 percent in this tumultuous year, and then spiking higher by 8 percent next year.

Risky forecast

However, forecasting what would happen in the months to come is actually fraught with risks, as nobody really knows what really awaits the world as the virus continues to spread and force places that had reopened to potentially pull down the shutters to save themselves from further damage.

While a vaccine is the potential upside, the downside is that fresh infections could ring the world to a grinding halt again, tightening, as the IMF said, financial conditions that could trigger debt distress.

“Geopolitical and trade tensions could damage fragile global relationships at a time when trade is projected to collapse by around 12 percent,” it said.

However, global trade could well be the spark – at least for the time being – if we were to believe the World Trade Organization (WTO), which this week said that overall situation may not turn out to be as bad as anticipated just back in April.

“The fall in trade we are now seeing is historically large – in fact, it would be the steepest on record. But there is an important silver lining here: it could have been much worse,” WTO Director‑General Roberto Azevêdo said in a statement.

World merchandise trade volume, 2005Q1‑2021Q4 (WTO)

This is genuinely positive news, but we cannot afford to be complacent, he said, adding that for output and trade to rebound strongly in 2021, fiscal, monetary, and trade policies will all need to keep pulling in the same direction.

According to WTO data, the volume of merchandise trade shrank by 3% year‑on‑year in the first quarter. Initial estimates for the second quarter, when the virus and associated lockdown measures affected a large share of the global population, indicate a year‑on‑year drop of around 18.5%.

These declines are historically large but could have been much worse, and the latest WTO forecast is a mix of optimism with a large dose of pessimism.

On the optimistic end, the WTO expects world trade to contract by 13 percent, while  a degree of wariness puts it falling by 32 percent at the other end. However, as things currently stand, trade would only need to grow by 2.5% per quarter for the remainder of the year to meet the optimistic projection.

But 2021 could be different story as global economy recovers and grows by an anticipated 5.4 percent. A quick return to growth across countries could see world trade jump by around 20 percent. Much, of course, will depend on a heady mix of monetary, fiscal and trade policies in affected countries and large economies – specially with what happens between the United States and China that could be guided by the results of the November U.S. presidential elections.

 Until then it probably pays to lean on the side of optimism.

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