Although warnings about the spread of viruses have become more frequent in recent years, the United Nations Conference on Trade and Development (Unctad) laments in its latest trade and development report update that “nobody anticipated the arrival of Covid-19 or its dramatic global impact”.

However, since the coronavirus’ initial spread in the first two months of 2020, and the great lockdown in the second quarter, the global economy has exhibited a “more predictable trajectory”, albeit one marked by variability at country and regional levels.

Central banks, for example, followed a similar pattern to that after the 2008 financial crisis, but on an even larger scale, and Unctad says their willingness to keep the monetary spigot open saw financial markets “bounce back quickly” from the lows of March and April 2020, with many ending the year at an all-time high.

Outside of the financial sector, lockdowns (though mostly in advanced economies) had a dramatic impact on output and employment through combined supply- and demand-side effects that spilled over into the global economy.

Investor anxieties, however, transmitted through the pronounced capital flight, and did have an immediate impact on emerging markets during the first half of 2020, Unctad notes, adding that the surge in net nonresidential outflows was “short-lived but brought lasting damage” and the subsequent reflux of funds has since been dominated by a few larger markets like Brazil, China and India.

The recovery in commodity prices in the second half of 2020, meanwhile, helped a number of developing countries manage the crisis better than what might have been otherwise expected, Unctad adds, though it warns that “there are concerns that more volatility may be emerging, particularly in markets of some agricultural commodities” with a threat to food security in several countries.

Overall, however, the global economy posted its sharpest yearly drop in output since statistics on aggregate economic activity were introduced in the early 1940s, with no region spared.

In Unctad’s report, the International Labour Organisation (ILO) has estimated that the crisis triggered an effective loss of 255-million full-time jobs worldwide. While the bounce-back experienced in the third quarter of 2020 was “sharp and in line with expectations”, a second wave of the virus hit earlier than expected in the final quarter of last year, thereby dampening the recovery.

However, an earlier-than-expected breakthrough with vaccines and improved management of lockdown measures have been offsetting factors in terms of Covid-19's overall economic impact.

For the global economy, the overall cost of the crisis has been exorbitant, says Unctad, which explains that gross domestic product (GDP) growth “does not begin to measure it”, but the estimated 3.9% drop in output reflects the widespread nature of the shock.

The loss of global output in 2020 with respect to the pre-pandemic trend meant destruction of income on an unprecedented scale, an estimated $5.8-trillion, and with already vulnerable parts of the population bearing the brunt, at a time when better income distribution had become most urgent.

“This loss will persist as even the most optimistic projections for the bounce-back of growth will not cover the shortfall of income for several years,” laments Unctad.

For this year, the organisation expects a 4.7% expansion, 0.6 percentage points better than its previous forecast. However, this more optimistic scenario hinges on three assumptions, namely improved vaccination and disease containment in advanced and middle-income countries; a speedy transition from economic relief policies to recovery policies in the largest economies of the world; and no financial crash of global significance.

SUMMARY OF REGIONAL TRENDS

The US economy experienced a less brutal contraction than was expected in mid-2020. On the fiscal side, the relief packages were larger than anticipated and succeeded in attenuating income losses.

Monetary policy remained expansionary and, more importantly, the Fed ruled out any early increases of interest rates, even if inflation goes above its 2% target.

Together with the early breakthrough in vaccine approval and the stock market boom, Unctad says these actions resulted in a quick recovery of aggregate income in the second half of 2020, although unevenly and more to the benefit of the wealthy, giving rise to concerns of a K-shaped recovery, including by the newly appointed Secretary of the Treasury.

For this year, Unctad expects the expansion to continue, on the assumption that the $1.9-trillion package of newly-elected President Joe Biden’s administration will engineer strong job creation, improve consumer confidence and result in a significant investment in productive capacity.

More specifically, Unctad suggests that cash transfers, extended unemployment benefits and deferrals in tax and mortgage payments will help sustain the momentum of consumption expenditure.

Investment and employment programmes will also increase both capacity and demand, but Unctad says the Biden administration’s approach to reducing economic inequalities will “be critical to achieving a broad-based recovery”.

Income inequality, meanwhile, has seen a dramatic acceleration last year owing to record financial earnings and the significant job losses in low-wage sectors, and Unctad here suggests that a federal minimum wage increase would be an important step to reverse this setback and the preceding four decades of increased inequality.

Capital spending was further fuelled by residential construction later in 2020 and should also see some pick-up this year as inventory stocks are replenished.

“We expect this expansion to partially spill over to its North American neighbours, with Canada and Mexico growing almost at the same pace as the US in 2021.”

In Canada, where the Covid-19 recession was deeper than in the US because of stricter lockdowns, the downside risk for this year is slow vaccination, Unctad laments.

“The Canadian government ordered enough vaccines for its population, but a slow rollout may hamper the recovery.”

In Mexico, which contracted slightly less than expected in 2020 thanks to a milder shock in the US, the downside risk is an even more stringent fiscal stance than that of last year.

In 2020, the Mexican government adopted a neutral budgetary response to Covid-19, and it now seems poised to tighten fiscal policy in 2021. Mexico’s income growth will therefore depend more on a lasting recovery in the US and on oil prices not falling.

Moving to other large Latin American economies, Unctad’s mid-2020 forecast for Argentina was confirmed: a 10% recession because of adverse pre-Covid trends and difficult debt negotiations, aside from the virus’ economic effects.

“In 2021, we continue to expect the Argentine economy to recover only 50% of the income loss. Rising inflation reduces room for compensatory domestic policy in 2021, while scarcity of foreign exchange without proper international assistance risks leading to a currency crisis,” Unctad comments.

The International Monetary Fund (IMF) can provide the necessary assistance if it transforms its pro-growth rhetoric into concrete actions, Unctad suggests.

Meanwhile, Brazil did much better than expected owing to a massive fiscal stimulus and monetary accommodation. The latter happened despite the rise in inflation at the end of 2020, and the two things temporarily reduced the Brazilian Treasury's financial cost. As proof that expansionary fiscal policy works, the budget deficit and public debt grew less than initially expected, leaving room for more relief or reconstruction policies this year.

So far, the Brazilian authorities do not seem willing to use their fiscal space, preaching, instead, a quick return to austerity, Unctad says, noting that because of the latter and the gradual monetary tightening to fight the recent rise in inflation, it maintains its initial growth forecast for this year.

It explains that the "upside risk" is a more gradual fiscal consolidation and a stronger pull from the US and East Asia in the second half of 2021.

“As we foresaw in mid-2020, the Andean economies were hard hit by Covid-19, with a double-digit recession in Peru and large falls in Chile and Colombia. However, we continue to expect these economies to recover faster than Brazil, Argentina, and Mexico in 2021, [owing] to the impact of high commodity prices and, in the case of Chile, faster vaccination and lifting of social distancing rules,” Unctad elaborates.

Meanwhile, European countries experienced the largest output contractions among developed economies in 2020. The euro area contracted by 7.3% in 2020 as its largest economies went into lockdown in the first and second quarters, reopened in the third and went back into partial lockdowns in the fourth.

France, Germany and Italy, the bloc’s three largest economies, also experienced a rebound of economic activity in the second half of the year, though Italy again registered negative growth in the fourth quarter. These differences in economic outcomes were owing to the unequal impacts of the pandemic but also to weak fiscal responses, Unctad says.

Relative to 2019, in 2020 government consumption expenditure increased in Germany and Italy but fell in France. In the European Union, it increased on average 1%, and in the second quarter of 2020 subsidies fell in France, and increased 8% in Italy and more than 300% in Germany, compared to the same quarter of 2019.

Early in 2021, the European Union does not show signs of solid recovery and may experience another quarter of negative growth with prospects for the rest of the year largely depending on how fiscal responses and vaccination programmes evolve, Unctad comments.

Overall, Unctad estimates the economy to grow by 4.4% this year.

Africa was severely hit in 2020 by the pandemic, which led to the worst economic performance in decades as economic output shrank 3.8%, compared with trend growth of 3.2% over the last few years.

The two main economies in sub-Saharan Africa were not exempted from the crisis, and South Africa’s real gross domestic product (GDP) increased at an annualised rate of 6.3% in the fourth quarter of 2020.

This followed growth rates of 67.3% in the third quarter and -51.7% in the second quarter.

According to the latest preliminary indicators, Unctad says the overall contraction for 2020 was 7%, representing the biggest yearly fall in economic activity the country has registered since at least 1946.

Given the very slow growth in the past years, such a shock brought back the yearly GDP level to where it was in real terms seven years ago.

“Despite the impact of the pandemic on economic growth, agriculture production was strong in 2020 growing 13%. Government spending grew marginally in 2020, which may have helped mitigate the sharp contraction in other parts of the economy,” Unctad comments.

The global recovery that began in the third quarter of 2020 is expected to continue through 2021 albeit with a good deal of unevenness and unpredictability, which will reflect epidemiological, policy and coordination uncertainties, says Unctad, noting that “a misguided return to austerity after a deep and destructive recession is the main risk to our global outlook”, especially in the context of fractured labour markets and deregulated financial markets.

Together with the erosion of States’ institutional capacity and policy space, these trends undermine the resilience of the global economy to all shocks, and even bar an immediate return of austerity, it will take more than one year for output and employment to return to their pre-Covid-19 levels in most countries, leaving the world economy of early 2022 well below where it would be if pre-Covid-19 trends had continued, Unctad points out.

From a more qualitative perspective, the pandemic’s implications for employment, income inequality and public welfare over the medium term will continue to depend on the evolution of macroeconomic conditions.