By Mark Stephen
The world economy may suffer its worst year since the Great Depression of the 1930s, the International Monetary Fund (IMF) says in its latest forecast.
“The COVID-19 pandemic is inflicting high and rising human costs worldwide,” IMF said in its April 2020 World Economic Outlook. “As a result of the pandemic, the global economy is projected to contract sharply by –3 per cent in 2020, much worse than during the 2008–09 financial crisis.”
Just three months ago, IMF had forecast that more than 160 countries would register income growth on a per-capita basis. Now, it expects negative per-capita income growth this year in 170 countries.
“The world has changed dramatically in the three months since our last World Economic Outlook update on the global economy,” said Gita Gopinath, IMF economic counselor, in the Foreward to the latest report. “A pandemic scenario had been raised as a possibility in previous economic policy discussions, but none of us had a meaningful sense of what it would look like on the ground and what it would mean for the economy.”
The outlook for Canada calls for a contraction of 6.2 per cent this year followed by growth of 4.2 per cent in 2021.
“It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago,” Gopinath continued
A partial recovery is projected for 2021, IMF said, with above trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound. “Much worse growth outcomes are possible and maybe even likely,” IMF said. “This would follow if the pandemic and containment measures last longer, emerging and developing economies are even more severely hit, tight financial conditions persist, or if widespread scarring effects emerge due to firm closures and extended unemployment.”
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,” 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, behavioral changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices.”
According to IMF, economic policies will also need to cushion the impact of the decline in activity on people, firms, and the financial system; reduce persistent scarring effects from the unavoidable severe slowdown; and ensure that the economic recovery can begin quickly once the pandemic fades. “Because the economic fallout reflects particularly acute shocks in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to support affected households and businesses,” the report said. “Such actions will help maintain economic relationships throughout the shutdown and are essential to enable activity to gradually normalize once the pandemic abates and containment measures are lifted.”
So far, IMF said, the fiscal response in affected countries has been swift and sizable in many advanced economies – such as Australia, France, Germany, Italy, Japan, Spain, the United Kingdom, and the U.S. “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,” 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, IMF noted. “Broad-based fiscal stimulus can preempt a steeper decline in confidence, lift aggregate demand, and avert an even deeper downturn,” the report said. “But it would most likely be more effective once the outbreak fades and people are able to move about freely.”