‘Great Lockdown’ to rival Great Depression with 3% hit to global economy, says IMF

Latest World Economic Outlook describes shock of coronavirus pandemic as ‘like no other’

The usually congested Harbor Freeway in central Los Angeles pictured during lockdown.




The usually congested Harbor Freeway in central Los Angeles pictured during lockdown.
Photograph: Mark J Terrill/AP

The International Monetary Fund has slashed its forecasts for global growth in response to the Covid-19 pandemic and warned of a slump in output this year unparalleled since the Great Depression of the 1930s.

In its half-yearly forecasts, the IMF said the “Great Lockdown” would cause a dramatic drop in activity that would be far more painful than the recession that followed the banking meltdown of the late 2000s.

The IMF said the sudden shock caused by the spread of the coronavirus meant it had been forced to tear up an estimate it made just three months ago of 3.3% global growth this year and replace it with an expected contraction of 3%.

Until now the downturn that followed the near meltdown of the global financial system in late 2008 has been the most serious of the postwar ear, with global activity shrinking by 0.1% in 2009

Q&A

What is gross domestic product (GDP)?

Gross domestic product (GDP) measures the total value of activity in the economy over a given period of time. 

Put simply, if GDP is up on the previous three months, the economy is growing; if it is down, it is contracting. Two or more consecutive quarters of contraction are considered to be a recession. 

GDP is the sum of all goods and services produced in the economy, including the service sector, manufacturing, construction, energy, agriculture and government. Several key activities are not counted, such as unpaid work in the home. 

The ONS uses three measures that should, in theory, add up to the same number.

• The value of all goods and services produced – known as the output or production measure.
• The value of the income generated from company profits and wages – known as the income measure.
• The value of goods and services purchased by households, government, business (in terms of investment in machinery and buildings) and from overseas – known as the expenditure measure.

Economists are concerned with the real rate of change of GDP, which accounts for how the economy is performing after inflation.

Britain’s government statistics body, the Office for National Statistics, produces GDP figures on a monthly basis about six weeks after the end of the month. It compares the change in GDP month on month, as well as over a three-month period. 

The ONS warns that changes on the month can prove volatile, preferring to assess economic performance over a three-month period as the wider period can smooth over irregularities. 

The most closely watched GDP figures are for the four quarters of the year; for the three months to March, June, September and December.

The figures are usually revised in subsequent months as more data from businesses and the government becomes available.  

The ONS also calculates the size of the UK economy relative to the number of people living here. GDP per capita shows whether we are actually getting richer or poorer, by stripping out the impact of population changes. Richard Partington

Bigger output losses have now been pencilled in for 2020, concentrated in the rich economies of the west, which are forecast to shrink by 6.1% on average. Italy and Spain – the two worst-affected European economies from Covid-19 so far – will see GDP falls of 9.1% and 8%, respectively, the IMF said in its world economic outlook. Britain’s drop in output is put at 6.5%.

Of the big emerging economies, China’s growth rate is expected to fall from 6.1% last year to 1.2% in 2020 – its lowest in decades. India is on course to expand by 1.9%, down from 4.2%.

Adjusted to take account of population changes, the IMF’s forecasts were even gloomier. Gross domestic product (GDP) per head – one measure of living standards – is expected to fall globally by 4.2% in 2020, by 6.5% in advanced countries, and by 7% in the UK.

uk recessions graphic

Gita Gopinath, the IMF’s economic counsellor, said the size of the hit to the global economy, uncertainty about the how long the shock would last, and the need to discourage economic activity to contain the virus had to led to a crisis “like no other”.

She added: “It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago. ‘The Great Lockdown’, as one might call it, is projected to shrink global growth dramatically.”

The IMF is predicting a partial recovery in 2021, when it is estimating that growth will recover to 5.6%, but Gopinath said the level of GDP would remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound.

She warned: “Much worse growth outcomes are possible and maybe even likely.”

The IMF’s World Economic Outlook (WEO) is assuming that economic disruptions are concentrated mostly in the second quarter of 2020 for almost all countries except China (where the impact was most intense in the first quarter). The time taken for production to be scaled back up means the sharp plunge in output will be followed by only a gradual recovery.

The IMF said its forecasts were highly uncertain and that the risks were that the economic cost of the pandemic would be worse than currently envisaged. Recovery relied on stimulus measures being effective in preventing widespread company bankruptcies, limiting job losses, and easing financial strains.

The WEO modelled three alternative scenarios: a 2020 lockdown lasting 50% longer than it is forecasting; a mild recurrence of the virus in 2021; and a protracted pandemic and longer containment effort in 2020, as well as a recurrence in 2021.

In the worst case, the global economy would shrink by around 11% rather than 3%.

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Gopinath said: “The economic landscape will be altered significantly for the duration of the crisis and possibly longer, with greater involvement of government and central banks in the economy.”

At a time when Italy and Spain have started to lift their lockdown restrictions, Gopinath said: “There are many reasons for optimism, despite the dire circumstances. In countries with major outbreaks, the number of new cases has come down, after strong social distancing practices were put in place. The unprecedented pace of work on treatments and vaccines also promises hope. The swift and substantial economic policy actions taken in many countries will help shield people and firms, preventing even more severe economic pain and create the conditions for the recovery.”

Although the effects of the pandemic have been more severe so far in developed countries, the IMF said they were better equipped to cope. It added that many emerging and developing economies faced a multilayered crisis comprising a health shock, domestic disruptions, plummeting external demand, capital flight, and collapsing commodity prices.