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Global recession worse than it looks

Lachlan Maddock
— 1 minute read

The IMF has warned the economic fallout of COVID-19 will be more severe than expected as a “recovery like no other” gets underway.

Global growth is now projected at – 4.9 per cent in 2020, 1.9 per cent below the April 2020 World Economic Outlook. Consumption growth has been hit particularly hard, while investment is expected to be “subdued” as businesses cut back on capital expenditures due to high uncertainty.

“Over 75 percent of countries are now reopening at the same time as the pandemic is intensifying in many emerging market and developing economies,” said IMF chief economist Gita Gopinath. “Several countries have started to recover.”

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“However, in the absence of a medical solution, the strength of the recovery is highly uncertain and the impact on sectors and countries uneven.

The IMF also warned that the forecast was subject to “pervasive uncertainty” and lacked visibility on the effects of the ultimate length of the pandemic, the ability of displaced workers to find new employment in different sectors, the reconfiguration of supply chains, and the economic scarring caused by firm closures and unemployed workers permanently exiting the workforce. The eventual resolution of the “disconnect” between asset valuations and prospects for economic activity will be another compounding factor in the recovery. 

“On the upside, better news on vaccines and treatments, and additional policy support can lead to a quicker resumption of economic activity,” Ms Gopinath said. “On the downside, further waves of infections can reverse increased mobility and spending, and rapidly tighten financial conditions, triggering debt distress.

“Geopolitical and trade tensions could damage fragile global relationships at a time when trade is projected to collapse by around 12 percent.”

Ms Gopinath warned that “we are not out of the woods” and urged countries to remain vigilant and manage health risks as they reopen. Ms Gopinath also urged the extension of fiscal stimulus in countries where activities are being “severely restrained” by COVID-19, while others should focus on reallocating workers to sectors with growing demand. 

“This could take the form of spending on worker training and hiring subsidies targeted at workers that face greater risk of long-term unemployment,” Ms Gopinath said. “Supporting a recovery will also involve actions to repair balance sheets and address debt overhangs. 

“This will require strong insolvency frameworks and mechanisms for restructuring and disposing of distressed debt.”

 

Global recession worse than it looks
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