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IMF: Shallower recession, tough path back to full recovery

by moneycompass
October 16, 2020
in Current News
Global economic growth forecast is expected to reduce to 3.6% due to the Russia-Ukraine war, said the International Monetary Fund (IMF).
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WASHINGTON – The International Monetary Fund (IMF) has warned that the world economy still faces an uneven recovery until COVID-19 is controlled even as it offered a less-dire view of this year’s recession following massive stimulus from central banks and governments.

The fund now forecasts the world gross domestic product (GDP) to shrink 4.4% in 2020, compared with the 5.2% drop seen in June, according to the latest World Economic Outlook released on October 13. For 2021, the IMF sees growth of 5.2%, down from 5.4%. The report includes revisions to June’s forecasts and other historical data to reflect updated country weightings.

The contraction would still be the deepest since the Great Depression, with COVID-19 having killed more than one million people and shut down large swathes of business. The report sets the tone for this week’s annual meetings of the IMF and World Bank as global policymakers discuss how to avert a wave of debt defaults in poorer nations resulting from COVID-19’s impact.

The impact of the downturn has been cushioned by policy initiatives, including a European pandemic-recovery package, and large-scale central bank asset purchases, the fund said. Such unprecedented support has helped ease financial conditions since June in advanced economies and in most emerging and developing economies, the fund said.

Policymakers must avoid prematurely withdrawing support in order to avoid setbacks, chief economist Gita Gopinath said. The forecasts assume monetary policy is maintained at current settings through 2025, helping alleviate debt service burdens for many countries. Governments globally have implemented US$6 trillion in direct tax and spending measures, according to the IMF.

The fund’s forecast is based on the expectation that social distancing will continue into next year but gradually fade over time as vaccine coverage expands. It also is premised upon local transmission of COVID-19 being brought to low levels everywhere by the end of 2022.

The upward revision in the IMF’s 2020 growth forecast reflects in particular better-than-projected second-quarter (Q2) growth in the US and the euro area, a stronger-than-anticipated return to growth in China, and signs of a more rapid recovery in Q3.

By contrast, the outlook for emerging markets, some with rising infections, has worsened slightly, with a 3.3% contraction anticipated for this year, compared with 3.1% previously.

China remains the only major economy estimated to expand, with 1.9% projected growth this year and an 8.2% boom in 2021. India saw the steepest forecast reduction, with a 10.3% contraction seen for this year, compared with just 4.5% previously, after a larger-than-expected Q2 contraction.

Overall, the fund sees global output by the end of 2021 being 0.6% higher than at the end of 2019, before the pandemic, but that is driven almost entirely by China. Most other nations, including the US, will need to wait until at least 2022 to see full recovery to pre-COVID-19 levels.

The subdued outlook for medium-term growth will be accompanied by a significant increase in sovereign debt — by about 20 percentage points in advanced economies to 125% of GDP by the end of 2021, and by more than 10 percentage points in emerging and developing economies to 65% of GDP, according to IMF’s estimation.

 

Read more: COVID-19 Economic Recovery Plan Series: ‘How can ASEAN bounce back: A US perspective’

Tags: Covid-19EconomyIMFWorld Bank
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