The IMF’s forecast for the global economy goes from bad to worse

IMF sees global economy shrinking 4.9 percent this year, warns of disconnect between Wall Street and Main Street.

Gita Gopinath
'The disconnect between real and financial markets raises concerns of excessive risk-taking, and this is a significant vulnerability,' Gita Gopinath, Economic Counsellor and Director of the Research Department at the International Monetary Fund, told reporters on Wednesday [File: Rodrigo Garrido/Reuters]

The outlook for the global economy keeps going from bad to worse. 

On Wednesday, the International Monetary Fund said it now sees the global economy shrinking 4.9 percent this year – nearly 2 percentage points below its April forecast – as the international lender struggles to take stock of the carnage triggered by the coronavirus pandemic. 

“It was already the worst recession since the Great Depression in April when we had projected growth for 2020 to be at minus 3 percent,” IMF chief economist Gita Gopinath told reporters during a webcast on Wednesday. “But now at minus 4.9 percent, that is even more strongly true, and no country has been spared. Both emerging-market developing economies and advanced economies have all been very badly hit during this crisis.”

The fund also lowered its forecast for 2021. It now sees global growth rebounding to 5.4 percent next year- 0.4 percentage points lower than its April forecast and roughly 6 percentage points lower than the pre-pandemic projections made in January. 

Economists are trying to get to grips with the unprecedented fallout triggered by coronavirus containment measures as borders closed, businesses shut and entire sectors of the global economy ground to a halt. As lockdown restrictions ease and economies reopen, the path to recovery is far from clear.

The IMF warned that their latest edition of the World Economic Outlook is based on key assumptions including lengthier lockdowns in economies struggling to control COVID-19 infection rates. In economies with declining infection rates, the fund assumes there will be “persistent social distancing”, greater damage to supply potential from a larger-than-anticipated hit to activity during the first half of the year, and a drag on productivity as “surviving businesses ramp up necessary workplace safety and hygiene practices”. 

The forecast also assumes that financial conditions will remain broadly at current levels. Central banks around the world have thrown trillions of dollars into the global financial plumbing this year to ensure credit markets do not freeze up.

But a number of factors could upend those assumptions, the fund notes, and “not just because of how the pandemic is evolving”.

While the global Main Street struggles to find its post-lockdown footing, Wall Street has been channeling optimism with United States stock markets sharply rebounding from March’s historic lows – a risk factor that could cause financial conditions to tighten. 

“The disconnect between real and financial markets raises concerns of excessive risk-taking, and this is a significant vulnerability,” Gopinath told reporters. 

Severe hit to labour market

The IMF noted that the steep plunge in economic activity “comes with a catastrophic hit” to the global labour market, highlighting that the worldwide decline in work hours in the second quarter of 2020 is equivalent to more than than 300 million full-time jobs being lost. 

Low-skilled workers who do not have the option to work from home have been hit particularly hard, while income losses appear to be uneven across genders, “with women among the lower income groups bearing a larger brunt of the impact in some countries,” the fund said. 

The IMF further highlighted how progress on poverty reduction could be reversed. The fraction of the world’s population living in extreme poverty – defined as living on less than $1.90 a day – had fallen in recent years, but “with more than 90 percent of emerging market and developing economies projected to register negative per capita income growth in 2020”, this progress in imperiled, said the fund. 

Source: Al Jazeera