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‘Profound uncertainty’ ahead

Lachlan Maddock
— 1 minute read

The IMF has warned that the outlook is worse than many believe and that it will be revising its own forecasts for the recession ahead.

Both advanced and emerging markets will be in recession for the first time since the Great Depression due to COVID-19, and International Monetary Fund chief economist Gita Gopinath has warned that it is likely that the forthcoming World Economic Outlook Update is “likely to show negative growth rates even worse than previously estimated”. 

“This is a truly global crisis. Past crises, as deep and severe as they were, remained confined to smaller segments of the world, from Latin America during the 1980s to Asia in the 1990s,” Ms Gopinath said. “Even the global financial crisis 10 years ago had more modest effects on global output.”

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The IMF has already warned of a 3 per cent contraction in global GDP – but expectations of a quick rebound fuelled by pent-up consumer demand are out of touch with reality, Ms Gopinath warned. 

“In a health crisis as consumers may change spending behaviour to [minimise] social [interaction, uncertainty] can lead households to save more,” Ms Gopinath said. “In the case of China, one of the early exiters from lockdown, the recovery of the services sector lags manufacturing as such services as hospitality and travel struggle to regain demand.”

Financial markets have also begun to diverge from the real economy, with indicators pointing to “stronger prospects of a recovery than real activity suggests”. 

“Despite the recent correction, the S&P 500 has recouped most of its losses since the start of the crisis; the FTSE [Emerging Market Index] and Africa index are substantially improved; the Bovespa rose significantly despite the recent surge in infection rates in Brazil; and portfolio flows to emerging and developing economies have [stabilised],” Ms Gopinath said.  

That divergence can be largely attributed to a stronger policy response than in previous crises, but the only way out of the “Great Lockdown” will be through improving health outcomes. 

“For individual countries, [minimising] the health uncertainty by using the least economically disruptive approaches such as testing, tracing, and isolation, tailored to country-specific circumstances with clear communication about the path of policies, should remain a priority to strengthen confidence in the recovery,” Ms Gopinath said. “As the recovery progresses, policies should support the reallocation of workers from shrinking sectors to sectors with stronger prospects.”

 

‘Profound uncertainty’ ahead
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