Global economy: a scenario even more bleak for a historic recession

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June 24, 2020 9h46

Updated at 22h13

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Global economy: a scenario even more bleak for a historic recession

Delphine Touitou

Agence France-Presse

WASHINGTON — More than 12 000 billions of dollars of cumulative loss to the global economy in 2020 and 2021 because of the pandemic of sars coronavirus. This crisis is not like the others” is far more severe than expected and the recovery will be slower than expected, warned Wednesday the international monetary Fund.

Gita Gopinath, its chief economist, unveiled a forecast of a recession of 4.9 % this year. It is much worse than the 3 % expected in April in the heart of the pandemic, when the IMF pointed out already that this was one of the worst crisis since the Great Depression of years 30.

And for some countries, especially in Europe, the contraction of the gross domestic Product is dizzying : -12,5 % for France, -12,8 % for Spain and Italy.

“A high degree of uncertainty surrounds” these forecasts, recognizes Mrs. Gopinath as the epidemic is not over and that homes are returning to where it seemed to be controlled, as in Germany, where the authorities announced on Tuesday reconfinements local.

To date, the pandemic COVID-19 has done more than 477 500 deaths in the world.

No country escapes the pessimism in the air at start with China, where left end of 2019, the deadly virus. The growth of the asian giant is only 1%, far from the 6.1 per cent achieved in 2019, which is already at a historic low because of the trade war with Washington.

The health crisis is going to be even more devastating for the United States, devoid of a social safety net and in spite of the gigantic plans of assistance from the government (some 3 000 billion dollars).

The GDP of the first world power will collapse by 8% compared with 5.9% estimated in April. The recovery in 2021 will be less strong (+4.5 per cent).

Everywhere else in the world, the figures are catastrophic: -10,2% for the euro area countries and for the United Kingdom, -9,4% in the region of Latin America and the Caribbean, -8% in South Africa -5,8% in Japan, 4.7% in Middle East and central Asia, or even -4,5% in India.

The degradation of the forecasts is explained by a stronger impact than expected in the first half and a “partial recovery” at the beginning of the third quarter.

“To remain vigilant”

In 2021, the global growth is expected to reach 5,4% (-0,4%).

Gita Gopinath urged the governments to “remain vigilant” because the crisis is not over. “Many countries are already doing a lot” to help businesses and households, she pointed out. They will have to ensure that it does not go back on such aid too quickly, but “gradually”, she also warned.

The IMF is particularly concerned about the negative impact on the most vulnerable, which “puts at risk the significant progress made in reducing extreme poverty in the world since the 1990s.”

“These are the low-income households and low-skilled workers who are most affected by this crisis,” said Gita Gopinath in an interview to l‘AFP. The same ones that will take longer time to find a new job.

“For young people entering the labour market at this time, there may be a negative impact on the future,” she added.

Worst or best ?

As for the forecasts published in April, “there is a degree of uncertainty higher than usual around this forecast,” notes the IMF.

Ultimately, this could prove to be worse or better.

“These are the low-income households and low-skilled workers who are most affected by this crisis. ”

—
Gita Gopinath, chief economist of the IMF

Best, if there is for example the discovery of a vaccine and if there are government subsidies further, which will accelerate the recovery.

On the contrary, “new wave of infections can hinder the recovery “and quickly firm up the financial conditions, causing a debt overhang”, a summary Gita Gopinath.

In economies where rates of infection are decreasing, the recovery is now longer because of the persistence of the detachment physics in the second half. It is also “uneven”, stresses Gita Gopinath. Some sectors, such as retail sales bounce back when others, such as the services-intensive “contact, hospitality, travel and tourism, remains depressed”, she said.

Countries dependent on these sectors will be “probably deeply affected for a prolonged period,” emphasizes the economist.

For economies struggling to contain the pandemic, containment measures continue to weigh.

Finally, beyond the pandemic, other risks threaten the global economy, says the IMF, citing “escalating tensions between the United States and China,” “the fraying of relations between the Organization of the petroleum exporting countries (OPEC) and the coalition of oil producers” or “social unrest”.

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“THIS CRISIS REQUIRES THE EXPENDITURE”, ACCORDING to The CHIEF ECONOMIST OF the IMF

The challenge of globalization, “exacerbated” by the pandemic COVID-19, is a legitimate one, but countries must continue to work together to allow the global economy to restart, believes Gita Gopinath, the chief economist of the international monetary Fund in an interview withAFP.

Q Some countries, unable to provide basic protective equipment such as masks, now want to regain their economic sovereignty and bring back the production of certain products, such as the paracetamol for France. This issue you are worried about it, then, that the IMF is in favour of multilateralism?

R – Well before this crisis erupted, we have seen a serious questioning of globalization and its benefits. And trade tensions rising were the result already of this question. But this crisis has probably exacerbated some of the questions on the liberalisation because of the pandemic, the factories have had to close and this has disrupted the global supply chains and trade flows (…) even so, it is very important that countries work together and we have explicitly called not to impose export restrictions, for example on the equipment and medical goods, because it is the time where the whole world is in need, where they (the countries) must be collaborative. The system is not perfect, the multilateral trading system needs to be improved and countries should work together. But moving production is not a good strategy for growth, this is not the right strategy to eradicate poverty population in the world.

Q The IMF has always advocated a balanced budget. He now encourage governments to spend more to help households and businesses, why this change of position?

R This crisis is forcing countries to spend. If they had not, at this stage, we préparerions a recovery much more difficult, with a lot more people who would have lost their income and would not have the means of basic subsistence. (…) This is why we encourage countries to do much more. That said, we also say that it is very important to put in place safeguard measures to ensure budget transparency and that it is necessary to have also a medium-term plan for after the crisis. But for now the strategy is to agree to the necessary expenditure. This crisis has been different in terms of policy response compared to the Great Recession (2009). The support has been rapid, it has been substantial, it has been targeted and this has absolutely helped, and I think that decision-makers are willing to do what it takes (to get through the crisis).

Q The United States are going through a deep social crisis, with protests of scale against inequality and racism. At the same time, new foci of infection appeared. These factors are likely to compromise the recovery of the first economy of the world?

R in The United States, we have revised down sharply our forecast for 2020, we now expect a contraction of 8%. The greatest impact will be felt in the second quarter. At present, there is a recovery in some sectors, but it is very uneven. Consequently, we would expect that the recovery will be gradual. Therefore, even by the end of 2021, our projections indicate that the level of GDP will be lower than it was in 2019. And, indeed, the social unrest, the possibility of new waves of infection are risks for the economic outlook. In our baseline, we have taken into account the fact that there will be a possible increase in the number of cases but not a second big wave. If this were to happen — that would be the case for any country in the world – this would be a major risk.

Regarding the response, the United States provided substantial support unprecedented in terms of fiscal and monetary policy. This has allowed (…) to avoid bankruptcies on a large scale. But it is not necessary that the decision-makers to withdraw support too quickly. And, ( … ), I think that substantial support must be put in place. AFP

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