The Covid-19 pandemic started in China at the end of 2019, the country's economy logically being the first to be affected. The global economy then came to a halt as the virus spread.

It is still too early to precisely estimate the extent of the economic crisis, but it is already certain that it will be more brutal than 2008-2009.

The COVID-19 pandemic hit the world as it exhibited persistent external imbalances. The crisis resulted in a sharp reduction in trade and large fluctuations in exchange rates but a limited decrease in current account deficits and surpluses worldwide. The outlook remains very uncertain, as the risks of further waves of contagion, reversal of capital flows, and a further decline in international trade are still looming on the horizon.

According to the latest edition of the External Sector Report, current account deficits and surpluses were just below 3% of global GDP in 2019, slightly lower than the previous year. The latest forecast for 2020 is that they are expected to decline by around 0.3% of global GDP, a more modest drop than that recorded after the global financial crisis a decade ago.

The immediate priorities are to provide emergency assistance and promote economic recovery. Once the pandemic subsides, both surplus and deficit countries will need to make a collective reform effort to reduce the external imbalances in the world economy. New trade barriers will not be helpful in this regard.

A loss of wealth of more than 10 trillion dollars in 2020 and 2021

The Covid-19 has changed the lives of humanity since its appearance in China at the end of 2019. Economically, the Covid-19 pandemic is at the origin of the most serious crisis since, in less, World War II. One way to measure its short-term economic impact is to compare the evolution of global gross domestic product (GDP) following the pandemic outbreak to the situation that would have prevailed in its absence.

For this, let's compare the forecasts of world GDP made by the World Bank in January 2020, that is, before considering the Covid factor, and in December 2020. In its projections for January 2020, the Washington-based institution predicted global economic growth of 2.5 and 2.6% respectively in 2020 and 2021. Faced with the development of the pandemic and the implementation of restrictive health measures for the economy, the World Bank recently revised its forecasts. It now anticipates a drop in global economic activity of 4.3% in 2020, followed by an estimated rebound of 4% in 2021.

According to the latest forecasts from the World Bank, world GDP could thus reach respectively 84,023 and 87,384 billion dollars in 2020 and 2021. Without the Covid-19 pandemic (assuming that the World Bank's projections were correct), global GDP would have been, respectively, 89,993 and 92,333 billion dollars, a cumulative loss of more than 10,000 billion dollars.

Loss of wealth affecting the entire planet

One of the characteristics of the current economic crisis is affecting almost all the world countries.

The most affected geographic area is Latin America / Caribbean. The cumulative loss of wealth over the two years reached nearly 16.5% of its pre-crisis GDP. Next come the Middle East and North Africa, and the European area. For the latter, the cumulative loss represented 14.8% of GDP in 2019. The European zone thus appears to be more seriously affected than the United States, for example, in particular, due to a more severe recession in 2020, with a decline of the economic activity expected, for that year, at 7.4% within the European zone, against 3.6% across the Atlantic.

The East Asia / Pacific area is expected to suffer the least, in economic terms, from the Covid-19 pandemic, with a cumulative loss of wealth of around 8% of GDP in 2019, while even that the area should experience positive growth in 2020 and 2021 with GDP growth of 0.9% and 7.4% respectively. This case, therefore, illustrates the concrete effects of lower growth on the level of wealth ultimately created.

What long-term effects of the current recession?

The loss of wealth mentioned so far is only the "immediate" impact of the economic crisis we are going through. However, even when short-lived, recessions can have long-term effects on the economies concerned. Given the magnitude of the current recession caused by the Covid-19 pandemic, and although it is still early to quantify it, it will likely continue to have an impact on the global economy at- beyond 2023, the year in which the global economy should have returned to its pre-Covid-19 level of activity.

The first factor to consider here is education. The current pandemic is disrupting, first of all, education systems around the world. The loss of income linked to the recession should then reduce the possibilities of continuing studies, especially in countries where higher education is expensive! This could result in less accumulation of human capital, an important factor in economic growth.

In addition, private investment tends to be lower during recessions, while measures to support the economy reduce states' room for maneuver in public investment. However, lower investment today will have a negative effect on production capacities and economic growth in the future.

Finally, a recession can negatively affect the pace of innovation, on the level of aggregate demand (for example, if unemployment increases significantly), or even international trade. These are all factors that could add to the economic cost of the current recession.

Providing aid and rebalancing the global economy

In the short term, government efforts should continue to focus on implementing emergency arrangements and promoting economic recovery. Countries with flexible exchange rates would benefit from continuing to allow them, to the extent possible, to adapt to external conditions. When necessary and when reserves are sufficient, interventions in the foreign exchange market could help reduce market instability. For countries facing pressures that disrupt their balance of payments and lack access to private external finance, official finance and reciprocal lines of credit can help support the economy and preserve spending essential health.

In the medium term, surplus and deficit countries will have to work together to reduce excessive imbalances in the world economy. As the economic and other distortions that preceded the COVID-19 crisis may persist or worsen, reforms will need to be made that are tailored to each country's particular situation.