Statsguru: The trail of Covid-19 destruction and a resulting recession

According to the International Monetary Fund, the pandemic is expected to cause the biggest recession since the Great Depression

The Covid-19 pandemic is ravaging the world economy, and has already infected 2,343,293 people. While 161,330 have died because of the pandemic, 602,793 have recovered. So, humanity will eventually prevail (chart 1). However, what the pandemic will leave behind is a trail of destruction in economic activity across the world.

The global economy will contract, except maybe China and India (chart 2). According to the International Monetary Fund (IMF), the pandemic is expected to cause the biggest recession since the Great Depression. Consequently, Budget deficits of countries will widen, as they will spend more on health care and emergency economic packages to arrest the economic meltdown (chart 3). That will also mean that these countries will have to borrow heavily. This will push up the national debt in most countries (chart 4).  

And as the world economy shows signs of recovery, there would be immense competition among emerging markets to export their products to the developed economies. Here, the real effective exchange rate (REER), which measures a currency’s strength vis-à-vis other trade partners, might come into play. 
 

Countries will probably try to get into a currency war and depreciate their currencies fast in a classic beggar thy neighbour move (chart 5).

Given that India’s REER is relatively stable, it may need to weaken the rupee substantially to match those of its export competitors. But when will the world recover remains a bigger question. The slowdown was already in the making, even before the Covid-19 pandemic struck the global economy. Negative bond yields in some countries were reflecting the economic weakness (chart 6).

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines