IMF revises economic outlook on partial recovery and calls for multilateral co-operation

Washington lender sees the global economy rebounding to 5.2% in 2021 after a 4.4% contraction this year

The global economy is coming back from the depths of the crisis, according to the International Monetary Fund. Reuters.

The International Monetary Fund said the world economy will contract 4.4 per cent this year, due to a partial and better-than-expected rebound in advanced economies from the impact of Covid-19 pandemic.

The fund called for greater multilateral co-operation to sustain the economic recovery. The latest projection is better than its earlier forecast, which it made in the June World Economic Outlook, of a 4.9 per cent contraction.

The global economy is now set to rebound and expand 5.2 per cent next year, 0.2 percentage points less than previously forecast, the fund said.

“Outturns would have been much weaker if it weren’t for sizeable, swift and unprecedented fiscal, monetary and regulatory responses that maintained disposable income for households, protected cash flow for [companies] and supported credit provision,” the fund's chief economist Gita Gopinath said.

“Collectively, these actions have so far prevented a recurrence of the financial catastrophe of 2008 to 2009.”

The "ascent will likely be long, uneven and uncertain", despite China's economic rebound and advanced economies exceeding expectations in the second quarter, she said.

Apart from China, emerging market and developing countries without the fiscal and monetary resources of advanced economies are expected to record a big decline in economic output this year and in 2021.

“A recovery is not assured while the pandemic continues”, and governments and banks should not withdraw policy support prematurely, Ms Gopinath said.

“The path ahead will require skillful domestic policies that make trade-offs between lifting near-term activity and addressing medium-term challenges.”

An economic recovery can only be sustained with strong international co-operation on health and the provision of financial support to countries that face liquidity shortfalls, she said.

The decline in economic activity has massively affected the world’s labour market. While 21 million jobs were lost in the US in March and April, and some European countries managed to contain the fallout with short-term work programmes, the effects are significant.

Compared with the last three months of 2019, the global decline in work hours during the second quarter is equal to the loss of 400 million full-time jobs, the fund said, citing the International Labour Organisation.

This is more than the first quarter's decline in work hours that was equal to the loss of 155 million full-time jobs.

Women in the labour force have been particularly affected by the pandemic. There are about 42 per cent of informally employed women working in hardest-hit sectors of the economy, compared with about 32 per cent of men in informal employment.

The decline in economic activity amplified domestic disruptions around the world and led to a contraction in global trade.

Trade is now set to shrink 10.4 per cent this year, compared with last year's growth of 1 per cent, due to weak demand, the collapse of the tourism industry and supply disruptions related to shutdowns. It is projected to expand by 8.3 per cent next year.

The fund said inflation is expected to remain weak and forecast an inflation rate of 0.8 per cent for advanced economies this year. It is expected to rise to 1.6 per cent next year as the recovery progresses.

In emerging market and developing economies, the fund expects inflation to be 5 per cent this year, before declining to 4.7 per cent next year.

After expanding by 1.7 per cent last year, advanced economies are expected to shrink by 5.8 per cent this year, compared with an earlier forecast in June of an 8 per cent contraction.

The US, the world’s largest economy, is set to contract 4.3 per cent, down from a forecast of 8 per cent three months ago.

Growth in Germany, Europe’s largest and the world’s fourth-biggest economy, is now expected to shrink by 6 per cent, compared with a previous growth forecast of minus 7.8 per cent, while France's economy is expected to shrink by 9.8 per cent, an improvement from an earlier forecast of a 12.5 per cent contraction.

Italy, which in April had the second-highest number of coronavirus deaths, is set to shrink by 10.6 per cent, down from a previous 12.8 per cent contraction projection.

Spain, which has the eighth-highest number of coronavirus deaths, is also expected to shrink by 12.8 per cent, more than the 8 per cent contraction previously projected.

Growth in China, the world’s second-biggest economy, will slow to 1.9 per cent, compared with a previous 1 per cent growth estimate, after expanding 6.1 per cent in 2019, its slowest pace in about three decades.

Japan, the world’s third-largest economy, is projected to shrink by 5.3 per cent, less than an earlier estimate of a 5.8 per cent contraction, after growing by 0.7 per cent last year.

India, whose economy was already slowing down due to its banking industry’s credit crisis, has the second-highest rate of infections in the world after the US and the third highest number of deaths.

Its economy is expected to shrink by 10.3 per cent, compared to a previous forecast of a 4.5 per cent contraction. The downturn is deep for Asia’s third-largest economy, which expanded by 4.2 per cent last year.

The UK, the world’s sixth-largest economy, is set to shrink by 9.8 per cent, a notch down from a previous 10.2 per cent contraction forecast.

In Latin America, where coronavirus infections have surged, the two largest economies, Brazil and Mexico, are projected to contract less than was previously expected this year.

Brazil will shrink by 5.8 per cent instead of 9.1 per cent, while Mexico will contract 9 per cent instead of 10.5 per cent.

Mena economies are projected to shrink by an average of 5 per cent this year and expand by 3.2 per cent next year.

Saudi Arabia, the Arab world’s largest economy, is set to contract by 5.4 per cent instead of 6.8 per cent, before expanding by 3.1 per cent in next year.

Iran, the centre of the outbreak in the Middle East, is on track for a 5 per cent contraction, compared with a previous 6 per cent forecast.

Lebanon, which face its worst economic crisis in three decades, is projected to shrink by a quarter this year.

Nigeria, Africa’s largest economy and biggest oil producer, is projected to shrink by 4.3 per cent instead of 5.4 per cent.

South Africa, the second-largest and most diversified economy on the continent, was already reeling from a Moody’s downgrade to junk rating in March. It remains unchanged and set to shrink 8 per cent this year before expanding by 3 per cent next year.

Oil prices are forecast at $41 per barrel this year and $43.8 next year, higher than the April and June forecasts. Prices are set to increase thereafter to $48, which is about 25 per cent lower than the 2019 average price, due to weaker demand.

The IMF projects a cumulative loss to the global economy of $11 trillion from 2020 to 2021, which rises to $28tn from 2020 to 2025.

“This crisis will likely leave scars well into the medium term as labour markets take time to heal, investment is held back by uncertainty and balance sheet problems, and lost schooling impairs human capital,” Ms Gopinath said in a blog post.

“This represents a severe setback to the improvement in average living standards across all country groups.”

Fiscal support worth $12tn that was extended by governments, as well as extensive rate cuts, liquidity injections and asset purchases by central banks – measures that have helped save lives and prevented a financial catastrophe, she said.

The fund said the initial recovery around the world is uneven and called on governments and policymakers to remain vigilant and manage health risks as they improve the capacity of healthcare systems.

“Tremendous progress is being made in developing tests, treatments and vaccines, but only if countries work closely together will there be enough production and widespread distribution to all parts of the world,” Ms Gopinath said.

The fund estimates that the could be a cumulative increase in global income of about $9tn by the end of 2025 if medical solutions can be made available faster and more widely.

The will raise the incomes of all countries and reduce inequality.

“Policies must aggressively focus on limiting persistent economic damage from this crisis. Governments should continue to provide income support through well-targeted cash transfers, wage subsidies and unemployment insurance,” she said.

Ms Gopinath called on governments and central banks to craft policies that put economies on the path of stronger, equitable and sustainable growth.

“The global easing of monetary policy, while essential for the recovery, should be complemented with measures to prevent [the] build-up of financial risks over the medium term, and central bank independence should be safeguarded at all costs,” Ms Gopinath said.

“This is the worst crisis since the Great Depression, and it will take significant innovation on the policy front, at both the national and international levels to recover from this calamity.”

Apart from the pandemic, multilateral co-operation is needed to overcome trade and technology tensions between countries, the fund said.

Countries must also act collectively to attain their commitments on climate change mitigation.