Global outlook c h a p t e r 1

B. Evolution of the pandemic in 
EMDEs
C. Positive COVID-19 test rate by 
region
D. Stringency of pandemic-control 
measures

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C H A P T E R 1 
G L O B A L E C O N O M I C P R O S P E C T S | J A N U A R Y 2 0 2 1 
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likely to contribute to a further decline in trade 
uncertainty.
Global trade is projected to contract by 9.5 
percent in 2020—comparable to the decline 
during the 2009 global recession but affecting a 
markedly larger share of economies—before 
growing by an average of 5.1 percent in 2021-22. 
The moderate pickup in global trade reflects 
persistently subdued global investment and the 
gradual and incomplete recovery of global travel, 
and is expected to result in a further decline in the 
trade intensity of activity.
Financial markets
Aggressive policy actions by central banks kept the 
global financial system from falling into crisis last 
year. Financial conditions are generally loose, as 
suggested by low borrowing costs, abundant credit 
issuance, and a recovery in equity market 
valuations amid positive news about vaccine 
developments (figure 1.5.A; Altavilla et al. 2020). 
This masks rising underlying vulnerabilities, 
however, including rising debt levels and 
weakening bank balance sheets.
Debt burdens have increased as corporates have 
faced a period of sharply reduced sales and 
sovereigns have financed large stimulus packages 
(box 1.1). This follows a decade in which global 
debt had already risen to a record high of 230 
percent of GDP by 2019. High debt levels leave 
borrowers vulnerable to a sudden change in 
investor risk appetite. This is especially true for 
riskier borrowers and EMDEs dependent on 
capital inflows to finance large fiscal and external 
current account deficits (figure 1.5.B). Capital 
inflows to many EMDEs remain soft, with 
significant weakness in both foreign direct 
investment (FDI) and portfolio flows (figure 
1.5.C; World Bank 2020b). This, alongside a 
collapse of export revenues, has led to substantial 
currency depreciations and rising borrowing costs 
in some countries, particularly commodity 
exporters (figure 1.5.D; Hofmann, Shim, and 
Shin 2020; Hördahl and Shim 2020).
Banks’ capital buffers are under pressure due to 
falling profitability and asset quality deterioration. 
Defaults have already surged in the hardest-hit 
sectors and countries, and rising credit 
downgrades point to further strains in the future 
(Banerjee, Cornelli, and Zakrajšek 2020). These 
developments reduce the resilience of financial 
systems, particularly in countries with weaker 
banking systems or without the policy space to 
provide sufficient support to stressed financial 
institutions. 
Commodity markets
Most commodity prices rebounded in the second 
half of last year; however, the pickup in oil prices 
lagged the broader recovery in commodity prices