COVID-19 – Global Economic Impact
IMF downgrades are a warning to the world
Fund’s forecasts reflect the fact that the pandemic is not under control
The editorial board
The IMF has provided a stark warning that the damage coronavirus has done to the global economy is worsening. With the world failing to keep a lid on infections and the focal point of the crisis moving from Europe to the Americas, the fund has lowered the growth forecasts it made in April — which even then forecast the worst contraction since the Great Depression. With the downturn deepening, it is vital that policymakers redouble efforts to avoid further economic collapse, and support the eventual recovery.
While the general mood in Europe is one of relief at the gradual suppression of coronavirus and a determination to enjoy what is left of the summer, the disease is still spreading across the world. Many of the most populous countries such as India and Brazil are seeing rapid increases in the number of deaths. The case count is also rising in the US south and west but so far, mercifully, deaths are not increasing at the same rate. Even many of those countries that appear to have eliminated the virus altogether are occasionally seeing isolated outbreaks and must now learn to live with the virus as a constant presence and potential threat.
This persistence of the pandemic is one reason for the IMF’s downgrades. The fund now expects the world economy to shrink by 4.9 per cent this year, from 3 per cent in its previous set of forecasts. This would “imperil” much of the world’s progress in reducing extreme poverty since the 1990s. Government debt, meanwhile, will surpass the record level it reached during the second world war according to Gita Gopinath, the fund’s chief economist. Projections for next year are weak, too; apart from China, neither advanced nor emerging countries as a group will exceed the pre-crisis peak size of their economy before the end of 2021.
Many factors contributed to the bleaker outlook: the long-term damage to economic potential from the shutdowns is worse than the IMF anticipated, countries currently exiting lockdown will have to persist with social distancing for longer and additional costs to companies will be higher, with new safety and hygiene practices throughout the second half of this year. Moreover, economies now seeing increasing numbers of infections will have to extend lockdowns. The impact of all this is a reduction in global trade and business investment.
The one brighter spot is financial conditions. The efforts of central banks, led by the Federal Reserve, have stabilised capital markets and allowed emerging market governments to raise funds, after the disruption earlier in the year. However the divergence between equity markets and the economy more generally raises the possibility that financial conditions could suddenly worsen if shares drop, leading to a return of disorder in markets.
Monetary and fiscal stimulus is essential to help the world recover. The IMF also, sensibly, calls for countries to resist further escalations in conflict over trade and technology — the US is considering further tariffs on European exports as part of its dispute over the treatment of aircraft maker Airbus. It urges global co-operation, too, to mitigate any repeat of the pandemic and “build on” the fall in carbon emissions.
While lockdowns have reduced the spread of infections in Europe, they have worked less well in many poorer countries where informal economies and multiple generations living in the same household have made it much harder to contain the disease. Poorer countries, too, have far fewer resources to fight it. If the IMF’s forecasts are correct then they are likely to need even more financial assistance. The rich world must ensure they get it.