Prepare for the “worst recession since the Great Depression” warns the IMF
What a difference a quarter makes. The International Monetary Fund last released its bellwether World Economic Outlook (WEO) in January. Back then it anticipated global growth would reach 3.3 percent this year. There was even consternation at the time of the slight – 0.1 percentage point – downgrade of global growth projected for 2020.
Skip forward three months and a 0.1 percent decline is a distant dream. The IMF’s latest WEO foretells of global growth dropping to -3 percent for 2020, with the Covid-19 pandemic to blame. This is, says IMF chief economist Gita Gopinath, “the worst recession since the Great Depression, and far worse than the Global Financial Crisis”.
Ms Gopinath describes the magnitude and speed of collapse in activity as a result of the great global lockdown as “unlike anything experienced in our lifetimes”.
“There is,” she continues, “considerable uncertainty about what the economic landscape will look like when we emerge from this lockdown.”
There is some good news though: the IMF projects global growth to rebound to 5.8 percent in 2021. However, there are a number of caveats to that prediction. First is the assumption that the pandemic fades in the second half of 2020. Second is the assumption that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains.
Add to this that the projected recovery for 2021 is only partial as the IMF expects the level of economic activity to remain below the level it had projected for 2021, before the virus hit. The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could reach around $9 trillion, said the IMF. That’s greater than the economies of Japan and Germany combined.
“This is a truly global crisis as no country is spared,” says Ms Gopinath. “For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession.”
Breaking down the data, growth in advanced economies is projected at -6.1 percent this year, while emerging and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0 percent in 2020. This falls to -2.2 percent if China is excluded. The IMF projects that income per capita will shrink for over 170 countries, nearly 90 percent of the world.
There are specific, local challenges to consider as well when it comes to predicting the scale and scope of any recovery. For example, countries reliant on tourism, travel, hospitality, and entertainment for their growth have experienced particularly large disruptions and recovery may take longer, while emerging market and developing economies face the combined challenges of unprecedented reversals in capital flows, currency pressures, weaker health systems, and limited fiscal space to provide support.
Commodity prices have already reacted to the downturn. From mid-January to end-March,
natural gas prices declined by 38 percent, and crude oil prices dropped by about 65 percent – representing a fall of about $40 a barrel. The IMF points to the futures markets for indications that oil prices will remain below $45 a barrel through to 2023 on the back of persistently weak demand. “These developments are expected to weigh heavily on oil exporters with undiversified revenues and exports — particularly on high-cost producers — and compound the shock from domestic infections, tighter global financial conditions, and weaker external demand,” said the IMF. However, it did concede that lower oil prices will benefit oil-importing countries.
Worst case scenario
But what happens if the recovery is not as voracious as anticipated? To answer this the IMF has modelled alternative, more adverse scenarios where the pandemic does not recede in the second half of this year. Unsurprisingly, in this scenario global GDP will plumb greater depths, dropping an additional 3 percent in 2020. If Covid-19 is still changing the way we live in 2021 global GDP could fall an additional 8 percent in 2021 compared with the IMF’s baseline scenario.
In the WEO, Ms Gopinath calls for multilateral co-operation in financing to bolster a global recovery. Specifically, she urges spending support in developing countries through concessional financing, grants, and debt relief from bilateral creditors and international financial institutions. The activation and establishment of swap lines between major central banks may also need to be expanded to more economies. “Collaborative effort is needed to ensure that the world does not de-globalise, so the recovery is not damaged by further losses to productivity,” she says.
For its part, the IMF is deploying its $1 trillion lending capacity to support vulnerable countries. Speaking last week, IMF managing director Kristalina Georgieva said that the organisation had received an “unprecedented number of calls for emergency financing” from over 90 countries.
For a small spot of hope for seaborne trades, the IMF projects that ‘Emerging Asia’ will be the only region with a positive growth rate in 2020 at 1.0 percent. While that is more than 5 percentage points below its average in the previous decade, it does mean that intra-Asia trades may still be able to offer solace when other regions remain in the doldrum this year and perhaps into the next.