The impact of the pandemic on global GDP growth is massive. The global COVID-19 recession is the deepest since the end of World War II (Figure 1). According to the World Economic Outlook Report published by the IMF in April 2021, the global economy contracted by 3.5 percent in 2020, a loss of 7 percent compared to the growth forecast of 3.4 percent in October 2019. negative growth in 2020 (IMF 2020b) , the downturn was more pronounced in the poorest parts of the world (Noy et al. 2020) (Figure 2).
The effects of the shock are likely to be long-lasting. While the global economy is expected to recover this year, GDP levels in both developed and emerging and developing countries (EMDE) are expected to remain below pre-virus baseline levels by the end of 2021 (Figure 3). As with the immediate impact, the level of medium-term costs varies significantly from country to country, with EMDE suffering the greatest loss. The IMF (2021) forecasts that world GDP in 2024 will be 3 percent (6 percent for low-income countries (LICs)) below the no-COVID scenario. Similarly, Djiofack et al. (2020) estimate that depending on the duration of the crisis, African GDP would be 1 to 4 percent lower than in the outlook before COVID.
The pandemic sparked a health and fiscal response unprecedented in both speed and scale. At the global level, fiscal support reached nearly $ 16 trillion in 2020 (around 15 percent of global GDP). However, the capacities of the countries to implement such measures varied widely. In this note, we identify three major pre-existing conditions that aggravated the effects of shock:
- Control room: The ability to support households and businesses depends largely on access to international financial markets,
- State Capacity: The swift and efficient implementation of household and business support measures requires considerable government capacity and well-developed tax and transfer infrastructure; and
- Labor market structure: A large proportion of informal workers who face significant difficulties in introducing teleworking, as well as high levels of poverty and inequality, add to the harmful effects of the crisis.
In addition, the speed and strength of the recovery will depend critically on the ability of governments to acquire and deploy the COVID-19 vaccines.
This paper presents a succinct summary of the existing economic literature on the economic and tax implications of the pandemic, as well as a preliminary estimate of the economic costs involved. It documents the influence of the initial conditions (with particular focus on the role of the labor market channel) on the transmission of the shock as well as the speed and extent of the expected recovery, summarizes how countries have tried to mitigate the economic consequences, and the international financial crisis institutions, which countries have supported, provides preliminary reports on medium-term COVID-related losses and concludes with some forward-looking considerations based on the lessons learned in 2020.