COVID-19 pandemic will leave a deep impact on global economy

With the world still in the grip of the deadly COVID-19 pandemic, the global economy will have a traumatized recovery process. Hopes were high on the vaccines for a faster recovery, but different strands of the virus, come 2021, has made it tougher.

In the early stages of the pandemic, foreign investors pulled an estimated $26 billion out of developing Asian economies, not including more than $16 billion out of India, increasing concerns about a major economic recession in Asia.

According to a report on Global Economic Effects of COVID-19 by the Congressional Research Service, despite a rebound in some key economic indicators from the depths of the pandemic-related economic recession in early 2020, a growing list of economic indicators makes it clear the COVID-19 pandemic continues to negatively affect global economic growth on a scale not experienced since at least the global financial crisis of 2008-2009.

Financial market indices have largely recovered from the losses experienced in March and April 2020, international oil prices reached their pre-pandemic levels in late February 2021, pressure on the dollar has eased, and labor markets appear to be stabilizing. Over the long run, however, damage to labor markets could be more problematic with large share of the labor force unable to return to pre-pandemic jobs.

India also reeled under the economic slowdown. On August 31, 2020, India reported the second GDP growth rate fell by 23.9% compared with the first quarter, raising concerns that the country could experience its most severe economic contraction on record. The report highlights that preliminary forecasts indicate that India’s economy contracted by 8.6% in the third quarter of 2020, reportedly reflecting increased consumer activity. On November 12, Finance Minister Nirmala Sitharaman announced a new package of fiscal measures totalling $35 billion to increase consumer spending and to assist manufacturing, agriculture, and exports. The move followed an announcement by the government that it had approved a spending package of $27 billion to provide incentives over five years to manufacturing firms, including automobiles, auto parts, pharmaceuticals, textiles and food products.

The International Monetary Fund, as a consequence of the resurgence in COVID-19 cases and fresh lockdowns in economies, argued that advanced economies need to sustain fiscal support for consumers and businesses as the most effective means of stimulating their economies. It argued that this is necessary because the global economy is experiencing what economists term a Keynesian liquidity trap.

The report explains that liquidity trap exists when central banks’ key interest rates are so low they have little impact through traditional means to affect business and consumer activity. According to the IMF, in 60% of the global economy, central banks have pushed key interest rates below 1% and in one-fifth of the global economy, interest rates are below zero. In these circumstances, adjusting fiscal policy or government taxing and spending is more effective in raising the rate of economic growth.

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Overall, the economic situation remains highly fluid globally and for most countries and regions. Uncertainty about the length and depth of the health crisis-related economic effects are fuelling perceptions of risk and volatility in financial markets and corporate decision making. In addition, uncertainties concerning the global pandemic and the effectiveness of public policies intended to contain its spread and prevent a second wave of infections have added to market volatility. In a growing number of cases, corporations are postponing investment decisions, laying off workers who previously had been furloughed, and in some cases filing bankruptcy.