The Great Lockdown: IMF predicts 3% contraction in global economy

dubai — Global economy will shrink by three per cent in 2020, much worse than the 2008-09 financial crisis as the world experiences “The Great Lockdown” following the outbreak of coronavirus, International Monetary Fund said on Tuesday.

Assuming that the coronavirus pandemic fades in the second-half of 2020, IMF forecasts that the global economy will bounce back strongly next year, growing by 5.8 per cent as economic activity normalises and policy initiatives support the world economy.

Gita Gopinath, chief economist at IMF, said there is still considerable uncertainty of when world will emerge from lockdown as this “Great Lockdown” is the worst since great depression.

“The accumulative loss of 2020-21 could be $9 trillion which is equal to the size of combined economies of Germany and Japan. It is first time since great recession that both advance and emerging economies are in recession. If the pandemic does not recede in H2 2020 and financial condition worsens, in this cases the global economy will fall another three per cent in 2020. And if crisis rolls over into 2021, it will reduce global GDP by eight per cent based on base line scenario,” said Gopinath.

She pointed out that the strength of recovery depends of what governments are doing now in terms of necessary support for households to meet their expanses and to help firms avoid going bankrupt.

With regard to China, she noted that the world’s second largest economy was worst hit in Q1 but measures have started pay off and there are signs of recovery. But rest of global economy is still in the grip of pandemic so that will have impact on China’s external demand.

“Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices. Risks of a worse outcome predominate,” IMF said in its World Economic Outlook released on Tuesday.

China and India are the only bright spot in IMF’s 2020 forecast, growing by 1.2 per cent and 1.9 per cent, respectively. Helped by these two Asian giants, emerging and developing Asia region will be the only region to see a positive growth of one per cent this year.

Advanced economies group — where several countries are experiencing widespread outbreaks and deploying containment measures — is projected to contract 6.1 per cent in 2020. Most economies in the group are forecast to contract this year, including the US (–5.9 per cent), Japan (–5.2 per cent), the UK (–6.5 percent), Germany (–7.0 percent), France (–7.2 percent), Italy (–9.1 percent), and Spain (–8.0 percent). With global rebounding to 5.8 percent next year, the advanced economy group is forecast to grow at 4.5 per cent, while growth for the emerging market and developing economy group is forecast at 6.6 per cent.

“The rebound in 2021 depends critically on the pandemic fading in the second half of 2020, allowing containment efforts to be gradually scaled back and restoring consumer and investor confidence… Nonetheless, the level of GDP at the end of 2021 in both advanced and emerging market and developing economies is expected to remain below the previrus baseline,” IMF said.

If the pandemic does not recede in H2 2020 and financial condition worsens, in this cases the global economy will fall another three per cent in 2020

Gita Gopinath

Chief economist at IMF