Economy to contract by 3.2% this fiscal, says World Bank

World in deepest recession since World War II

June 08, 2020 08:37 pm | Updated June 09, 2020 09:55 am IST - Washington DC

A view of the World Bank headquarters.

A view of the World Bank headquarters.

The Indian economy is expected to contract by 3.2% in this fiscal year as a result of the COVID-19 pandemic and its associated restrictions, the World Bank said in its Global Economic Prospects (GEP) June 2020 report released on Monday. Growth is forecast at 3.1% next year.

Also read: GDP growth in 2020-21 likely to go negative, says RBI Governor

The world economy, as a whole, is set to witness its deepest recession since World War II, with a forecasted contraction of 5.2% this year — some 60 million could be pushed into extreme poverty, World Bank Group President David Malpass had warned last week.

With updated data now available, this number could be 70-100 million, a Bank economist told reporters on a briefing call on Monday.

Emerging market and developing economies (EMDEs) are expected to contract by 2.5% this year, and economic activity in advanced economies is forecast to shrink by 7%, as domestic supply and demand, finance and trade have been disrupted due to the pandemic.

Also read: Measures taken by Indian govt. will boost economic growth: SBI MD Dinesh Khara

Countries most reliant on global trade, tourism, external financing and commodity exports are likely to be hit the hardest. “This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges,” said World Bank economist Ceyla Pazarbasioglu.

“Our first order of business is to address the global health and economic emergency. Beyond that, the global community must unite to find ways to rebuild as robust a recovery as possible to prevent more people from falling into poverty and unemployment.”

Also read: World Bank sees FY21 India growth at 1.5-2.8%, slowest since economic reforms 30 years ago

In the baseline scenario, global growth is set to rebound at 4.2% in 2021, with EMDEs growing at 4.6% and advanced economies growing at 3.9%. This, however, is the baseline forecast and assumes that pandemic-induced domestic restrictions will be lifted by mid-year in advanced economies and a bit later in EMDEs. The downside scenario is more severe – the global economy could shrink this year by as much as 8% (5% for EMDEs) , followed by a weak recovery at just above 1% growth next year.

India to grow at 3.2% in FY2020-21

India’s growth is estimated to have slowed to 4.2% in FY 2019-20 (year ending March 31, 2020). Output is expected to contract by 3.2% (so growth is -3.2%) in FY2020-21, as the impact of the pandemic (the restrictions on activity) will largely fall in this year, despite the fiscal and monetary stimulus. The growth forecast for this fiscal year is 9 percentage points lower than the GEP forecasts from January 2020, when the forecast for this fiscal was a (positive) 5.8% - the world was not yet in the grip of the pandemic. Spillover effects from weak global growth and balance sheet stress are also weighing down on economic activity, as per the report. India is forecast to see some recovery next year and grow at 3.1%.

Also read: GDP growth slows to a 11-year low of 4.2%, Q4 slumps to 3.1%

South Asia expected to grow at 2.7%

For the South Asian region as a whole, economic activity is expected to contract by 2.7% in 2020, due to restrictions impacting consumption and services and the uncertainty causing a chill in private investments. These forecasts are highly uncertain, and the risks to the outlook are heavily skewed to the downside (i.e., there is a good chance the forecasts will be even worse). The high share of workers who are employed in the informal sector exacerbates the health and economic challenges caused by the pandemic. Food price increases could also lead to food insecurity for more people and global financial market disruption could add pressure to vulnerable balance sheets. Spillover effects from major trading partners could negatively impact economic activity in the South Asian region and supply chain linkages could depress activity in the medium term. The region as a whole is expected to grow at a (positive) rate of 2.8% next year.

Rest of the World

The U.S. is expected to contract at a forecasted 6.1% this year due to pandemic-caused restrictions and disruptions. The Euro Area is projected to shrink 9.1% due to the heavy outbreaks and their impact on activity. Japan is expected to shrink at 6.1% due to preventative measures that had impacted economic activity. China is expected to slow to 1% in 2020, its lowest rate in more than four decades.

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