Global economy to suffer 'significant scarring effects', says IMF

The organisation's chief economist said growth projections to be released this month will likely be worse than the 3% contraction estimated in April

Gita Gopinath, the IMF’s chief economist, cited the depth of the crisis, the need for labour reallocation, the onset of bankruptcies and insolvency issues, and changes in consumer behaviour, as variabShow more

The global economy is recovering more slowly than expected from the coronavirus pandemic and will bear lingering scars from the experience, according to the International Monetary Fund.

The IMF is set to release economic growth projections June 24 that “will be, very likely, worse than what we had” in April, even as there remains “profound uncertainty” around the forecasts, Gita Gopinath, the IMF’s chief economist, said in a video recorded June 4 and released on Friday as part of the seventh annual Asian Monetary Policy Forum.

“One has to be quite concerned about the path of recovery,” said Ms Gopinath, citing the depth of the crisis, the need for labour reallocation, the onset of bankruptcies and insolvency issues, and changes in consumer behaviour. “Many of these variables point to significant scarring effects.”

In April the IMF estimated the global economy would shrink by 3 per cent this year – the deepest contraction since the Great Depression – and anticipated an even worse outcome if the coronavirus lingers or returns. That analysis saw growth rebounding to 5.8 per cent in 2021.

Asian economies are further along in their recoveries and generally have done better at containing their virus outbreaks, Ms Gopinath said, noting Taiwan’s success specifically. Asia’s deep integration with the Chinese economy, where “containment has worked very well”, could also provide a “mild positive” for the region, she added.

At the same time, the region’s open economies are especially vulnerable to the downturn in global trade, and external financing needs and fiscal vulnerabilities remain for emerging markets even after effective liquidity injections, she said.

Geopolitical issues, including US-China tensions and turmoil in Hong Kong, also continue to exacerbate risk in Asia and worldwide, Ms Gopinath said.

“All of that has very big implications for global supply chains, the location of production going forward, the risks to globalisation and the rise of protectionism,” she said.

Ms Gopinath said a faster improvement in financial markets could be credited to the rapid global policy reaction to the pandemic, which helped ease liquidity problems.

Her video was recorded before this week's whipsaw in financial markets, which included a Wall Street buying surge ahead of the Federal Reserve's policy decision on Wednesday and a sharp sell-off on Thursday amid worries about a second wave of coronavirus infections.

“You’ve had very rapid cuts in monetary policy rates, very large amounts of liquidity infusion, and this has absolutely helped with global liquidity,” she said. “The question of course is how long will this continue, and can this hold up.”