COVID-19 has plunged the global economy into its worst recession since the Second World War. Economies cannot start to recover until the disease is brought under control. The failure of leading advanced nations to effectively control the spread of the contagion has caused unprecedented economic and social disruptions and set back decades of development that will have long term impact on future growth prospects.

Although effective vaccines for the virus have been found and approved for usage, there are signs that the planned implementation of a universal vaccination programme will take much longer than anticipated that may further impinge on the lifting of social distancing measures and a wider restoration of economic activities.

In its January Global Economic Prospects report, the World Bank estimates global growth in 2020 to contract by 4.3%, a drop of 6.8% from its pre-COVID-19 forecast in January 2020. It envisioned a subdued recovery in global economic output in 2021, which will grow at 4.0% but still remains more than 5.0 % below its pre-pandemic trend.

The World Bank described the depth of the ongoing global recession as “surpassed only by the two World Wars and the Great Depression over the past century and a half.” And added that the pandemic “has exacerbated the risks associated with a decade-long wave of global debt accumulation. Debt levels have reached historic highs, making the global economy particularly vulnerable to financial market stress.”

It emphasised the need for global cooperation to address these challenges. “In particular, the global community needs to act rapidly and forcefully to make sure the ongoing debt wave does not end with a string of debt crises in EMDEs, as was the case with earlier waves of debt accumulation.”

Gross domestic product (GDP) growth of emerging markets and developing economies (EMDEs) in East Asia and Pacific in particular is projected to slow significantly in 2020, to 0.9% — a 4.8% contraction pre-COVID-19, the lowest since 1967 — and due to tightening financing conditions, and a precipitous drop in exports. Significant government support is required to avert a worsening of conditions.

While the World Bank expects regional growth to rebound to 7.4% in 2021 as the pandemic subsides with more widespread COVID-19 vaccination. However, should there be a protraction of the health crisis, it may heighten financial stress, and precipitate a sharper- and longer-than-expected contraction in global trade compounded by re-escalating trade tensions. This may result in financial crises that will cause a collapse in lending and a longer global recession as well as slower recovery.

In its June report, the World Bank pointed out rising national debts as an area of concern. This has made the global financial system more susceptible to financial market stress. Since the 2007/8 global financial crisis, global debt has grown to 230% of GDP, and EMDE debt level has reached a historic high of 170% of GDP by 2019. In almost 40% of EMDEs, government debt is now at least 20 percentage points of GDP higher than it was in 2007. In addition, more than a quarter of corporate debt in the average EMDE is denominated in foreign currency.

The World Bank opined that carrying such a significant debt burden increases EMDEs’ vulnerability to increases in borrowing costs and drops in domestic currency value, which typically happen during time of stress. It warned that large and prolonged flights to safety, or a series of ratings downgrades, could trigger cascading debt defaults leading to full-fledged financial crises that would cause further declines in consumption and investment.