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‘Crisis like no other’: IMF warns ‘Great Lockdown’ recession will be worst in almost 100 years

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April 14, 2020

The International Monetary Fund predicted the “Great Lockdown” recession would be the steepest in almost a century and warned the world economy’s contraction and recovery would be worse than anticipated if the coronavirus lingers or returns.

In its first World Economic Outlook report since the spread of the coronavirus and subsequent freezing of major economies, the IMF estimated on Tuesday that global gross domestic product will shrink 3 per cent this year.

That compares to a January projection of 3.3 per cent expansion and would likely mark the deepest dive since the Great Depression. It would also dwarf the 0.1 per cent contraction of 2009 amid the financial crisis.

Like in a war or a political crisis, there is continued severe uncertainty about the duration and intensity of the shock

Gita Gopinath, IMF’s chief economist

While the fund anticipated growth of 5.8 per cent next year, which would be the strongest in records dating back to 1980, it cautioned risks lay to the downside. Much depends on the longevity of the pandemic, its effect on activity and related stresses in financial and commodity markets, it said.

Even if the IMF’s forecast proves accurate, it said output in both advanced and emerging markets would undershoot their pre-virus trends through 2021, seemingly dashing any lingering hopes of a V-shaped economic rebound from the health emergency.

In a further sign of pessimism, the IMF sketched out three alternative scenarios in which the virus lasted longer than expected, returned in 2021 or both. A lengthier pandemic would wipe 3 per cent off GDP this year compared to the baseline, while protraction plus a resumption next year would mean 8 per cent less output than projected in 2021, it said.

“This crisis is like no other,” Gita Gopinath, the IMF’s chief economist, wrote in a foreword to its semi-annual report. “Like in a war or a political crisis, there is continued severe uncertainty about the duration and intensity of the shock.”

As with the virus’s reach, the economic hit is sweeping. In the U.S., gross domestic product is expected to contract 5.9 per cent, compared with a 2 per cent expansion in its last global outlook in January. It may grow 4.7 per cent next year, the IMF said. The euro area will probably shrink 7.5 per cent in 2020 and expand 4.7 per cent in 2021, it said.

“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,” the IMF said. “Risks of a worse outcome predominate.”

The grim projections are a stark reversal from the IMF’s outlook less than two months ago. On Feb. 19, the fund told Group of 20 finance chiefs that “global growth appears to be bottoming out.” Three days later, Managing Director Kristalina Georgieva predicted the virus would likely cut just 0.1 percentage point from the fund’s global growth forecast for this year, although she acknowledged “more dire scenarios” were being studied.

The fund sees advanced economies shrinking the most, contracting 6.1 per cent. Emerging-market and developing economies will see a 1 per cent drop. Growth in China and India will decelerate but their economies will still manage to expand 1.2 per cent and 1.9 per cent respectively, the fund said.

The IMF’s baseline scenario assumes that the pandemic fades in the second half of this year and that containment measures can be gradually wound down.

Global trade volume in goods and services will probably tumble 11 per cent this year, the fund said.

Growth in consumer prices in advanced economies may average 0.5 per cent this year, accelerating to 1.5 per cent in 2021, it said. The jobless rate in the U.S., which was at a half-century low before the pandemic, may swell to 10.4 per cent in 2020, the IMF said.

Most central banks around the world have cut interest rates to around or below zero to blunt the effect of the coronavirus, with the Federal Reserve launching an unprecedented range of emergency programs to support as much as $2.3 trillion in loans. Fiscal stimulus packages have varied more. The U.S. is providing about 10 per cent of gross domestic product in support and Germany about 4.5 per cent, while Japan’s program is worth about 20 per cent of GDP, according to Bloomberg Economics.

The IMF said that fiscal measures will need to increase if stoppages to economic activity persist, or if the pickup in activity once restrictions are lifted is too weak. Economies with financing constraints may also require external support, the fund said. Georgieva had repeatedly pledged to use the IMF’s $1 trillion in loan capacity to help its members.

The IMF and World Bank are holding their spring meetings via video conference for the first time ever this week. Their normal in-person meetings typically draw thousands of delegates, observers and journalists from 189 member countries. The program has been pared down to mostly media briefings and private meetings, skipping the typical seminars and public discussions.

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