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
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.
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%.
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.