Speed of undetected coronavirus spread pushing down GDP hopes – IMF

LONDON (ICIS)–The rate of undetected contagion and wide geographic spread of coronavirus is pushing the IMF’s global economic growth expectations towards more “dire” scenarios, the managing director of the fund said on Wednesday.

The virus outbreak has led the organisation to cut back its expectations for worldwide GDP growth in 2020, now expected to shrink below 2019 levels under any scenario the IMF can envisage, according to managing director Kristalina Georgieva.

“This is no longer a regional issue, this is a global problem calling for a global response,” she said.

The IMF cut its expectations for GDP growth in 2020 by 0.1 percentage points in January, before the extent of the outbreak was known, to 3.3% compared to 2.9% last year.

Speaking at World Economic Forum in Davos, Austria, that month, Georgieva noted that there was little momentum behind the tentative recovery seen at the time, with most of the expanded growth expected from emerging markets.

Since then, the coronavirus has arrested what little growth uptick had been seen in the global economy, darkening expectations for the year.

“In terms of our projections, we unfortunately over the last week have seen a shift to a more adverse scenario for the global economy,” she said, speaking at a joint press conference with the World Bank on Wednesday.

The outlook has worsened significantly in the past week, with the extent of the spread beyond China meaning that over a third of the IMF’s 189 member countries now have confirmed cases. A better understanding of how the virus spreads has made for a bleaker prognosis, she added.

“It is the sheer geographic spread of the epidemic around the world… [and] the additional knowledge that has been accumulated on how the virus spreads, and it is unfortunately spreading undetected more than was initially thought,” Georgieva said

The shock from the outbreak is unusual, Georgieva noted, in that it affects significant elements of both supply and demand, with production hit by tighter credit, quarantine measures and supply chain disruption, and consumption shrinking due to uncertainty and rising financial costs.

Overall productivity in China stands at around 60% of normal levels at present, she said, which the IMF expects to rise to 90-100% in coming weeks.

The IMF and World Bank have been in close contact with representatives of stakeholder countries according to Georgieva and World Bank president David Malpass.

According to Malpass, a key factor in the global financial system is the drying up of available liquidity, particularly the short-term capital needed by companies to keep production running, pay for imports and keep the lights on, particularly in the developing world.

The bank has helped to assemble a $12bn funding package in a bid to offset the growing liquidity crisis, made up of $6bn in European Bank of Reconstruction and Development (EBRD) financing and $6bn from the International Finance Corporation (IFC).

The latter is private sector cash that can be used for trade financing and working capital, which can be put to work extremely quickly, he added.

The bank is also evaluating the need for a “pandemic financing facility”, likely in the form of bonds, which could be deployed if additional cash is needed he added.

The US Federal Reserve announced an interest rate cut on Tuesday in response to the crisis, and other central bankers have pledged to intervene as necessary to stabilise market jitters, following the US Dow suffering a sharp fall late last week, raising the spectre of a more protracted sell-off

“We do need to have measures that are bringing a sense of confidence,” said Georgieva. “At the moment the financial system is in good shape, there has been a lot done since the financial crisis to put us on a better footing today.”

Late in February, the IMF cut its GDP growth forecasts for China to 5.6% and projected a minor, short-lived impact and V-shaped recovery for the country, where the economy would fall and rebound sharply.

This was based on baseline assumptions that the outbreak was limited to China and was fully contained, according to Georgieva.

“That has not happened, we have seen this week that our baseline scenario is no longer valid,” she said.

“Unfortunately we have moved into the territory of the more dire scenarios,” she added.

The IMF will outline the specifics of its current expectations for global GDP growth in its next world economic outlook, Georgieva added.

Focus article by Tom Brown

Front page image: IMF director Kristalina Georgieva and World Bank Group president David Malpass at joint press conference on response to the COVID-19 coronavirus outbreak at the IMF headquarters in Washington. Source: ERIK S LESSER/EPA-EFE/Shutterstock