EIU: World Economy to Shrink by 2.5% in 2020 due to Covid-19

The world’s economy is expected to shrink by 2.5 percent in 2020 hit by the coronavirus (Covid-19) pandemic and its effect on demand and supply channels, according to the Economist Intelligence Unit (EIU).

Initial estimates had global GDP growth at 2.3 percent. The expected post-coronavirus contraction is deeper than during the global financial crisis due to stringent quarantine measures, illness, and negative consumer and business sentiment suppressing demand as well as the closure of factories and disruption to supply chains.

According to EIU analysts, the economic shock will be mostly concentrated in the first half of 2020, with regional variations depending on the spread of the virus.

The EIC estimates a modest rebound in global output in Q2 of 2020 on condition that Covid-19 is contained with no additional waves of the pandemic reoccurring.

The impact on confidence and demand, however, will be long lasting with the increased insecurity leading to more precautionary savings among households and delayed business investment.

EIC analysts believe that consumers may chose to remain in quarantine after lockdowns are lifted for fear of contracting the deadly virus which will dampen private consumption even further.

Referring to a worst-case scenario, the EIC study notes that sovereign debt crises are possible due to governments draining fiscal revenues and increasing public expenses in attempts to contain the pandemic.

According to the study, the measures implemented across Europe to hinder Covid-19’s spread are expected to lead to shrinking economies this year. Indicatively, Italy, reporting the highest number of deaths worldwide during the study, has recorded a 5 percent drop in output quarter on quarter in Q1.

Analysts expect all eurozone countries to post a contraction of their output on a quarterly basis. Germany will also be affected. In large part export-oriented, Germany’s output is set to shrink by 10 percent in Q2 on a quarterly basis and by 6 percent overall this year.