2020: The year the global economy finally fell off a cliff

Economic pundits, as readers might have noticed, tend to talk about “cliff edges” a lot. Usually it’s for dramatic effect – an attempt to inject some life into what can be, at times, a dry subject. But in 2020 the cliche was true. This really was the year the global economy went over the edge of a cliff.

Thanks to the coronavirus pandemic, we experienced the biggest collapse in economic activity across the planet seen since the Great Depression of the 1930s – a historical period resonant with social catastrophe and political breakdown.

As a large proportion of the planet’s population stopped working, travelling, socialising, going on holiday, and having fun – either because they were forbidden from doing so or because they were afraid of infection – international GDP is estimated to have declined by around 4.5 per cent.  

Now that might not sound spectacular, but bear in mind that it’s around 10 times larger than the contraction in the global financial crisis of 2009, which had previously been the worst economic crisis since the Second World War by some distance.

Zooming in on the performance of particular countries, particularly developed nations such as Britain, shows an even more stunning impact. In the first half of the year the UK and Spanish economies each contracted by more than 20 per cent – historically unprecedented drops.  Output in France and Italy fell by more than 15 per cent. The US and Japan sank by around 10 per cent. Again, these were slumps which made the recessions of 2008-09 look  like mere blips.

Those metrics of aggregate activity, of course, reflect immense human economic suffering on an individual level.  On top of the 1 million plus death toll, millions of people lost their jobs in 2020. Many businesses, which people had built up over many years, went bankrupt. Incomes have fallen and poverty levels have jumped.

The very poorest were especially hard hit by the sudden slump in activity in our globally integrated economy, not least by a near total collapse in international tourism. The World Bank has estimated that in 2020 an additional 88 to 115 million people in developing countries were plunged into extreme poverty – living under the equivalent of $1.90 per day.

What some have described as the “great escape” – the steady decline in the share of humans living a subsistence existence in recent decades – was thrown into reverse, with the extreme poverty rate jumping from 8.5 per cent to 9.5 per cent, according to estimates by the World Bank.

Such economic carnage, it should be stressed, would have been far worse had governments and central banks not rushed into the breach with unprecedented quantities of fiscal and monetary support for workers and firms, such as the UK’s novel furlough scheme.  

The International Monetary Fund estimates the total fiscal support amounted to some $12 trillion, around 15 per cent of global income in 2019.  And the Federal Reserve, the European Central Bank and the Bank of England, among others, have injected further trillions of dollars, euros and pounds and many other denominations of currency into financial markets that were slipping into panic in March. Put simply, had they not done all this, we might well still be falling now.

The natural question to ask is whether 2021 will see a recovery? Is there a trampoline at the bottom of the cliff? It’s worth examining the case for optimism. It rests, in a sense, on the sheer abnormality of the crisis.

The synchronised economic swan dive in the Spring was not brought on by some imbalance or pathology within the economy, such as a financial panic, out-of-control inflation or rising interest rates, or any of the other usual suspects. Rather this was a crisis that came purely from outside: from a lethal new virus against which we had no natural immunity, vaccines, treatments or even any real scientific knowledge base.

That, some have argued, should make it easier to recover in theory.  

Normal recessions are often followed by a painful period of internal restructuring and adjustment as the excesses and distortions of the period leading up to the crisis are worked out of the system.  But could this time be different? Once the virus is vanquished, the logic goes, surely things can, quite soon, return to normal, without all of that internal restructuring. This then, was the case for the so-called “V-shaped” recovery.

Such optimism looked like a siren song that would lure us onto the rocks of complacency in the autumn as a second wave of cases hit many countries and it began to look likely that many parts of the economy would disappear forever as consumption patterns changed for good.

Early in the crisis the economist Ricardo Reis noted that lockdowns were like putting the economy into the deep freeze. But he added: “If you freeze a steak, and unfreeze it one month later, it is still pretty good. If you do that to a grape, it becomes inedible.”

Many started to fear that the economy was a frozen grape and began to make the case for adjusting to the new normal by withdrawing support of “unviable” jobs in ravaged sectors such as retail, hospitality and travel. We should, some argued, take the pain of higher unemployment now, rather than postpone the inevitable.

Yet the news of successful trials of three coronavirus vaccines in November has transformed the outlook again and kindled hopes that we really can go back to something that more closely approximates the pre-crisis economy, with many of the same jobs.

It’s telling to note the difference in language used in the International Monetary Fund’s forecasts from October, which talks of a “long and difficult ascent” for the global economy, and the OECD’s outlook published in December, which states that “the worst has been avoided” and suggests “the rebound will be stronger and faster as more and more activities re-open, limiting the aggregate income loss from the crisis.”

What a difference a vaccine makes. Yet the projections underlying those forecasts were, in truth, relatively similar. They both expect the level of measured global activity to be back late 2019 levels by the end of 2021. Would this represent a bounce back? Perhaps that would be to define success too loosely. We should really be talking about “bouncing back” not in relation to where we were but where we expected to be before the crisis.

The latest projections from the IMF show that, relative to the forecasts made prior to the pandemic, the level of world economic activity is not set to catch up at all over the next four years.

Summing all this foregone economic activity in this gap, the IMF has come to the shocking conclusion that the losses from the pandemic could reach $28 trillion by 2025. To put that in context, that’s around a third of the size of the global economy in 2019.

It’s also important to note, as well, that the global economy has to grow by around 1 per cent a year merely to keep up with global population growth. So the loss in world economic output per head relative to expectations will be even greater than implied by these figures.

Another way of looking at the question of bouncing back is to consider the poorest on the planet. The rise in the extreme poverty rate up from around 8.5 per cent to 9.5 per cent this year, undoes the benefit of three years of declines in this metric. And the World Bank expects only a slight decline in this rate in 2021.

If this is correct, an economic “bounce back” for the least well off does not look likely and underlines the imperative of debt relief and support for the worst hit states. Now, of course, these projections could be overly pessimistic. If coronavirus vaccines can be rolled out more rapidly that could allow a swifter return to economic growth around the planet. 

It’s not impossible that 2021 could see an unprecedented global boom, as the pent-up desire for people to spend, travel and invest, to have fun, is unleashed, and we return not only to where we were by the end of the year but, indeed, where we previously expected to be.

There are serious questions, as there were before the crisis, about the sustainability of the Chinese economy’s growth momentum. Yet leaving that issue to one side, if the global economy could engineer something similar that really would constitute a bounce back. And we should hope it materialises, for the sake of the millions of people who will be looking for jobs next year and the millions of new entrants to the job market.

An armistice in the beggar-thy-neighbour trade wars triggered by a Donald Trump in 2017 and return to diplomatic normality could also help global co-ordination in exiting this pandemic nightmare.

Yet, sadly, the boom scenario does not feel the most likely. In the UK we have the end of the post-Brexit transition to navigate, with outcomes ranging from painful and disruptive in the event of concluding a free trade deal to calamitous if we leave the European Union with no deal.

Britain – and most other rich world governments – will also face the complex challenge of both supporting and stimulating their economies in the coming months (and getting the timing right of both) so as not to crystalise damage from the crisis permanently in the form of permanently weaker investment and higher unemployment.

Getting out of this economic emergency safely promises to be even harder, in some ways, than dealing with its onset.  In America, a Republican-controlled Senate can be expected to thwart the attempts of the incoming president Joe Biden to boost the US economy, the world’s largest, through much needed infrastructure spending and higher government investment.

As for developing world countries, they may not get vaccines until late in the year given the rapidity with which richer states have dominated manufacturers’ order books.

Countries in sub-Saharan Africa also face a painful legacy of higher debt incurred in the pandemic, a problem the G20 forum, made up of the leaders of the world’s most important economies, chose to sidestep, rather than face head on, recently.  

The same is true of a great many private companies in the developed world. Governments can still borrow at unprecedentedly cheap rates, but they will need to find ways to ensure that these new private sector debt burdens do not act like an anchor on recovery.

None of this will be easy, to put it mildly. We’re at the bottom of the cliff and facing a long and quite difficult ascent back up.