Thursday July 25, 2024

Great lockdown as bad as Great Depression: IMF

By Mehtab Haider
April 15, 2020

Ag Agencies

BRUSSELS/ISLAMABAD: The global economy will suffer its worst year since the Great Depression in the 1930s due to the coronavirus and lockdowns that have shut down much of the world, the International Monetary Fund (IMF) said in its latest forecast.

In its biannual World Economic Outlook released on April 14, the global lender projected the world economy will contract by 3.1 percent this year before returning in 2021 to 5.8 percent growth. "This makes the great lockdown the worst recession since the Great Depression and far worse than the global financial crisis" in 2009, said Gita Gopinath, the IMF chief economist.

The estimate represents a sharp downward swing of nearly 6 percent from the IMF’s previous global growth estimate of 3.3 percent issued earlier this year before the coronavirus spread across the globe.

The dire economic projections could be deeper, the IMF warned, if lockdowns persist over several quarters and there are renewed outbreaks later this year or next.

"Much worse growth outcomes are possible and maybe even likely," the report cautioned, adding that there were many unknowns about how the pandemic and its economic fallout would play out.

Lockdowns, business shutdowns, social distancing, and travel restrictions have plunged the world economy into standstill, disrupting trade and leading to millions of job losses. Worldwide trade will plummet 11 percent this year, according to the IMF, and then grow 8.4 percent in 2021.

“The world has been put in a great lockdown,’’ Gopinath told reporters. “This is a crisis like no other.”

In the outlook, the US economy this year is forecast to shrink 5.9 percent, while the 19 EU countries that share the euro currency are projected to retreat 7.5 percent.

Elsewhere, Russia’s economy is forecast to slump 5.5 percent compared to modest growth of 1.3 percent last year, in part driven by low oil and commodity prices. It is then expected to rebound to 3.5 percent in 2021.

Meanwhile, neighboring Belarus is projected to see its economy shrink by 6 percent, compared to 1.2 percent growth last year.

In Ukraine, which has registered modest growth in recent years since the economy dived more than 16 percent in 2014-15 due to the conflict in the east of the country, the economy is expected to plummet 7.7 percent in 2020.

Countries in southeastern Europe face a range of negative growth estimates, from a slump of 3 percent in Serbia to a 9 percent drop in Montenegro.

In the Middle East and Central Asia, the IMF forecasts growth will slip 2.8 percent compared to a modest gain of 1.2 percent last year. It is then projected to increase by 4 percent in 2021.

Iran, where a combination of sanctions and coronavirus have pummeled the second largest economy in the Middle East, growth is forecast to shrink 6 percent in 2020 for its third contraction in a row. In 2018 and 2019, it shrank by 3.6 percent and 7.6 percent, respectively.

In Central Asia, Uzbekistan, Turkmenistan, and Tajikistan are some of the few countries in the world that will eke out modest growth of between 1 and 1.8 percent this year, the IMF said.

However, neighboring Kazakhstan and Kyrgyzstan will shed 2.5 and 4 percent, respectively. That compares to 4.5 percent growth in each country last year.

Meanwhile, the economies of Afghanistan and Pakistan this year will fall 3 and 1.5 percent, respectively, compared to growth near 3 percent last year.

In the South Caucasus, the IMF forecasts Armenia’s economy will drop 1.5 percent this year after booming 7.6 percent in 2019, while energy-rich Azerbaijan’s growth will fall to negative 2.2 percent compared to a gain of 2.3 percent last year.

After experiencing solid growth of around 5 percent over the past three years, Georgia’s economy will slump 4 percent in 2020, the IMF said.

Meanwhile, the Fund drastically slashed its growth estimates for the Eurozone on Tuesday, as the virus lockdowns decimated the European economy.

The IMF said the Eurozone economy would crash by a staggering 7.5 percent this year, a free-fall not seen since the 1930s Great Depression.

The IMF also projected Britain -- which left the EU in January and was never part of the Eurozone — would see its economy contract by 6.5 percent.

The European region overall was predicted to have the worst performance of any region in the world.

In a note of optimism, however, the IMF said the economic destruction wrought by the pandemic in the Eurozone would fade in the second half of 2020, as a gradual lifting of containment measures gained momentum.

The 19 countries that use the euro currency would then recover, but at a far slower pace, with the IMF predicting a growth of 4.7 percent in 2021.

Before the emergence of COVID-19 outbreak, the IMF said the Eurozone was going to grow by a slow but respectable 1.3 percent. But with tens of thousands dead due to the novel coronavirus across Europe and the economy in shutdown, the impact was going to be painful.

The IMF said the French economy would see its economy shrivel by 7.2 percent instead of a 1.3 percent expansion. But France´s finance minister, Bruno Le Maire, forecast an even worse contraction of eight percent because of an extension of his country´s lockdown announced on Monday.

President Emmanuel Macron said restrictions would now be extended nearly a month longer to May 11.

Export-powerhouse Germany, which was suffering sluggish growth from the US-China trade war, would see its economy contract by 7.0 percent, the IMF said.

The IMF praised the already sizeable fiscal responses by both countries, which together make nearly half of the Eurozone economy, though France will see its debt level soar to levels not seen in the modern era.

Italy, one of the hardest hit countries by the outbreak, would suffer badly economically, the IMF said.

Italy´s economy was on course to slump by 9.1 percent in 2020, followed by an expansion of just below 5 percent the following year.

The IMF said certain Eurozone countries were better equipped to face the challenge of the crisis than others — an implicit reference to the current row brewing in Europe.

Richer countries in the north, such as Germany and the Netherlands are resisting calls for unprecedented levels of European solidarity to confront the crisis.

But Italy, Spain and France are calling for new ways of thinking including common borrowing among the EU 27 that would fund a massive recovery plan and relaunch the post-pandemic economy.

The IMF urged for "meaningful European support" to be targeted at countries particularly hard-hit by what is a "purely exogenous common shock".

It observed that "advanced economies with relatively stronger health care capacity, better access to international liquidity and comparatively lower borrowing costs will be better equipped to combat the health crisis."

According to the IMF, if the virus is contained and economies can begin operating again, 2021 should see a rebound of 5.8 percent.

With much of the global economy shut down amid efforts to contain the virus and keep health systems from collapsing, the IMF warned that there are "severe risks of a worse outcome" due to the "extreme uncertainty around the strength of the recovery."

"The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around $9 trillion, greater than the economies of Japan and Germany combined," Gopinath said.

The coronavirus has infected nearly two million people worldwide and killed close to 120,000, bringing travel to a standstill and forcing businesses, shops and restaurants to close.

"Much worse growth outcomes are possible and maybe even likely," the report cautioned, "if the pandemic and containment measures last longer... or if widespread scarring effects emerge due to firm closures and extended unemployment."

The severe slowdown is "unavoidable," but "substantial targeted fiscal, monetary and financial" measures can soften the blow, the IMF said.

Many governments have already deployed massive spending measures in tandem with central banks that have been pumping liquidity into the financial system to prevent any breakdown.

But Gopinath said even more will be needed once the health crisis is over.

"Once the recovery happens, and we are past the pandemic phase for advanced economies, it would be essential to undertake a broad based fiscal stimulus," she said.

The spending "would be even more effective if it were coordinated across all the advanced economies of the world," she said.

Synchronized actions "can magnify their impact" but also can avoid some of the errors of the past century when countries adopted "futile mercantilist policies... which further worsened the global downturn," the report said.

Sub-Saharan African economies are projected to contract by 1.6 percent in 2020 due to blanket lockdowns, curfews and closures imposed by governments to brake the coronavirus juggernaut.

The GDP of the continent´s economic superpowers, Nigeria and South Africa, is expected to shrink by 3.4 and 5.8 percent respectively as a result of the pandemic, which has crushed global demand and caused commodity prices to plummet.

"The health crisis is... having a severe impact on economic activity," said the IMF in a world economic outlook released on Tuesday.

It projected the global economy would contract by 3.0 percent this year -- worse than during the 2008-09 financial crisis.

"Among emerging market and developing economies, all countries face a health crisis... which will have a severe impact on economic activity in commodity exporters," said the report.

The bleak figures were released following a grim prediction by the World Bank, which warned last week that sub-Saharan Africa could slip into its first recession in 25 years because of coronavirus.

Africa continues to lag behind the global curve for coronavirus infections and deaths.

To date the world´s poorest continent has recorded nearly 15,500 cases of the respiratory disease and almost 850 fatalities, according to an AFP tally which includes North Africa.

Many African governments used precious time to close borders and impose stay-at-home laws to stem the disease when just a handful of cases had been confirmed.

"Even in countries not experiencing widespread detected outbreaks... the significant downward revision to the 2020 growth projection reflects large anticipated domestic disruptions to economic activity from COVID-19," the IMF said.

Africa´s larger economies will be disproportionately affected.

South Africa had already slipped into recession in the final quarter of 2019 and recently saw its credit ratings cut to junk status.

Oil giants Angola and Nigeria saw their revenues tumble with the global fall in oil prices, as air travel has almost ground to a halt due to the pandemic.

The IMF said fiscal measures provided the keys for easing the slump and helping businesses recover once shutdowns are lifted.

It called on "external support" for countries "facing financing constraints to combat the pandemic".

South Africa´s central bank also predicted on Tuesday that the economy would shrink by 6.1 percent in 2020 as it cut its main interest rate by a full percentage point.

"Fiscal stimulus can preempt a steeper decline in confidence, lift aggregate demand and avert an even deeper downturn," said the Fund.

"But it would most likely be more effective once the outbreak fades and people are able to move more freely."

Some of Asia´s biggest economies are likely to narrowly avoid recession this year and are poised to bounce back strongly in 2021 if the coronavirus is contained, the IMF forecast Tuesday, with China leading the recovery.

The pandemic has hammered the world economy, with millions of jobs lost and businesses shut because of unprecedented lockdown measures to slow the spread of the disease.

But unlike the United States and major Western nations, China -- the world´s second-largest economy -- will scrape through 2020 without going into recession, the IMF said in its latest World Economic Outlook.

It predicted growth of 1.2 percent growth for China this year, the slowest expansion in more than four decades.

"Emerging Asia is projected to be the only region with a positive growth rate in 2020 (1.0 percent), albeit more than 5 percentage points below its average in the previous decade," the IMF said.

"Other regions are projected to experience severe slowdowns or outright contracts in economic activity."

The Fund forecast China to bounce back next year with 9.2 percent.

India, Asia´s third-biggest economy, is also expected to grow at 1.9 percent in 2020 before surging 7.4 percent next year.

Indonesia too is expected to just stay above water, gaining 0.5 percent this year before an 8.2 percent bounce in 2021.

However, more advanced economies in the region -- Japan, South Korea, Australia, Singapore and Hong Kong -- will dip into recession, according to the forecast.

Thailand and Malaysia are also expected to be in negative territory, but the Philippines and Vietnam are expected to still see modest growth this year.

China is expected to lead the economic recovery in Asia, and Beijing has unveiled a number of massive stimulus measures.

But economists have warned that China, where the virus first emerged late last year, will depend on recovery in other parts of the world.

And the Chinese government´s domestic measures like increased credit will have a limited effect as long as the rest of the world is in turmoil, analysts said.

"Beyond China´s own domestic challenges, the global recession poses additional threat to the economy," Chang Shu and David Qu of Bloomberg Economics said in a note.

According to a scenario published Tuesday by fiscal watchdog the Office for Budget Responsibility, Britain´s economy could shrink by an unprecedented 13 percent this year in the case of a three-month coronavirus lockdown.

"The resulting 13 percent fall in annual GDP in 2020 would comfortably exceed any of the annual falls around the end of each world war or in the financial crisis," the OBR said.

In the model, real GDP could fall 35 percent in the second quarter, but bounce back quickly once the coronavirus restrictions are eased. Unemployment could also rise by more than two million to hit 10 percent in the second quarter, with the recovery in jobs lagging behind GDP, said the OBR.

"We´re up to about 1.4 million people who have claimed Universal Credit (social security) and also other people who have claimed other things like Jobseeker´s Allowance or Employment Support Allowance," social welfare minister Theresa Coffey told Sky News on Tuesday.

The model suggested that half of those made unemployed by the crisis could return to work by the end of the year, but that the unemployment rate could still be around 1.5 percent higher than pre-virus levels at the end of 2021.

Finance minister Rishi Sunak told the BBC that the study made "clear this will have a very significant impact on our economy".

"There´s hardship ahead," he warned, adding "it´s clear we must defeat this virus as quickly as possible".

Britain announced an initial 3-week lockdown on March 23, but with the death toll soaring, the government has extended the restrictions and there is little chance of them being lifted imminently.

On Monday, Foreign Secretary Dominic Raab, who is deputising for Prime Minister Boris Johnson as he recovers from his own bout of COVID-19, warned the UK would not lift its nationwide lockdown anytime soon.

The government must decide by Thursday whether to maintain its rules to keep schools and shops shut and order people to stay in their homes to try to stop coronavirus spreading. The country has recorded 11,329 deaths of people testing positive for the virus, although official data released Tuesday suggested that the true figure could be a lot higher.

The OBR scenario envisages a net borrowing increase of £218 billion in 2020 to 14 percent of GDP, the largest single-year deficit since World War II. Public sector net debt could peak at over 100 percent of total economic output during the year, according to the model, ending 2020 at 95 percent.

Measures taken by the government and the Bank of England are "likely to have only a limited effect as the fall in output is largely the by-product of the impact of the health measures on the supply of, and demand for, goods and services," the OBR said. It warned that the scenario "should not be taken as our view of the most likely path for the economy", which is highly sensitive to underlying factors. "It would not require particularly large changes to the highly uncertain assumptions about prospects for individual sectors to alter the estimated fall in GDP significantly and it is quite plausible that the impact could be materially smaller or larger than in our reference scenario," it explained.

Meanwhile, in an encouraging development, Group of Seven (G7) finance officials Tuesday vowed to continue to act as needed to combat the coronavirus pandemic and stabilize the global economy, and threw their support behind a push to provide temporary debt relief to the poorest countries.

In a joint statement, G7 finance ministers and central bankers said they were ready to provide “a time-bound suspension on debt service payments due on official bilateral claims for all countries eligible for World Bank concessional financing” if joined by China and other countries in the Group of 20 major economies, and as agreed with the Paris Club group of creditors.

Following a video conference, the officials also called for more contributions to the International Monetary Fund’s facilities that support the poorest countries, and said the debt relief effort should include private creditors on a voluntary basis, as well as efforts to enhance debt transparency.

“Ministers and Governors reiterated their pledge to do whatever is necessary to restore economic growth and protect jobs, businesses, and the resilience of the financial system,” they said in the statement, saying they would continue to work closely together in other forums, such as the G20, the IMF, the World Bank and the Financial Stability Board (FSB).

“The scale of this health crisis is generating unprecedented challenges for the global economy,” they said, underscoring the importance of a well-coordinated international response and vowing to use “all available policy tools” to reducing the depth of the crisis.

The officials said they were working to address the global shocks caused by the pandemic, which are hitting emerging markets and developing economies particularly hard.

They said they supported measures taken by the IMF, the World Bank and regional development banks to provide flexible and rapid financing in response to the crisis, including the IMF’s temporary expansion of access to emergency aid and its proposed introduction of a short-term liquidity line.

The officials also expressed support for the FSB’s efforts to mitigate the financial stability risks posed by the pandemic, including through the use of flexibility within existing international regulatory standards.

They said they would continue to consider further near-term actions to stabilize the global economy, and pledged to return to other priority agenda items, such as debt transparency and sustainability, digitalization and illicit financial flows, once the immediate impact of the crisis abated.