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Challenges to the world economy in 2020

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Essay Contest for UPSC Exam for IAS

The world economy hurts. A growth of 1.4% for advanced economies and an increase of 4.2% for emerging countries. These are according to Euro monitor, the forecasts for the world economy in 2020, which is marked by three risk factors: the commercial war, the fall in consumption, and the coronavirus.  

The outbreak of the epidemic has become an unexpected actor on the game board of the world economy. Although according to Euro monitor, China is the country with the greatest risk in the face of the situation, the report warns that if the outbreak of the epidemic continues to spread throughout the planet, the risk of a global recession will increase, weighed down by the reduction of consumption and the fall in business investment.     

The social unrest seen across the world in 2019 is also expected to continue in 2020, challenging both policymakers and business models.

Five areas of potential threat:

  • US-Iran conflict may lead to a spike in global oil prices

 The Economist Intelligence Unit has estimated that there is a 25 per cent chance that the US and Iran will engage in a direct, conventional war, which would have devastating consequences for the global economy. It has also pointed out that there is a distinct possibility that the Strait of Hormuz, which is a source of around 20 per cent of global oil supplies transit, could be closed for an extended period of time.

  • A trade war may break out between the US and the EU 

The Economist Intelligence Unit also predicts that the EU-US tensions will rise further this year, as the recent completion of a first-phase US-China trade deal has caused the US’s attention to shift back to the EU’s trade surplus with the US, and the EU’s position becomes more assertive with a new Commission in place. As a result, a further escalation in tariffs involving the US and EU auto industries cannot be ruled out. The report estimates 25 per cent chances of its occurrence.

  • Coronavirus may take a lasting toll on the global economy 

The EIU has assessed a 20 per cent probability that the virus will not be completely contained in China until mid-2020, and a 5 per cent chance will remain of it being uncontained beyond 2020. In the latter worst-case scenario, the economic impact would be much deeper and more persistent.

  • Debt burdens may cause a recession across emerging markets 

Fragile economies that have recently seen a stabilisation in their currencies, such as Turkey and Argentina, could rapidly fall back into crisis, and new crises could emerge, particularly in the countries hoping for bilateral support from China or regional powers.

  • Hong Kong protests may cause an exodus from Asia’s biggest financial centre

The EIU report has also highlighted that there is a distinct chance that protests could flare up again this year if existing civil rights are seen to be under threat over the longer term. This could occur around the elections for the Legislative Council scheduled for September 2020.

One question that might be asked is whether the coronavirus crisis will undermine globalization. The answer is that this has already happened. Many countries have already engaged in protectionist action related to the crisis. Several have imposed restrictions on exports of medical supplies, drugs, and food. These include the United Kingdom, Brazil, India, Turkey, South Korea, and Russia. The intention of such policies is to assure adequate supplies, but the reality is that such action usually results in shortages.

Meanwhile, some of the challenges to globalization that preceded the coronavirus crisis remain. These include the continuing high level of US tariffs on Chinese goods, continued US tariffs on steel and aluminium, continued US threats of protectionist action against the European Union, and US refusal to allow the appointment of new members of the Appellate Body of the World Trade Organization. The coronavirus crisis could provide the US administration with added support for these policies. Even if President Trump is succeeded by former Vice President Biden next year, Biden (who is more of an internationalist) will likely face significant pressure within his own party to be tough on China and other trading partners.

-Sangeeta Paul

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