Covid-19: IMF sees global economy contracting sharply in 2020 ‘worse than in 2008/09 crisis’

Written by on April 14, 2020 in World - Comments Off on Covid-19: IMF sees global economy contracting sharply in 2020 ‘worse than in 2008/09 crisis’

As a result of the Covid-19 pandemic, the global economy is projected to contract sharply by –3 per cent in 2020, much worse than during the 2008–09 financial crisis, the International Monetary Fund (IMF) said in its April 2020 World Economic Outlook.

In a baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound, the global economy is projected to grow by 5.8 per cent in 2021 as economic activity normalizes, helped by policy support.

There is extreme uncertainty around the global growth forecast, the IMF said.

The economic fallout depends on factors that interact in ways that are hard to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, the extent of supply disruptions, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioural changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices.

“Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices. Risks of a worse outcome predominate.”

The fiscal response in affected countries has been swift and sizeable in many advanced economies (such as Australia, France, Germany, Italy, Japan, Spain, the United Kingdom, and the United States).

Many emerging market and developing economies (such as China, Indonesia, and South Africa) have also begun providing or announcing significant fiscal support to heavily impacted sectors and workers, the IMF said.

Fiscal measures will need to be scaled up if the stoppages to economic activity are persistent, or the pickup in activity as restrictions are lifted is too weak.

“Economies facing financing constraints to combat the pandemic and its effects may require external support.”

Broad-based fiscal stimulus can pre-empt a steeper decline in confidence, lift aggregate demand, and avert an even deeper downturn.

“But it would most likely be more effective once the outbreak fades and people are able to move about freely.”

The significant actions of large central banks in recent weeks include monetary stimulus and liquidity facilities to reduce systemic stress, the IMF said.

“These actions have supported confidence and contribute to limiting the amplification of the shock, thus ensuring that the economy is better placed to recover.”

The synchronized actions can magnify their impact on individual economies and will also help generate the space for emerging market and developing economies to use monetary policy to respond to domestic cyclical conditions.

“Supervisors should also encourage banks to renegotiate loans to distressed households and firms while maintaining a transparent assessment of credit risk.”

Strong multilateral co-operation is essential to overcome the effects of the pandemic, including to help financially constrained countries facing twin health and funding shocks, and for channeling aid to countries with weak health care systems.

“Countries urgently need to work together to slow the spread of the virus and to develop a vaccine and therapies to counter the disease.

“Until such medical interventions become available, no country is safe from the pandemic (including a recurrence after the initial wave subsides) as long as transmission occurs elsewhere,” the IMF said.

(Main photo: Piotr Lewandowski)

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