• Monetary policy and fiscal stimulus measures have prevented economic collapse, and activity could rally by 5.2 percent in 2021

• Measures to combat the pandemic raise the debt-to-GDP ratio to a record high of 331 percent


The COVID-19 pandemic has generated an unprecedented shock in the global economy that has resulted in a sharp drop in activity levels. The emergence of this ‘black swan’ will lead to a reduction in GDP in 90 percent of the world’s economies, with asymmetrical effects that will depend on the productive structure in each country, and on the economic and health-related vulnerabilities of each system. MAPFRE Economics explains this in the quarterly update to its “2020 Economic and Industry Outlook” report, published by Fundación MAPFRE.

In its baseline scenario, the insurer’s Economics service expects a correction in the global economy of around 4.4 percent, with significant differences between regions, which will widen the poverty gap. In terms of disposable income, the expectation is for a widespread reduction of the increased levels of prosperity built up by the middle classes since the beginning of the millennium, especially in Latin America. However, central bank support and fiscal stimuli have prevented economic collapse, according to MAPFRE Economics. As a result, their forecasts have improved slightly compared to the beginning of the pandemic (in the previous quarter, they predicted a decline of 4.9 percent). For 2021, they predict a rebound in activity of between 4 percent and 5.2 percent. However, as they mention in the report, “it’s possible that new risks will appear that we are currently unaware of, but which may be provoked by the interaction of pre-existing risks and the crisis triggered by the COVID-19 pandemic.”

The recession created by the implementation of the lockdown and social distancing measures necessary to control the expansion of the COVID-19 pandemic has brought with it a number of undesirable effects. One of these undesirable effects is the increase in the global debt-to-GDP ratio to a new historic peak of 331 percent in the first quarter of 2020, compared to 320 percent in the fourth quarter of 2019.

This lower pessimism is also reflected in each of the economies they analyzed. The economists from MAPFRE Economics have revised their estimate for economic growth in 2020 for the eurozone as a whole to -7.6 percent (from -10.0 percent) but with broad downside risks as a result of the unequal recovery between sectors and countries, precisely because of the specialization of each of the eurozone markets. “The risks to the economy are generally to the downside in view of the surge in infection across the eurozone, the new restrictions on mobility and their effects on uncertainty, in a context of already tight monetary space and serious national fiscal imbalances. The latter will soon put pressure on financing costs, especially in the European periphery,” the experts point out. In turn, a deep and protracted crisis may transform current liquidity problems into solvency problems. “In a context of low revenue, an increase in arrears would lead to a deterioration in banks’ regulatory solvency levels. Sovereign financial adjustments have been prolonged and painful in Europe (2010–2013),” they add.

The decline in US GDP could range from 4 percent to 4.5 percent, which represents a significant improvement compared with the previous quarter (between 8 percent and 9.4 percent). This is due, as MAPFRE Economics points out, to the enormous fiscal and monetary stimuli implemented in a debt monetization strategy that is becoming less and less hesitant. In this sense, to date, the fiscal effort made amounts to approximately 15 percent of GDP. But, as with all economies, forecasts are also subject to a high level of uncertainty based not just on the evolution of the pandemic, but also on November’s election result. “The uncertainty caused by the COVID-19 pandemic will continue to weigh on consumer and business confidence. The extension of this uncertainty over a long period of time will test the solvency of many businesses and the strength of the labor market. In this sense, both households and businesses will see a surge in defaults. If it lasts over a long period of time, this could lead to structural damage to the corporate fabric, especially in activities related to the travel, accommodation, transport, hospitality and leisure sectors,” they explain.

In the case of Spain, MAPFRE Economics expects a contraction in GDP of between 11.8 percent (baseline scenario) and 12.1 percent (stressed scenario) for this year, compared to the range of between 12.1 percent and 13.1 percent for the previous quarter. The outlook for recovery in 2021 is maintained (at 6.7 percent), but is moderate and elusive given the context of biological and economic uncertainty, in a context of political stalemate and a serious erosion of institutional stability which has blocked the adoption of a financial program that could give access to the European Union’s recovery fund.


Emerging markets

Despite its global nature, the shock of COVID-19 will have different effects on emerging economies, exacerbating the weakness of those with worse external positions and depreciating their currencies throughout 2020 and part of 2021. In addition, countries with the greatest number of accumulated vulnerabilities are more sensitive to the cycle and to the global aversion to risk, which makes it more difficult for them to honor debts with the outside world, increasing the perception that this may result in a default or implicit write-off of debt issued in local currency (in the face of progressive devaluations). The coverage required against this counterparty risk thus increases the need for strong currencies (USD), which exerts even more pressure on local currencies and only serves to intensify the problem.

The full Outlook report is available here (in Spanish).