Tags: imf | damage | economy | recession

IMF Warns of 'Sharp Adjustment' in Financial Markets Despite 'Remarkable' Recovery

(Sasa Kadrijevic/Dreamstime)

Tuesday, 13 October 2020 09:47 AM EDT

The global economic crisis will not be quite as grim as feared this year, but GDP will still contract 4.4 percent and the ongoing pandemic means the outlook remains uncertain, the IMF said Tuesday.

Massive injections of government aid kept economies from plunging further, but growth in 2021 is expected to be slightly slower than forecast in June and even weaker in the next few years due to the lasting damage inflicted by Covid-19, the IMF said in its latest World Economic Outlook.

The recession was less severe but still deep and "the ascent out of this calamity is likely to be long, uneven, and highly uncertain," IMF chief economist Gita Gopinath said in the report released ahead of the annual meetings of the IMF and World Bank.

The result "would have been much weaker if it weren't for sizable, swift and unprecedented" response from governments and central banks, she said, again warning of the dangers of removing support too quickly.

The IMF upgraded the global GDP forecast for this year by 0.8 percentage points, but trimmed the 2021 growth outlook to 5.2 percent.

In the United States, the growth estimate saw a major upgrade after $3 trillion in stimulus spending deployed in the early weeks of the pandemic. The economy is now expected to decline 4.3 percent this year, and post growth of 3.9 percent in 2021.

“A disconnect persists, for example, between financial markets — where there have been rising stock market valuations (despite the recent repricing) — and the weak economic activity and uncertain outlook,” Tobias Adrian, the IMF’s director of the monetary and capital markets department, wrote in a blog post Tuesday.

He warned that if the economic recovery was delayed, “investor optimism may wane.”

“As long as investors believe that markets will continue to benefit from policy support, asset valuations may stay elevated for some time. Nonetheless, and especially if the economic recovery is delayed, there is a risk of a sharp adjustment in asset prices or periodic bouts of volatility,” Adrian wrote.

China, where the virus originated, has recovered faster and will see growth of 1.9 percent this year, accelerating to 8.2 percent next year, according to the report.

However, Gopinath said that if China is excluded, global growth next year would be negative.

While most countries will see their economies return to pre-pandemic levels by 2022, some like those in Latin America will not see a recovery until 2023, she told reporters.

Countries like India, Spain and Italy will suffer double digit economic declines in 2020, while Britain just misses that threshold with a 9.8 percent contraction, the IMF said.

Continued aid critical 

Amid the widespread economic shutdowns, the rapid rollout of $12 trillion in government spending worldwide "helped saved lives and livelihoods and prevented a financial catastrophe," Gopinath said.

But the depth of the crisis, which caused massive unemployment as well as more than a million deaths, means continued support will be critical, especially in the face of "unusually large" risks.

"It is essential that fiscal and monetary policy support are not prematurely withdrawn," Gopinath said in a blog post that accompanied the report.

The spread of Covid-19 remains the critical factor in the recovery, she said, "and many more millions of jobs are at risk the longer this crisis continues."

The IMF called for continued lifelines including wage support, cash payments and credit lines for small and medium businesses until the recovery is underway, warning that removing them too soon could lead to a wave of bankruptcies and push economies back into recession.

In addition, poor countries will need concessional financing as well as debt relief.

Economic scars

Even once the immediate crisis has passed, the IMF warned that "most economies will experience lasting damage to supply potential, reflecting scars from the deep recession this year."

Global growth is expected to slow to 3.5 percent in the medium term, a stunning $28 trillion in lost output in the five-year period through 2025 compared to the pre-pandemic expectations, according to the report.

The World Bank said up to 150 million more people may be pushed into extreme poverty by 2021, the first time it has worsened in more than two decades, while the IMF warns the crisis will exacerbate inequality, especially for women.

World trade volume is also expected to collapse 10.4 percent this year before rebounding by 8.3 percent next year.

The IMF called on governments to rethink their spending priorities and direct funding to projects that will boost productivity, including green energy investments and education.

And with debt on the rise, policymakers may need to increase taxes on the highest earners, cut out loopholes and deductions, "and ensure that corporations pay their fair share of taxes while eliminating wasteful spending."

"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," Gopinath said.

© AFP 2024

The global economic crisis will not be quite as grim as feared this year, but GDP will still contract 4.4 percent and the ongoing pandemic means the outlook remains uncertain, the IMF said Tuesday.
imf, damage, economy, recession
Tuesday, 13 October 2020 09:47 AM
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