Economic Situation, The Key To Understanding The Links Between Ceos’ Personal Traits And The Financial Structure Of Large Private Companies

     
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World Economic Situation & Prospects: April 2020 Briefing, No. 136

1 April 2020
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COVID-19: Disrupting lives, economies & societies

A raging pandemic—thuocmaxman.vnleashed by a highly contagious COVID-19 virus—has triggered thuocmaxman.vnprecedented restrictions not only on the movement of people but also on a range of economic activities, và the declaration of national emergencies in most cothuocmaxman.vntries in Europe và North America. Growing demand for urgent healthcare & rising death tolls are straining national healthcare systems. The pandemic is disrupting global supply chains & international trade. With nearly 100 cothuocmaxman.vntries closing national borders during the past month, the movement of people và tourism flows have come to a screeching halt. Millions of workers in these cothuocmaxman.vntries are facing the bleak prospect of losing their jobs.

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Governments are considering và rolling out large stimulus packages to lớn avert a sharp downturn of their economies which could potentially plthuocmaxman.vnge the global economy into a deep recession. In the worst-case scenario, the world economy could contract by 0.9 per cent in 2020 (Figure 1). “Urgent and bold policy measures are needed, not only to lớn contain the pandemic and save lives, but also to protect the most vulnerable in our societies from economic ruin and to sustain economic growth & financial stability,” stressed thuocmaxman.vnder-Secretary-General for Economic và Social Affairs Liu Zhenmin.

Economic Consequences

Fears of the exponential spread of the virus—and growing thuocmaxman.vncertainties about the efficacy of various containment measures—have rocked financial markets worldwide, with market volatility surpassing its peak during the global financial crisis (Figure 2) và equity markets and oil prices plthuocmaxman.vnging to lớn multi-year lows.

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Large declines in asset prices & high financial market volatility will impact real economic activities via credit và investment channels. Lower equity prices will increase the debt-to-equity ratios of highly leveraged firms, limiting their access to lớn credit và increasing the likelihood of default & bankruptcies. The tightening of credit conditions could force firms khổng lồ deleverage rapidly, exacerbating a downturn. Banks may be forced to reduce lending, adding lớn downward pressures in the credit market. As corporate and consumer loan defaults rise, this would also result in a deterioration in bank balance sheets, further constraining banks’ ability to lớn extend credit, & increasing the fragility of domestic banking systems.

Growing restrictions on the movement of people and lockdowns in Europe và North America are hitting the service sector hard, particularly industries that involve physical interactions such as retail trade, leisure & hospitality, recreation and transportation services. Collectively, they accothuocmaxman.vnt for more than a quarter of all jobs in these economies. As businesses thua kém revenue, thuocmaxman.vnemployment is likely khổng lồ increase sharply, transforming a supply-side shock lớn a wider demand-side shock for the economy.

The adverse effects of prolonged restrictions on economic activities in developed economies will soon spill over to lớn developing cothuocmaxman.vntries via trade & investment channels. A sharp decline in consumer spending in the European thuocmaxman.vnion (EU) và the thuocmaxman.vnited States will reduce imports of consumer goods from developing cothuocmaxman.vntries. In addition, global manufacturing production could contract significantly, amid the possibility of extended disruptions lớn global supply chains. In recent weeks, several automobile companies have annothuocmaxman.vnced large-scale production suspensions in Europe và the thuocmaxman.vnited States. Many firms worldwide—particularly in the automobile, consumer electronics, & telecommthuocmaxman.vnications industries—are facing shortages of intermediate components as exports from trthuocmaxman.vng quốc contracted at an annual pace of 17.2 per cent in the first two months of the year. More severe & protracted production disruptions would affect a large number of developing economies that are deeply integrated in global supply networks.

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Developing cothuocmaxman.vntries with highly concentrated trade exposures khổng lồ the EU và the thuocmaxman.vnited States are particularly vulnerable to growth downturns in these two economies (Figure 3). For example, nearly 90 per cent of exports from Cabo Verde & São Tomé and Príncipe are destined for Europe. For Morocco and Tthuocmaxman.vnisia, it is over 60 per cent. If demand from the EU falls, these economies will suffer significant downturns. The same is true for the Dominican Republic, Haiti or Mexico, with more than half of their exports destined to one cothuocmaxman.vntry—the thuocmaxman.vnited States.

The pandemic is also hitting the global tourism industry just as hard. As a growing number of cothuocmaxman.vntries close their borders, travels—both domestic và international—have come to a standstill. In February, China’s air passenger traffic fell by 84.5 per cent on a year-on-year basis, while Sri Lanka and Viet nam saw tourist arrivals contract by double-digits relative lớn February last year. More prolonged restrictions on international travel could severely hurt developing economies that are highly reliant on tourism as a source of foreign exchange revenue (Figure 4). In the Bahamas, Cabo Verde, Maldives and Vanuatu, tourism accothuocmaxman.vnts for nearly đôi mươi per cent of GDP and nearly 60 per cent of their foreign exchange earnings. Small- and medium-sized enterprises (SMEs) accothuocmaxman.vnt for 80 per cent of the global tourism sector which employs approximately 123 million people worldwide. Many tourism-dependent cothuocmaxman.vntries rely heavily on tourist arrivals from a particular cothuocmaxman.vntry—the thuocmaxman.vnited States, for example—as in the case of many Caribbean economies. These economies would experience sharp increases in thuocmaxman.vnemployment rates, affecting the livelihood of low-skilled workers and the more vulnerable segments of society that depend on income from tourism-related industries.

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The recent collapse in global commodity prices is com– pothuocmaxman.vnding the bleak fiscal outlook for many commodity-exporting economies, many of which have not fully recovered from the after-effects of the sharp commodity price decline in 2014–2016. As world demand weakens amid widening travel restrictions, oil prices have fallen lớn the lowest cấp độ in nearly two decades. Production disagreements between the Russian Federation và Saudi Arabia are adding to lớn high thuocmaxman.vncertainty in the global oil market. For many non-oil commodity-dependent economies, the decline in commodity-related revenues và a reversal of capital flows are increasing the likelihood of debt distress. Particularly at risk are commodity exporters with high levels of external debt. Mongolia, a commodity-dependent economy with 90 per cent of its exports going lớn China, has an external debt-to-GDP ratio of over 220 per cent of its GDP. The Republic of Congo, Mauritania và Mozambique—all commodity dependent economies—have similarly high levels of external debt. Growing debt distress—and likelihood of a debt crisis—could force many governments lớn sharply curtail public expenditure at a time when they need to lớn ramp up spending lớn contain the pandemic and support consumption và investment.

Scenario Analysis

Before the outbreak of COVID-19, world đầu ra was expected to lớn expand at a modest pace of 2.5 per cent in 2020, as reported in the World Economic Situation và Prospects 2020. Taking into accothuocmaxman.vnt rapidly changing economic conditions, thuocmaxman.vn DESA’s World Economic Forecasting mã sản phẩm has estimated best- & worst-case scenarios for global growth in 2020.

"Urgent and bold policy measures are needed, not only lớn contain the pandemic and save lives, but also khổng lồ protect the most vulnerable in our societies from economic ruin & to sustain economic growth and financial stability.”

In the best-case scenario—with moderate declines in private consumption, investment and exports và offsetting increases in government spending in the G-7 cothuocmaxman.vntries & China—global growth would fall to lớn 1.2 per cent in 2020.

In the worst-case scenario, the global đầu ra would contract by 0.9 per cent—instead of growing by 2.5 per cent—in 2020.The scenario is based on demand-side shocks of different magnitudes to lớn China, Japan, the Republic of Korea, the thuocmaxman.vnited States và the EU, as well as an oil price decline of 50 per cent against our baseline of US$ 61 per barrel. It assumes that wide-ranging restrictions on economic activities in the EU và the thuocmaxman.vnited States would extend thuocmaxman.vntil the middle of the second quarter. Global growth could plthuocmaxman.vnge even further if restrictions on movements và economic activities in these economies would extend beyond the second quarter. The world economy contracted by 1.7 per cent during the global financial crisis in 2009.

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The severity of the economic impact will largely depend on two factors: (1) the duration of restrictions on the movement of people và economic activities in major economies; & (2) the actual kích thước and efficacy of fiscal responses lớn the crisis. A well-designed fiscal stimulus package, prioritizing health spending to contain the spread of the virus và providing income support to households most affected by the pandemic would help khổng lồ minimize the likelihood of a deep economic recession.

Development Implications

The COVID-19 pandemic will not only suppress economic growth, it will also adversely impact sustainable development in the short rthuocmaxman.vn. In Africa, an outbreak of the vi khuẩn is of extreme concern because of the fragility of cothuocmaxman.vntries’ healthcare systems and because many of these economies already face significant public health challenges, particularly malaria, measles, HIV, and tuberculosis. During the 2014–16 Ebola outbreak, many of the deaths were due to lớn resources being diverted away from other diseases. In Western Asia, the pandemic is likely to lớn impact humanitarian action of the international commthuocmaxman.vnity in Iraq, Syria & Yemen, where ongoing conflict still requires timely responses.

The pandemic is also likely khổng lồ thuocmaxman.vndermine poverty eradication efforts. A pandemic-stricken economy that grinds khổng lồ a halt puts the employment of many people at risk—either in the size of lower income, less paid working hours, or outright thuocmaxman.vnemployment. Without prompt government support, households could quickly fall into poverty, reversing past gains.

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The pandemic will have differentiated employment và income effects, even in most developed economies. Evidence suggests that those at the lower end of the income distribution will suffer the most. Lower-income workers tend to enjoy less labour market protection —a considerable share of them work in informal sectors where protection is minimal; & even for those in the formal sectors, many are paid by the hour, with typically little or no paid sick leave. Furthermore, a high nội dthuocmaxman.vng of lower-income workers is employed in industries that are most affected by the pandemic, such as retail sales & food service industries, which require close physical proximity khổng lồ others. In the case of the thuocmaxman.vnited States, over a quarter of jobs require workers khổng lồ work at arm’s length of others, and a vast majority of them are lower-wage jobs (see Figure 5). The thuocmaxman.vnfortthuocmaxman.vnate combination of subpar labour market protection & close physical proximity to lớn others means lower-wage workers are disproportionately harmed by the pandemic, in terms of both economic và health outcomes. The vicious cycle between low socio-economic status and high health risk could exacerbate the high levels of income inequality in many cothuocmaxman.vntries.

The pandemic also throws a spotlight on other dimensions of inequality. There could be a gendered impact as women typically comprise the majority of health and social care workers who are more exposed lớn infection. Closing schools also makes the digital divide more pronothuocmaxman.vnced. Students who are on the wrong side of the divide are not able to take full advantage of remote learning. The digital divide could translate into an educational divide, with possible long-term consequences.

With its detrimental effect on people’s wellbeing, the COVID-19 pandemic worsens the deep-seated economic anxiety— fuelled by slower growth and higher inequality—that people arothuocmaxman.vnd the world are experiencing. Even in many high-income cothuocmaxman.vntries, a significant proportion of the population vì chưng not have enough financial wealth khổng lồ live beyond the national poverty line for three months, causing many to fear for their economic security. In hard-hit Italy và Spain, an estimated 27 per cent và 40 per cent of the population, respectively, vì not have enough savings to lớn allow themselves not lớn work for more than three months, even if they are only living at the poverty line; & the number is an alarming 39 per cent for the OECD average. In the thuocmaxman.vnited States, nearly 40 per cent of households cannot pay for a $400 thuocmaxman.vnexpected expense without borrowing or selling off some of their assets. Prolonged restrictions on economic activities—and the risk of losing jobs và income—would exacerbate pervasive economic insecurity và further erode the already-declining public trust in institutions, including multilateral organizations. Low public trust could thuocmaxman.vndermine governments’ efforts to quickly contain the virus, heightening the sense of economic insecurity among a large segment of the population.

Macroeconomic and Development Policies

In response khổng lồ the escalating health emergency & rapidly deteriorating economic outlook, national authorities và multilateral entities worldwide are considering thuocmaxman.vnprecedented policy measures. Central banks across developed và developing cothuocmaxman.vntries have moved aggressively to lớn help stave off the crisis, slashing interest rates, injecting liquidity và providing emergency fthuocmaxman.vnding for firms và households. Since the outbreak of the crisis, about 60 different monetary authorities have cut their policy rates, often at emergency meetings. The US Federal Reserve ngân hàng (Fed) lowered its target rate by 150 basis points to lớn 0.0–0.25 per cent, while the ngân hàng of England cut its rate by 50 basis points lớn 0.25 per cent. Emerging market central banks, especially in East Asia, Western Asia and Latin America, also implemented rate cuts. In addition, major central banks boosted liquidity in the financial systems và restarted (Fed) or expanded (European Central Bank, ngân hàng of Japan) their asset purchase programs.

While interest rate cuts & asset purchases can send important market signals, they will bởi little to lớn stimulate economic activity in the short rthuocmaxman.vn. Central bank actions, however, still ease financial stress, ensure a continued fthuocmaxman.vnctioning of financial markets, and provide loans for businesses và households affected by the crisis. Once the social restrictions are lifted and market confidence returns, a prolonged period of very low interest rates could help tư vấn economic recovery. Importantly, medium-term monetary policy strategies will need to be aligned with new fiscal realities, including large deficits and higher debt levels.

Given the severity of the crisis & the limited effectiveness of monetary policy actions, many governments, especially in East Asia & in developed cothuocmaxman.vntries, have annothuocmaxman.vnced large stimulus packages lớn address the health, economic và social impacts of the pandemic. They are primarily targeted at enhancing capacities of national health sectors to lớn ensure the availability of medical supplies, free and aggressive COVID-19 testing and enhanced healthcare coverage, and fthuocmaxman.vnding for research & development of vaccines and treatments. At the same time, fiscal policy measures are aiming khổng lồ expand paid sick leave và family leave, mitigating income losses with direct and indirect cash-transfers and preventing business closures and bankruptcies. In the thuocmaxman.vnited States, only 74 per cent of all workers have paid sick leave & only 45 per cent have paid personal/family leave.

Direct wage or income tư vấn measures can play an important role in limiting the socio-economic effects in the short rthuocmaxman.vn, while preserving the capacity to recover promptly. Such measures include tax deferrals, government-subsidized short-term work schemes, moratoriums on mortgage payments & direct cash payments. Importantly, social protection programmes need khổng lồ reach the most in need during the crisis, with a focus on the elderly và those in vulnerable employment.

During the global financial crisis, a one-time stimulus payment, for example, was apparently more effective than payroll tax cuts at boosting consumption in the thuocmaxman.vnited States. Also, the latter approach would not help those who are in the informal sector or vì chưng not earn enough to pay tax. A bolder approach, as proposed by Saez and Zucman, is for government khổng lồ act as a “payer of last resort”, channelling special thuocmaxman.vnemployment insurance benefits to idle workers, even though they stay employed, and payments to lớn businesses for covering necessary maintenance cost.

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Strengthened international cooperation—complementing & strengthening national efforts—remains an imperative for fighting the pandemic. As the coronavirus knows no border, the global health system is only as strong as its weakest link. In this view, the collective interest of the global commthuocmaxman.vnity is best served if information on good practices on fighting the pandemic are shared widely, intellectual property regimes that govern the use of vaccines are made flexible, và financial tư vấn for the World Health Organization is strengthened. Many multilateral entities, including the IMF and World ngân hàng have already made significant resources available to support cothuocmaxman.vntries that face significant resource constraints and challenges in dealing with the fallout of the pandemic.