The coronavirus pandemic is plunging the global economy into its deepest slump since the Great Depression of the 1930s and governments and health officials must work together to prevent an even worse outcome.
That’s the stark warning from the International Monetary Fund, which said on Tuesday there was a risk of the recession extending into 2021 if policymakers fail to coordinate a global response to the virus.
In its latest outlook for the world economy, the IMF said it expects GDP will contract by 3% in 2020, a far worse recession than the one that followed the global financial crisis of 2008, and a 180-degree reversal of its previous forecast in January when it was expecting growth of 3.3% this year.
“The Great Lockdown, as one might call it, is projected to shrink global growth dramatically. A partial recovery is projected for 2021 … but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound,” the IMF said. “Much worse growth outcomes are possible and maybe even likely,” it added.
In the United States, where lawmakers have approved over $2 trillion in stimulus and where the Federal Reserve has unleashed trillions more to keep the financial system from seizing up, the IMF expects the economy to shrink by 5.9% this year. That would be the worst slump since 1946, but a smaller decline in output than some European countries are likely to experience.
Growth in China, the world’s second-largest economy and the first to be slammed by the coronavirus, will meanwhile plummet to 1.2%. It hasn’t seen growth that weak since 1976.
The outlook is bleak even in countries where governments and central banks have responded forcefully in an effort to help workers and businesses. The IMF expects Germany’s economy, the largest in Europe and heavily exposed to global trade, to contract by 7% in 2020. The Canadian economy is forecast to shrink by 6.2%, while the United Kingdom can expect a decline of 6.5%.
Japan, the world’s third largest economy, will contract by 5.3% even though it has so far avoided imposing harsh nationwide restrictions on travel, work and public life that have frozen economic activity in other parts of the world.
EU countries have committed huge sums of money to supporting companies and households, and limits on budget deficits have been relaxed to allow them to borrow more. But Spain and Italy, which have been hit hard by the virus, are predicted to lose 8% and 9.1% of their economies respectively, underscoring the urgent need for the bloc to find a way of financing a recovery plan.
The IMF forecast suggests the world is in the early stages of the most severe economic crisis in nearly a century, and that efforts to contain the pandemic will cost tens of millions of people their jobs and put tens of thousands of companies out of business. Unemployment in the United States will rise to 10.4% this year, according to the IMF, and 9.1% in 2021.
The IMF expects the global economy to rebound in 2021, with growth hitting 5.8% if the pandemic fades in the second half of this year. But the group warns that its outlook is highly uncertain, and any number of factors could mean that efforts to contain the coronavirus remain in place for much longer than expected.
“The pandemic could prove more persistent than assumed …. Moreover, the effects of the health crisis on economic activity and financial markets could turn out to be stronger and longer lasting, testing the limits of central banks to backstop the financial system and further raising the fiscal burden of the shock,” the IMF warns in its report.
Consumer confidence may fail to improve, for example. Companies and households may change their behavior, leading to weak demand and further disruption to supply chains. Reduced investment and bankruptcies could leave “scars” that “may run more extensively through the economy,” the IMF said.
Global response needed
The best way to ease the economic trauma is for governments and public health officials to increase their cooperation, according to the IMF.
“Countries urgently need to work together to slow the spread of the virus and to develop a vaccine and therapies to counter the disease. Until such medical interventions become available, no country is safe from the pandemic,” the group’s report states.
The IMF recommends that governments spend more on testing, rehiring retired medical professionals and purchasing equipment such as ventilators and personal protective equipment. Trade restrictions on medical products should be lifted.
The group praised developed economies including Australia, France, Germany, Italy, Japan and the United States for their fiscal response to the crisis, while also crediting China, Indonesia and South Africa. But more may need to be done.
“Fiscal measures will need to be scaled up if the stoppages to economic activity are persistent, or the pickup in activity as restrictions are lifted is too weak,” the IMF said.
Governments should also provide relief to workers. In places where paid sick and family leave are not standard, “governments should consider funding them to allow unwell workers or their caregivers to stay home without fear of losing their jobs during the pandemic,” the IMF said.