IMF paints bleaker picture for world economy as Covid-19 threat grows

Fund revises forecast down to a 4.9% contraction and reiterates earlier call for international co-operation to contain fallout and facilitate recovery

The IMF's offices in Washington. Reuters

The International Monetary Fund downgraded its forecast for the world economy and said it would contract by 4.9 per cent this year due a more severe economic fallout from the Covid-19 pandemic.

The projection is 1.9 percentage points below the April World Economic Outlook forecast, and a partial, sluggish recovery is expected this year, the fund said. The global economy will expand by 5.4 per cent next year, it said.

“The Covid-19 pandemic pushed economies into a Great Lockdown, which helped contain the virus and save lives but also triggered the worst recession since the Great Depression,” the Washington lender’s chief economist Gita Gopinath said in comments on the updated estimates.

“Over 75 per cent of countries are now reopening at the same time as the pandemic is intensifying in many emerging market and developing economies. Several countries have started to recover.

“However, in the absence of a medical solution, the strength of the recovery is highly uncertain and the impact on sectors and countries uneven. We are now projecting a deeper recession in 2020 and a slower recovery in 2021.”

The revision will leave next year’s GDP about 6.5 percentage points lower than the pre-coronavirus projections made in January.

The fund said the economic fallout was worse than it expected as the pandemic had accelerated in many countries but levelled off in others.

It cited a synchronised deep downturn with the first quarter of the year that affected most countries.

Indicators point to a more “severe contraction” in the second quarter, the fund said, except for China, which reopened in April.

The downturn was made worse by a drop in the output of consumption and services, reflecting social distancing measures, movement restrictions, steep income losses and weaker consumer confidence.

Mobility remains depressed, which correlates with subdued activity in the retail and recreation segments, and at workplaces.

The fund said the steep decline in economic activity led to “a catastrophic hit” to the world’s labour market. Although some countries, mostly in Europe, contained the fallout with short-term work programmes, the effects were significant.

The year-on-year global decline in work hours in the first quarter is equal to the loss of 130 million full-time jobs, the fund said, citing the International Labour Organisation.

The second-quarter decline is expected to be equal to the loss of more than 300 million full-time jobs. The downturn in economic activity amplified domestic disruptions around the world and led to a contraction in global trade.

Trade shrank by about 3.5 per cent year on year in the first quarter because of weaker demand, the collapse of the tourism industry and supply disruptions related to shutdowns, the fund said.

It also cited weaker inflation, which fell by about 1.3 percentage points from the end of 2019 in advanced economies to 0.4 per cent in April, year on year. Inflation fell 1.2 percentage points to 4.2 per cent in emerging market economies.

After expanding by 1.7 per cent last year, advanced economies are projected to shrink by 8 per cent this year, more than the 6.1 per cent contraction forecast by the IMF in April.

The US, the world’s largest economy, is expected to contract by 8 per cent instead of the 5.9 per cent contraction forecast three months ago.

After millions of Americans lost their jobs, the unemployment rate fell to 13.3 per cent in May as the economy began to reopen. The pandemic, however, has wiped out all the jobs created in the US since the 2008 global financial crisis.

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Growth in Germany, Europe’s largest and the world’s fourth-biggest economy, is now expected to shrink by 7.8 per cent, compared to a previous 7 per cent contraction forecast, while France is set to shrink 12.5 per cent, far greater than the previous 7.2 per cent contraction estimate.

Italy, which in April had the second-highest number of coronavirus deaths, is expected to shrink 12.8 per cent, compared to a previous 9.1 per cent contraction estimate. Spain, which has the sixth-highest number of coronavirus deaths, is also set shrink 12.8 per cent, more than the 8 per cent contraction previously projected.

Growth in China, the second-biggest economy and the country where Covid-19 started, will decelerate to 1 per cent, compared to a previous 1.2 per cent growth estimate, after expanding 6.1 per cent in 2019, its slowest pace in about three decades.

Japan, the world’s third-largest economy, is projected to shrink 5.8 per cent, more than the previous 5.2 per cent contraction estimate, after growing by 0.7 per cent last year.

India, whose economy was slowing down due to its banking industry’s credit crisis, is now expected to contract by 4.5 per cent, compared to a growth forecast of 1.9 per cent previously, after expanding 4.2 per cent last year.

The UK, the world’s sixth-largest economy, which already faced the impact of Brexit before the pandemic, is set to shrink by 10.2 per cent, a steeper decline than the previous 6.5 per cent contraction forecast.

In Latin America, where coronavirus infections have surged recently, the two largest economies, Brazil and Mexico, are projected to contract by 9.1 and 10.5 per cent, respectively this year.

The economies of the Middle East and Central Asian countries are projected to shrink by an average of 4.7 per cent, more than the earlier 2.8 per cent contraction forecast.

Saudi Arabia, the Arab world’s largest economy, is forecast to shrink by 6.8 per cent instead of the earlier 2.3 per cent contraction estimate.

Iran, the centre of the outbreak in the Middle East, is set to see is its economy contract an estimated 6 per cent, as previously forecast.

Nigeria, Africa’s largest economy and biggest oil producer, is projected to shrink 5.4 per cent wider than the previous 3.4 per cent contraction estimate.

South Africa, the second-largest and most diversified economy on the continent, was already reeling from a Moody’s downgrade to junk in March and is now projected to shrink 8 per cent instead of the previous 5.8 per cent contraction forecast.

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World trade volume is estimated to shrink 11.9 per cent this year, slightly above the previous 11 per cent contraction forecast, in reflection of weaker demand for goods and services, as well as tourism. Trade grew 0.9 per cent last year.

Oil prices are forecast at $36.20 this year and $37.50 next year. Prices are set to increase thereafter to $46, compared to a previous estimate of $45 a barrel, about 25 per cent lower than the average price last year, due to weaker demand and indicative pricing from futures, the IMF said.

The IMF projects a cumulative loss to the global economy of over $12 trillion (Dh44tn) over two years (2020-21) and 10 per cent of this total loss (about $1.2tn) stems from Latin America.

Two third of governments have topped up their fiscal support to offset the effects of pandemic, pumping about $11tn into their economies, compared with $8tn in April, the fund's managing director Kristalina Georgieva, said at a conference of Latin American and Caribbean leaders. That's in addition to monetary policy measures that amount to over $6tn.

"This is the time to do all it takes to support those most affected by the crisis," she said. "So please spend whatever is needed but spend wisely and keep your receipts—both to return eventually to a sustainable fiscal position and to ensure the accountability of pandemic-related expenditures."

While fiscal and monetary support has helped, the initial recovery around the world is uneven. Governments and policy makers need to remain vigilant and manage health risks in tandem with building up health capacity, which should be a priority, the IMF said.

“The global community must act now to avoid a repeat of this catastrophe by building global stockpiles of essential supplies and protective equipment, funding research and supporting public health systems, and putting in place effective modalities for delivering relief to the neediest,” the fund said.

It stressed its earlier call for debt relief and multilateral co-operation, calling for liquidity to be made available to countries battling health crises and external funding shortfalls.

Global public debt is projected to hit a record this year, in relation to economic output, across advanced, emerging market and developing economies.

The segment of the world’s population living in extreme poverty, or on less than $1.90 a day, which fell to below 10 per cent in recent years, from more than 35 per cent in 1990, is threatened by the pandemic, the fund said.

"This is truly a global crisis," Ms Georgieva said, adding nearly 95 per cent of countries are projected to face negative per capita income growth in 2020.

“Beyond the pandemic, policymakers must co-operate to resolve trade and technology tensions that endanger an eventual recovery from the Covid-19 crisis,” the fund said.

Carbon emissions, which fell about 8 per cent in the first part of the year as countries went into lockdown, should provide impetus for policymakers “to implement their climate change mitigation commitments and work together to scale up equitably designed carbon taxation or equivalent schemes”, the IMF said.