The International Monetary Fund (IMF) predicted that the global economy could shrink as much as 3 percent on an average this year if the novel coronavirus lingers or returns.
In its first World Economic Outlook report since the spread of the dreaded virus and subsequent freezing of major economies, the IMF said the “Great Lockdown” recession would be the steepest in almost a century and warned the world economy’s contraction and recovery would be worse than anticipated if the coronavirus lingers or returns.
IMF also expected a cumulative loss in global Gross Domestic Product (GDP) in 2020 and 2021 could be about $9 trillion, bigger than the economies of Japan and Germany combined, IMF chief economist Gita Gopinath said.
The Fund had in January projected the global economy would expand by 3.3 percent, while its latest projections of a contraction would likely mark the deepest dive since the Great Depression. It would also dwarf the 0.1 percent contraction of 2009 amid the financial crisis.
While the fund anticipated growth of 5.8 percent next year, which would be the strongest in records dating back to 1980, it cautioned risks are tilted to the downside.
Much depends on the longevity of the pandemic, its effect on activity and related stresses in financial and commodity markets, it said.
Even if the IMF’s forecast proves accurate, it said output in both advanced and emerging markets would undershoot their pre-virus trends through 2021, seemingly dashing any lingering hopes of a V-shaped economic rebound from the health emergency.
“This is a crisis like no other, which means there is substantial uncertainty on the impact it will have on people’s lives and livelihoods,” Gopinath said in an online briefing.
In a Bloomberg TV interview, she said that a worse-than-expected impact in emerging markets is a major downside risk to the IMF’s baseline scenario.
In its forecasts, the IMF assumes that countries experiencing severe epidemics will lose about 8 percent of working days this year during containment efforts and the loosening of restrictions.
In a further sign of pessimism, the IMF sketched out three alternative scenarios in which the virus lasted longer than expected, returned in 2021 or both. A lengthier pandemic would wipe 3 percent off GDP this year compared to the baseline, while protraction plus a resumption next year would mean 8 percent less output than projected in 2021, it said.
As with the virus’s reach, the economic hit is sweeping. In the U.S., GDP is expected to contract 5.9 percent, compared with a 2 percent expansion in the fund’s last global outlook in January. It may grow 4.7 percent next year, the IMF said.
The euro area will probably shrink 7.5 percent in 2020 and expand 4.7 percent in 2021, it said.
“Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital-flow reversals and a collapse in commodity prices,” the IMF said. “Risks of a worse outcome predominate.”
The grim projections are a stark reversal from the IMF’s outlook less than two months ago. On Feb. 19, the fund told Group of 20 finance chiefs that “global growth appears to be bottoming out.” Three days later, Managing Director Kristalina Georgieva predicted the virus would likely cut just 0.1 percentage point from the fund’s global growth forecast for this year, although she acknowledged “more dire scenarios” were being studied.
The fund sees advanced economies shrinking the most, contracting 6.1%. Emerging-market and developing economies will see a 1 percent drop. Growth in China and India will decelerate but their economies will still manage to expand 1.2 percent and 1.9 percent respectively, the fund said.
The IMF’s baseline scenario assumes that the pandemic fades in the second half of this year and that containment measures can be gradually wound down.
Global trade volume in goods and services will probably tumble 11 percent this year, the fund said.
Trade Slump
Growth in consumer prices in advanced economies may average 0.5 percent this year before accelerating to 1.5 percent in 2021, it said. The U.S. jobless rate, which was at a half-century low before the pandemic, may swell to 10.4 percent in 2020, the IMF said.
In a separate report, the IMF warned that the coronavirus crisis also “presents a very serious threat to the stability of the global financial system.”
While forceful government and central-bank actions have stabilized investor sentiment, “there is still a risk of a further tightening in financial conditions” that could expose cracks in the system, the fund said in its Global Financial Stability Report.
Should that happen, central banks may need to consider further measures to support the flow of credit to their economies, it said.
Most central banks have cut interest rates to around or below zero to blunt the effect of the coronavirus, with the Federal Reserve launching an unprecedented range of emergency programs to support as much as $2.3 trillion in loans. Fiscal stimulus packages have varied more. The U.S. is providing about 10 percent of GDP in support and Germany about 4.5%, while Japan’s program is worth about 20% of GDP, according to Bloomberg Economics.
The IMF said that fiscal measures will need to increase if stoppages to economic activity persist, or if the pickup in activity once restrictions are lifted is too weak. Economies with financing constraints may also require external support, the fund said. Georgieva had repeatedly pledged to use the IMF’s $1 trillion in loan capacity to help its members.
The IMF and World Bank are holding their spring meetings via video conference for the first time ever this week. Their normal in-person meetings typically draw thousands of delegates, observers and journalists from 189 member countries. The program has been pared down to mostly media briefings and private meetings, skipping the typical seminars and public discussions.
*With Report from Bloomberg
