IMF warns of lasting damage, long climb out of recession

DM Monitoring

LONDON: The global economic crisis will not be quite as grim as feared this year, but GDP will still contract 4.4 percent and the ongoing pandemic means the outlook remains uncertain, the IMF said Tuesday.
Massive injections of government aid kept economies from plunging further, but growth in 2021 is expected to be slightly slower than forecast in June and even weaker in the next few years due to the lasting damage inflicted by Covid-19, the IMF said in its latest World Economic Outlook.
The recession was less severe but still deep and “the ascent out of this calamity is likely to be long, uneven, and highly uncertain,” IMF chief economist Gita Gopinath said in the report released ahead of the annual meetings of the IMF and World Bank.
The result “would have been much weaker if it weren’t for sizable, swift and unprecedented” response from governments and central banks, she said, again warning of the dangers of removing support too quickly.
The IMF upgraded the global GDP forecast for this year by 0.8 percentage points, but trimmed the 2021 growth outlook to 5.2 percent.
In the United States, the growth estimate saw a major upgrade after $3 trillion in stimulus spending deployed in the early weeks of the pandemic. The economy is now expected to decline 4.3 percent this year, and post growth of 3.9 percent in 2021.
China, where the virus originated, has recovered faster and will see growth of 1.9 percent this year, accelerating to 8.2 percent next year, according to the report.
However, Gopinath said that if China is excluded, global growth next year would be negative. While most countries will see their economies return to pre-pandemic levels by 2022, some like those in Latin America will not see a recovery until 2023, she told reporters. Countries like India, Spain and Italy will suffer double digit economic declines in 2020, while Britain just misses that threshold with a 9.8 percent contraction, the IMF said.
Continued aid critical
Amid the widespread economic shutdowns, the rapid rollout of $12 trillion in government spending worldwide “helped saved lives and livelihoods and prevented a financial catastrophe,” Gopinath said. But the depth of the crisis, which caused massive unemployment as well as more than a million deaths, means continued support will be critical, especially in the face of “unusually large” risks. “It is essential that fiscal and monetary policy support are not prematurely withdrawn,” Gopinath said in a blog post that accompanied the report.
The spread of Covid-19 remains the critical factor in the recovery, she said, “and many more millions of jobs are at risk the longer this crisis continues.”
The IMF called for continued lifelines including wage support, cash payments and credit lines for small and medium businesses until the recovery is underway, warning that removing them too soon could lead to a wave of bankruptcies and push economies back into recession.
In addition, poor countries will need concessional financing as well as debt relief.
Economic scars
Even once the immediate crisis has passed, the IMF warned that “most economies will experience lasting damage to supply potential, reflecting scars from the deep recession this year.”
Global growth is expected to slow to 3.5 percent in the medium term, a stunning $28 trillion in lost output in the five-year period through 2025 compared to the pre-pandemic expectations, according to the report.
The World Bank said up to 150 million more people may be pushed into extreme poverty by 2021, the first time it has worsened in more than two decades, while the IMF warns the crisis will exacerbate inequality, especially for women.