Output is estimated to contract by 9.6% in fiscal year 2020-21, due to drop in household spending and private investment, even as high frequency data indicate recovery gaining momentum in services and manufacturing, according to the World Bank’s January 2021 Global Economic Prospects report.
The bank noted that the informal sector, which accounts for four-fifths of employment, has also been subject to severe income losses during the pandemic, while in the financial sector, non-performing loans were already high before the pandemic.
In South Asia, output contracted by an estimated 6.7% in FY21, reflecting the effects of the pandemic and nationwide lockdowns, particularly in Bangladesh and India. The bank has projected that the region will grow by 3.3% in FY22 assuming that a vaccine will be distributed on a large scale starting the second half of 2021 and no widespread resurgence in infections.
The bank also noted that the Covid-19 pandemic caused deep output losses and contributed to a sharp rise in poverty and unemployment in the region, but activity rebounded in the second half of 2020, led by industrial production and easing up of stringent lockdowns.
The bank, however, flagged risks to its outlook more severe and longer-lasting infection rates from the pandemic, financial and debt distress caused by an abrupt tightening of financing conditions or possible widespread corporate bankruptcies.
Additional stress on domestic banks in the region could be triggered by the economic consequences of a more protracted recovery from the pandemic, which in turn could lead to a rise in bankruptcies and weaken the balance sheets of the banking and non-banking sectors among several economies of the region, including India, Bangladesh, Bhutan and Sri Lanka.
The global economy is expected to expand 4% in 2021, assuming an initial Covid-19 vaccine roll out becomes widespread throughout the year, the World Bank said in its report.
Recovery is likely to be subdued, unless policy makers move decisively to tame the pandemic and implement investment-enhancing reforms.
“While the global economy appears to have entered a subdued recovery, policymakers face formidable challenges—in public health, debt management, budget policies, central banking and structural reforms—as they try to ensure that this still fragile global recovery gains traction and sets a foundation for robust growth,” said World Bank Group president David Malpass.
He added that a major push to improve business environments, increase labour and product market flexibility, and strengthen transparency and governance was needed to overcome the impacts of the pandemic and counter the investment headwind.