by Aniket Bhushan, Lance Hadley, Bridget Steele
Published: April 22, 2020
This analysis, the first in a series, outlines projected effects of COVID-19 on global economic growth, trade, investment, and remittances, and global poverty reduction, before providing a specific outlook on Canadian economic growth.
Below we compile a list of these projected impacts, uncertainties, and risks. In subsequent analyses we explore how COVID-19 may influence donor aid response.
The only thing that has evolved faster than this crisis is its projected economic impact.
- In March 2020 the OECD projected global growth for 2020 at 2.4%, down 0.5% from its 2.9% forecast in late 2019, but noted growth could fall to -1.5%.
- Private forecasts projected no global growth for 2020 in March but only as their “worst case scenario”.
- By April, the UN was projecting a contraction, -0.9% growth for 2020.
- The IMF estimates COVID-19 related economic uncertainty is three times greater than that experienced during SARS and 20 times greater than that experienced during Ebola.
- The IMF subsequently projected -3% growth for 2020. This is arguably the closest estimate we have to a current global baseline scenario, but it may be optimistic. The projection sharply contrasts IMF’s January projection of 2020 global growth at 3.3%.
- GDP contractions for many regions and countries (Canada included) are far worse than the global estimate (e.g. Canada -6.2%, Latin America -5.2%, Euro area -7.5%, US -5.9%, UK -6.5%, Italy and Spain -8% to -10%, South Africa -5.8%).
Trade, investment, remittances
After years of growth, 2019 saw a contraction in global trade. However, FDI and remittance flows to developing countries were resilient and reached all-time highs. External flows to developing countries will be hit hard as a result of COVID-19.
- The WTO projects trade contraction between -13% and -35% for 2020. A key driver is the dual contraction stemming from commodity crises.
- On March 8, UNCTAD projected that global FDI would contract between -5% to -15%. On March 26, UNCTAD updated projection estimating global FDI contraction of anywhere from -30% to -40% for 2020.
- The World Bank is currently projecting a -20% decline in remittances for 2020, a $110billion drop, the sharpest in recent history. Projected declines are even larger for Sub Saharan Africa (-23%) and other developing regions.
- Capital outflows from emerging markets in 2 months have exceeded $100billion, a rate far faster than seen at the worst of the 2008 global financial crisis and the highest on record.
The above economic effects of COVID-19 will have a direct and decisive impact on poverty reduction.
- The key variable that differentiates the impact of COVID-19 on global poverty is the level of contraction in per capita income, which in developing countries, especially, is linked to growth and external capital flows.
- External flows, especially remittances, have become extremely important for some countries and far exceed aid flows and recently surpassed FDI. They are significant from a macroeconomic balance perspective and have also been linked to outcomes such as improved nutrition, higher spending on education and healthcare, reduced child labour.
- In past crises, remittance flows have been counter-cyclical, this is not the case in the COVID-19 crisis. Impacts are simultaneous and transmission is instant, which is likely to exacerbate depressive effects.
- There is evidence of gender effects. Gender-based violence is reported to have increased three-fold in the worst affected countries.
- Extreme poverty has been declining relatively uninterrupted at the global level since 1998 but this could change:
- The global population living in extreme poverty (under $1.9/day) is estimated at approx. 734 million (2015). The estimated increase in extreme poverty in 2020 due to COVID-19, according to the World Bank’s projection, is between 40 to 60 million. Others project the rise in extreme poverty to be anywhere from 80 million to 420 million, the key distinguishing factor being the level of contraction of per capita income (from 5% to 20%).
- While extreme poverty is increasingly concentrated in Sub Saharan Africa and South Asia and in fragile states, at higher thresholds ($5.5/day), vast numbers across East Asia, Middle East, North Africa and Latin America would see increases in poverty levels. If poverty is considered at $5.5/day, with a 5% contraction of per capita income, 110 to 330 million people would be forced into poverty. A 20% income contraction would add nearly 600 million to global poverty at the higher thresholds, undoing recent progress in terms of the growth of the middle class in many developing regions.
Outlook on Canadian growth
The Bank of Canada governor’s description of the Canadian economy as a “healthy individual” is increasingly becoming an outlier perspective. This description was used at the release of the April Monetary Policy Report, which, for the first time, did not forecast GDP growth for 2020. Absent this usually reliable economic forecast, private and international forecasts for 2020 GDP are referenced below:
- Private forecasts have reversed dramatically. In early March most private forecasters were predicting a mild slowdown for 2020, notably this included modeling pandemic effects. The lowest estimate at the time was -1.0% GDP growth.
- By late March every major Canadian bank was predicting a significant contraction between -1.0% to -3.3% for 2020.
- As indicated in the table below, by mid April the picture changed significantly, with all major banks projecting a severe contraction, most in the -5% to -9% range.
- The closest approximation of a baseline for Canada now lies in the range of -5% and the -6.2% projected by the IMF.
This outlook and associated domestic fiscal costs could have significant implications for Canada as an aid donor, which we turn to in subsequent analyses. See our second article in the series: ODA is “recession proof”: a reality check
|Canada, real GDP growth forecasts (as of April 2020)|
|Canadian Sources||Report Title||Q1||Q2||Q3||Q4||2020 forecast||2021 forecast|
|ScotiaBank||SCOTIABANK’S FORECAST TABLES||-10.10%||-43.90%||21.30%||17.80%||-9.10%||6.50%|
|CIBC Capital Markets||Economic Insights – April 16, 2020||-10.20%||-40.50%||33.40%||18.50%||-6.90%||6.80%|
|RBC||A downturn like no other||-4.0%||-32.0%||20.0%||8.0%||-4.90%||3.40%|
|National Bank of Canada||Monthly Economic Monitor||–||–||–||–||-2.10%||1.20%|
|IMF||World Economic Outlook, April 2020||–||–||–||–||-6.20%||4.20%|
|Capital Economics||OUR KEY FORECASTS||–||–||–||–||-8.00%||8.00%|
|Canada, real GDP growth forecasts (as of March 2020)|
|Conference Board||Canadian Outlook Economic Forecast||–||–||–||–||0.34%||2.45%|
|TD Economics||Canadian Quarterly Economic Forecast||–||–||–||–||0.20%||2.10%|
|BMO||Tracking the Pandemic’s Economic Footprint||–||–||–||–||-1.00%||–|
|Deloitte||Canadian economy battered by global pandemic and oil price slump||–||–||–||–||-0.20%||1.80%|