Global economy projected to contract by 3% in 2020 – IMF

HOUSTON (ICIS)–The global economy is projected to contract sharply by 3% in 2020, the International Monetary Fund (IMF) said in the newly released first chapter of its World Economic Outlook (WEO) report on Tuesday.

The WEO offered a grim global economic forecast and outlined a baseline scenario of recovery hinged on the pandemic fading in the second half of 2020. If it takes longer, warned the report, we should brace ourselves for much worse outcomes.

If a vaccine or treatment came along sooner, things will bounce back faster.

Financial markets are sharply repricing. The falling oil and commodity prices is an early indication of the severe economic fallout.

“Equity markets have sold off dramatically; high-yield corporate and emerging market sovereign spreads have widened significantly; and portfolio flows to emerging market funds have reversed, particularly in the case of hard currency bonds and equities,” the report said. “The rapidly worsening risk sentiment has prompted a series of central bank rate cuts, adding to the macroeconomic fallout of the pandemic.”

GLOBAL ECONOMY IN RECESSION

The projected global growth of -3.0% is a far worse outcome than the one predicted in 2009. Growth in the “advanced economy” group is expected to be -6.0 in 2020, and the growth rate for the group of “emerging economies” (excluding China) is -2.2%.

Emerging Asia is projected to have a positive growth rate in 2020 (1%), attributed mainly to India and Indonesia which have expected economic growth rates of 1.9% and 0.5% respectively.

Other regions in Latin America, Middle East and Africa are expected to suffer severe slowdowns and contractions.

IMF predicts a much larger fraction of countries will experience negative per capita income growth in 2020 than at the time of the 2009 financial crisis.

UNCERTAIN RECOVERY
If the pandemic fades during the second half of 2020, the global growth is expected to rebound to 5.8% in 2021. The advanced economy group is forecast to grow at 4.5%, while growth for the emerging market and developing economy group is forecast at 6.6%.

THE ROLE OF POLICYMAKERS IN MAINTAINING ECONOMIC TIES
Reiterating the situation’s unprecedented nature, the IMF said that economic policy has a very different role to play during the Great Lockdown, characterized as it is by extreme uncertainty and labour shortages due to coronavirus-containment measures.

However, the economic damage amplifies through familiar channels—rising unemployment, lenders worried about defaulters, fire sales, funding withdrawals and market turmoil.

In a “normal crisis”, IMF said, policymakers try to boost the economy by stimulating aggregate demand as quickly as possible.

In this case, policymakers need to ensure that people can meet their needs and businesses resume as soon as it is safe to do so.

Maintaining the economic ties between workers, firms lenders and borrowers and keeping intact the economic and financial infrastructure of society requires fiscal and monetary stimulus.

Many countries have provided or intend to provide fiscal support to heavily impacted sectors and workers. Eligible American citizens are expecting their first Economic Impact Payment checks this week.

This crisis will need to be dealt with in two phases: containment and stabilization followed by recovery.

TWO PHASES
During the containment and stabilization phase, resources should be made available for healthcare systems—this means more public spending for testing, rehiring retired doctors, buying PPE and ventilators and expanding isolation wards in hospitals.

The fiscal measures should  have two objectives: cushion the impact on those most vulnerable  and preserve economic relationships for the post-crisis era.

The coronavirus affects all countries. Countries with limited healthcare capacity should receive international aid, through grants and zero-interest loans. Policies should focus on avoiding trade restrictions on medical products and encouraging multilateral cooperation.

Even after containment measures are lifted,  it will be a while before people lose their wariness and confidently step outside. Analysts predict a gradual recovery.

This phase will see the scaling back of targeted fiscal and financial sector measures. Firms and business will slowly get back on their feet and rehiring workers. Some nonviable businesses will have to be dissolved or declare bankruptcy. Multilateral cooperation should continue and include plans for improving global healthcare infrastructure.

IMF’s full report will follow in May.

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Images above by IMF.