IIF expects global economy to contract 1.5% as virus takes toll

Uncertainty regarding the length of shutdowns in many countries underpins assessment

The global economy is expected to contract 1.5 per cent this year as the US and eurozone economies shut down amid the coronavirus pandemic and financial distress increases in emerging markets, the Institute of International Finance said.

A more than 60 per cent plunge in oil prices since the beginning of this year, is exacerbating the economic fallout from the virus outbreak, IIF managing director and chief economist Robin Brooks, said in a report.

Earlier this month the IIF cut its estimates for global growth in 2020 to 1.6 per cent from 2.6 per cent and further downgraded its forecast to just above zero last week. It sees further downside risks to its latest projection.

“The global economic picture has been evolving at lightning speed,” Mr Brooks, who co-authored the report with IIF economist Jonathan Fortun, said. The “Covid-19 pandemic, the Opec price war and mounting credit stress in advanced and emerging markets continue to reshape the picture in fundamental ways.”

The IIF projection, which factors some economic recovery in the second half of the year, is slightly more optimistic than that of the International Monetary Fund.

The multilateral lender anticipates a worldwide recession this year to be "at least as bad as during the global financial crisis or worse", with the likelihood of a recovery in 2021, its managing director, Kristalina Georgieva, said in a statement late on Tuesday.

The Organisation for Economic Co-operation and Development (OECD), however, has warned the economic shock of coronavirus is already bigger than the 2008 financial crisis and it will take the world years to fully recover from the downturn. It is “wishful thinking” to believe that countries will bounce back quickly, Angel Gurría, OECD secretary general, told the BBC.

The IIF said underlying its forecast is the uncertainty about how long shutdowns in many countries will last and if consumer and investment activity will rebound quickly enough once quarantines end.

Pockets of vulnerability in the world economy are concentrated in the eurozone, and in some emerging markets, including Argentina and South Africa that had entered 2020 in a weak state, the IIF said. It expects US and eurozone economic growth to contract 2.8 and 4.7 per cent, respectively.


“What seems clear at this stage is that the eurozone is getting hit with greater force, given that it entered 2020 with weak growth and a legacy output gap that could grow to 10 per cent of potential GDP by end-2020,” IIF said.

The institute estimates a contraction of 3.3 per cent across mature markets and growth of only 1.1 per cent in emerging markets, which, excluding China, is flat lining as risks are “considerable in a few places”.

“A deep downturn is the likely result in 2020, given the sharp sudden stop in EM inflows,” the IIF said.

The euro dropped to its lowest level against the dollar in nearly three years this week to 1.063 before recovering only slightly.