IMF calls for multilateral co-operation and debt relief as global economy set to contract
The global economy is forecast to shrink 3% this year and will slide into the worst recession since the 1930s, according to the fund
The global economy, facing its greatest crisis since the 1930s, is projected to contract sharply this year, dragged down by the impact of the coronavirus, the most serious pandemic in a century, which has brought economic activity to a halt, the International Monetary Fund said.
The global economy is projected to shrink 3 per cent in 2020, a sharp revision from a previous 3.3 per cent expansion forecast and a grimmer outlook than the 2008 financial crisis.
“It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago,” the fund’s chief economist Gita Gopinath wrote in the 37-page World Economic Outlook (WEO) report released on Tuesday.
This time, the crisis is to a large extent the consequence of needed containment measures. This makes stimulating activity more challenging and, at least for the most affected sectors, undesirable.
Gita Gopinath, IMF
“The Great Lockdown, as one might call it, is projected to shrink global growth dramatically. A partial recovery is projected for 2021, with above trend growth rates, but the level of GDP (gross domestic product) will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound.”
The growth forecast for this year is marked down by more than 6 percentage points relative to the October 2019 WEO and January 2020 WEO update. The downward revision for this year is largely a result of advanced economies shrinking 6.1 per cent this year after expanding 1.7 per cent in 2019, according to IMF forecasts.
“This crisis is like no other. First, the shock is large. The output loss associated with this health emergency and related containment measures likely dwarfs the losses that triggered the global financial crisis,” said Ms Gopinath.
“Second, like in a war or a political crisis, there is continued severe uncertainty about the duration and intensity of the shock. Third, under current circumstances there is a very different role for economic policy."
In normal crises, policymakers try to encourage economic activity by stimulating aggregate demand as quickly as possible, said Ms Gopinath.
"This time, the crisis is to a large extent the consequence of needed containment measures. This makes stimulating activity more challenging and, at least for the most affected sectors, undesirable,” she added.
The US, the world’s largest economy, is projected to contract 5.9 per cent after expanding 2.3 per cent last year. Nearly 17 million Americans, equivalent to 10 per cent of the workforce, have lost their jobs in the last month.
Growth in Germany, Europe’s largest and the world’s fourth biggest economy, is expected to shrink 7 per cent, while France is set to contract 7.2 per cent. Italy, which has nearly 20,500 deaths from Covid-19, the second highest globally after the US, is projected to decline 9.1 per cent. Spain, which has the third highest coronavirus deaths worldwide, is forecast to contract 8 per cent.
China, the second biggest economy globally and where Covid-19 started, will decelerate to 1.2 per cent this year after expanding 6.1 per cent in 2019, its slowest pace in nearly three decades.
Japan, the world’s third largest economy, is projected to contract 5.2 per cent after growing 0.7 per cent in 2019. India, whose economy was slowing down due to its banking industry’s credit crisis, is set to decelerate to 1.9 per cent after expanding 4.2 per cent in 2019. The UK, the world’s sixth largest economy, which was already facing the impact of Brexit before the pandemic, is set to shrink 6.5 per cent.
The economies of the Middle East and Central Asian countries are projected to contract 2.8 per cent in 2020, while Saudi Arabia, the Arab world’s largest economy, is forecast to shrink 2.3 per cent, with its non-oil GDP contracting 4 per cent. The UAE’s economy is projected to contract 3.5 per cent but forecast to expand 3.3 per cent in 2021.
Gas-rich Qatar is set to see its economy shrink 4.5 per cent this year. Iran’s economy, the centre of Covid-19 in the Middle East and battered by US sanctions, is projected to contract 6 per cent with inflation estimated at 34.2 per cent in 2020.
Lebanon, which was enduring its worst economic crisis in three decades before the pandemic, is forecast to shrink 12 per cent this year, while inflation is estimated to surge to 17 per cent. Jordan, whose economy relies heavily on foreign aid and grants, is projected to contract 3.7 per cent.
Nigeria, Africa’s largest economy and biggest oil producer, is projected to shrink 3.4 per cent. South Africa, the second-largest and most-diversified economy on the continent which was already reeling from a Moody’s ratings downgrade to junk in March, is forecast to contract 5.8 per cent.
World trade volume is estimated to contract 11 per cent this year after growing 0.9 per cent in 2019. Oil prices will remain below $45 a barrel through 2023, about 25 per cent lower than the 2019 average price, due to weaker demand and indicative pricing from futures, the IMF said. Average petroleum spot prices per barrel are estimated at $35.60 in 2020 and $37.90 in 2021.
The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around $9 trillion, greater than the economies of Japan and Germany combined, Ms Gopinath said at a televised press conference following the release of the IMF's report.
Though the fund forecasts a rebound in 2021, with the economy expanding 5.8 per cent, it said there is “extreme uncertainty” around the global growth forecast given the various factors at play such as the assumption that the pandemic fades in the second half of this year, containment efforts unwind and economic activity normalises.
“As with the size of the downturn, there is extreme uncertainty around the strength of the recovery. Some aspects that underpin the rebound may not materialise, and worse global growth outcomes are possible – for example, a deeper contraction in 2020 and a shallower recovery in 2021 – depending on the pathway of the pandemic and the severity of the associated economic and financial consequences,” the IMF said.
The fund said this needs to be dealt with in two phases: containment and stabilisation followed by the recovery. It emphasised the need for co-ordinated public health and economic policies which are critical to avoiding a more severe and protracted slump in activity and setting the stage for an economic recovery.
The Washington-based lender called on policymakers to ensure people can meet their needs and businesses are in a position to bounce back once the acute phases of the pandemic pass.
“This requires substantial targeted fiscal, monetary and financial measures to maintain the economic ties between workers and firms and lenders and borrowers, keeping intact the economic and financial infrastructure of society,” the IMF said. “Broad-based stimulus and liquidity facilities to reduce systemic stress in the financial system can lift confidence and prevent an even deeper contraction in demand by limiting the amplification of the shock through the financial system and bolstering expectations for the eventual economic recovery.”
Governments have already rolled out more than $8 trillion in stimulus packages and the size is likely to increase as the pandemic continues and countries enforce lockdowns.
“The economic landscape will be altered significantly for the duration of the crisis and possibly longer, with greater involvement of government and central banks in the economy,” the fund said.
“Taming the pandemic,” the fund said, requires multilateral co-operation in addition to a reduction of tariffs and nontariff barriers that impede trade and supply chains. The Washington-based lender called on the international community to increase financial assistance to emerging market and developing economies.
“For those facing large debt repayments, debt moratoria and restructuring may need to be considered,” the IMF said.
On Monday, the IMF approved immediate debt relief for 25 countries struggling to cope with the economic impact from the coronavirus pandemic. G20 finance ministers and central bank governors will meet virtually on Wednesday to discuss and take urgent joint actions needed to address the impact of the pandemic on the global economy. The world’s 20 biggest economies are finalising a proposal for a six- or nine-month freeze on bilateral government loan repayments until 2021, to give lower income countries buffering space and help mitigate the prospect of an emerging markets debt crisis, according to the Financial Times.
“When the world economy last faced a crisis of this magnitude in the 1930s, the absence of a multilateral lender-of-last-resort forced countries to scramble for international liquidity, adopting futile mercantilist policies in that pursuit, which further worsened the global downturn,” the fund said. “A crucial difference in the current crisis is we have a stronger global financial safety net – with the IMF at its centre – that is already actively helping vulnerable countries.”
The fund said as it works to limit the economic damage to countries through its lending facilities, including rapid disbursing emergency financing, its members are again stepping up to further strengthen its resources.
Updated: June 23, 2020 06:30 PM