IMPACT OF COVID-19 ON INVESTMENT: DEEP, PERSISTENT, AND BROAD BASED
Report based on findings from World Banks.
The plunge in global economic activity during the COVID-19 pandemic has been accompanied by an even larger collapse in investment. The investment contraction in 2020 was deeper in advanced economies than in emerging market and developing economies (EMDEs) but the investment downturn in EMDEs was considerably sharper than during the global financial crisis. Against this backdrop, this box addresses three questions about investment in EMDEs:
- How has the pandemic impacted investment?
- What are the prospects for it?
- What will be the long-term effects of the pandemic?
Pre-pandemic trends. As the pandemic began, the world had already experienced a decade-long slowdown in investment growth (figure B3.2.1). From a peak of 10.8% in 2010, investment growth in EMDEs had fallen to 2.5% in 2019, complicating progress toward the Sustainable Development Goals (SDGs) related to infrastructure (Vorisek and Yu 2020). Periods of weakness in global commodity prices and associated adverse terms-of-trade developments, policy uncertainty, and rising corporate leverage had all curtailed investment over this period (Kose et al. 2017; World Bank 2017a, 2019a). The sluggishness of investment growth was broad-based, with more than half of EMDEs experiencing investment growth below their 2000-19 average in every year since 2012.
Deep investment collapse during the pandemic. Investment plunged particularly sharply in EMDEs excluding China as the pandemic took hold. In the full year 2020, investment in EMDEs shrank by an estimated 4.5%, and by a much deeper 10.6% if excluding China. This contraction for EMDEs excluding China was more than 4 percentage points deeper than during the 2009 global recession, despite financial conditions being substantially easier in 2020. The contraction in 2020 was sharpest in Latin America and the Caribbean and South Asia, where GDP also declined the most. The decline in investment in 2020 was smallest in East Asia, where activity was supported by large fiscal stimulus programs in China and Vietnam and also resilient foreign direct investment (FDI) inflows to Vietnam.
Subdued investment rebound, by historic standards. Even with the pandemic expected to recede in 2021, the short-term rebound in EMDE investment is projected to be much weaker in 2021, at 5.7%, than the rebound in 2010 (10.8%) following the global financial crisis. For most EMDEs, investment growth during the forecast period will remain at or below average rates during the 2010s (figure B3.2.2). These growth rates will be insufficient to reverse the investment losses during 2020. After the substantial fiscal stimulus of 2020, the transition to tighter fiscal policy in EMDEs in order to retain creditworthiness and contain debt service costs will constrain public investment projects. Private investment will be limited by uncertainty about the post-pandemic economic landscape and the viability of existing production structures. Overall investment growth in EMDEs is projected to soften to 4.3% in 2022. China is expected to contribute half or more of aggregate EMDE investment growth in 2021 and 2022. Without China, investment in EMDEs is projected to be still below the pre-pandemic level by 2022.
Source: https://blogs.worldbank.org/