As the world economy is expected to suffer its worst year in 2020 since the Great Depression of the 1930s, another “possibly much worse downturn” is likely to follow.
On Tuesday, the International Monetary Fund said it expected the global economy to shrink 3 percent this year, a great deal worse than its 0.1 percent dip in the Great Recession year of 2009.
However, the Economist Intelligence Unit (EIU) has warned a subsequent recession, caused by a debt crisis from governments with weak balance sheets, might begin.
World governments are currently providing stimulus packages worth trillions of dollars to help bolster their economies, but sovereign debts they are accumulating may push the global economy into another recession.
“Many of the European countries that are among the worst affected by the pandemic, such as Italy and Spain, already had weak fiscal positions before the outbreak,” said Agathe Demarais, the EIU’s global forecasting director.
“A potential debt crisis in any of these countries would quickly spread to other developed countries and emerging markets, sending the global economy into another - possibly much worse - downturn.”
Although this is not a major scenario for the EIU, “the long-term impact on growth of mounting fiscal deficits across Western countries is unknown,” she noted.
What is more is that a second, or possibly third, wave of the outbreak could make the scenario much more realistic, the EIU warned.
Meanwhile, even after social distancing is lifted and businesses can reopen, a possible recovery would occur gradually as consumer demand is not likely to bounce back to pre-crisis levels immediately, the EIU said.
“The recovery in the global economy will only be gradual, all the more so as countries will lift lockdowns at different points in time."
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