IMF Projects Three Percent Global Economic Contraction in 2020

RIO DE JANEIRO, BRAZIL – The coronavirus crisis is causing an unusually severe impact on economic activity. The International Monetary Fund (IMF) projects that, as a result of the pandemic, the world economy will contract by three percent in 2020.

In short, a dramatic reversal after closing 2019 with growth of 2.9 percent. This is a “much greater” impact than the 2008 and 2009 financial crisis. Assuming the pandemic subsides in the second half of 2020, which is the IMF’s assumption, the economy will grow 5.8 percent in 2021 as activity normalizes and is aided by public policy incentives.

The IMF warns that the outlook is surrounded by “extreme uncertainty” because it is based on the assumption of the interplay of several factors.

The evolution of the pandemic, the effectiveness of containment measures, the scope of supply disruption, changes in people’s behavior, the impact on confidence… These are all factors on which the way out of the crisis will hinge, and which lead to “the risk of a worse outcome prevailing,” according to the Fund.

The IMF’s projections, as “gloomy” as anticipated a week ago by its managing director, Kristalina Georgieva, mark the beginning of a week of meetings in the institution this time of year, which will focus on the impact of the coronavirus and which are held virtually, as a collateral effect of the pandemic.

To overcome the Great Lockdown, as the fund refers to the crisis triggered by the virus, “strong multilateral cooperation is essential”. “No country is safe from the pandemic while there are still contagions elsewhere,” it warns.

The economic outlook is radically different from that projected only a few months ago. The three percent contraction in the global economy represents a six-point drop compared to the projections released by the fund in October and January: this is an extraordinary correction in such a short period of time.

The impact will be greater in developed economies (-6.1 percent in 2020) than in developing economies (-1 percent). Emerging Asia is the only region where the fund expects positive growth (one percent) in 2020, although it is still five points below its average in the last decade.

Those most affected will be Italy (-9.1 percent) and Spain (-8 percent), as well as Greece (-10 percent) and Portugal (-8 percent), but France (-7.2 percent), Germany (-7 percent), the United Kingdom (-6.5 percent) and the United States (-5.9 percent) will also be affected. In Brazil, the projected contraction is of -5.3 percent.

In the United States, now the global epicenter of the pandemic, the expected economic blow is the biggest since the 1929 Great Depression. The deterioration indicators caused by the distancing measures are now clear.

More than 16 million people, one in every ten workers in the country, applied for unemployment benefits between the last two weeks of March and the first week of April, and experts expect millions more to apply for the benefit. This comes after the lowest unemployment rate (3.5 percent) in 50 years was reached in February.

The crisis coincides in the United States with the electoral year, which renders any projection even more precarious.

“This crisis is unlike any other,” insists Fund chief economist Gita Gopinath. “The drop in production associated with the health emergency and related containment measures make the losses of the global financial crisis seem small. It is very likely that this year the world economy will experience its worst recession since the Great Depression”.

The IMF expects the pandemic to ease in the second half of the year, allowing the “phasing out” of containment efforts and restoring consumer and investor confidence. Thus, according to its estimates, the world economy will grow by around 5.8 percent in 2021.

In the preceding major crisis, the indicator increased from -0.1 percent in 2009 to 5.4 percent in 2010. Next year’s growth projection is 4.5 percent in the group of developed economies and 6.6 percent in developing economies as a whole. In neither bloc is it expected that the 2019 level of GDP, before this crisis exploded, will be reached before the end of 2021.

“Significant” economic policy measures have already been implemented worldwide, notes the Fund, “focused on meeting public health requirements and limiting their spread to economic activity and the financial system”.

The projected rebound assumes that these policies will be effective in “avoiding widespread corporate bankruptcy, major job losses and stress across the financial system. “As in the downturn, there is extreme uncertainty surrounding the strength of the rebound,” it notes.

“Despite the extreme circumstances, there are many reasons for optimism,” concludes Gopinath. “The number of cases has decreased due to measures and social distancing. The unprecedented pace of work on treatments and vaccines offers hope, and rapid and substantial actions in economic policy will help protect companies and people”.

Source: El País