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April 28, 2020

Global Economy: That sinking feeling

  • The exponential rise in Covid-19 cases in the United States (US) and Europe after China has resulted in steep decline in economic activity as social distancing measures take effect
  • The International Monetary Fund (IMF) has projected that the global economy will contract by 3% in 2020 due to the health crisis’ severe impact on economic activity
  • Economic indicators such as trade balance in major economies have shown a dip, with consumer prices inflation moderating, indicating slowdown in demand

With countries across the world sealing themselves in lockdown mode in an attempt to contain the Covid-19 pandemic, economic activity has taken a severe hit. Global agencies have revised downwards growth forecasts in this rapidly evolving situation, as the trajectory and depth of the spread have been difficult to predict. They are already mentioning the ‘R’ word – recession. The IMF, in its latest World Economic Outlook, has forecast that global economy will contract by 3% in 2020 - much worse than during the 2008–2009 financial crisis. However, extreme uncertainty regarding the forecast persists, as it depends on a multitude of factors: spread of the pandemic, health response, extent of containment measures and supply disruptions, changes in spending patterns, among others.


Monetary policy response has also been unprecedented. Major central banks have already cut interest rates to record lows, last seen during the Global Financial Crisis. Asset purchase programs have been ramped up and reserve requirements reduced to ensure liquidity and encourage credit flow.


The prevailing high degree of uncertainty around the spread of the virus indicates economic activity will likely remain subdued, with more stimulus packages in the offing.