Global economy to contract by 3% due to coronavirus

The global economy will this year likely suffer the worst financial crisis since the Great Depression, the International Monetary Fund said Tuesday, as governments worldwide grapple with the Covid-19 pandemic.

The Washington-based organization now expects the global economy to contract by 3% in 2020. By contrast, in January it had forecast a global GDP (gross domestic product) expansion of 3.3% for this year.

“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,” Gita Gopinath, the IMF’s chief economist, said in the latest World Economic Outlook report.

In January, the IMF had estimated 3.4% growth for global GDP in 2021; this has now been revised up to 5.8% (although growth is expected to be coming from a lower base following 2020’s projected contraction).

Speaking to CNBC Tuesday, Gopinath said: “This is a crisis where the economic shock is something that is not exactly controlled by economic policy,” as it’s unclear when the pandemic will end.

Great Depression vs. Great Lockdown

The IMF’s chief economist also said that in comparison to the Great Depression, “we are (now) better off on the health front. On the economic front, I think it makes a big difference that there are lenders of last resort, that monetary policy is proactively able to come in and ensure enough liquidity in markets, that fiscal policy is able to play a major role in supporting firms and households.”

The IMF expects a “partial recovery” in 2021, provided that the pandemic eases throughout this year.

The dramatic downgrade in this year’s growth expectations comes as other institutions also warn that the coronavirus outbreak is bringing massive economic challenges. The World Trade Organization said last week that global trade will contract by between 13% and 32% this year. The Organization for Economic Coordination and Development has also warned the economic hit from the virus will be felt “for a long time to come.”

To contain the spread of the virus, many governments have implemented lockdown measures, only allowing people to leave their houses to purchase groceries, medicines and, in some cases, to exercise. As a result, business activity has stalled in many countries.

The IMF, which dubbed the current crisis “the Great Lockdown,” said “this is a crisis like no other.” Speaking at a press conference, Tuesday, Gopinath explained “the magnitude and speed of collapse in activity that has followed (the lockdown) is unlike anything we’ve experienced in our lifetimes.”

Inequality can go up

There’s severe uncertainty about the duration and intensity of the economic shock, and stimulating economic activity is more challenging given the required social distancing and isolation policies. 

The IMF said it had received “an unprecedented number of calls for emergency funding.” Out of its 189 members, more than 90 of them have asked for financial support.

The fund, which provides financing to members which are struggling economically, has $1 trillion in lending capacity. 

When speaking to CNBC, Gopinath said: “When you have a deep recession of this kind, there is always unfortunately tremendous loss of income for people at the lower end of the income scale, so poverty can go up, inequality can go up.” 

Euro zone to be hit the hardest

The latest forecasts from the IMF suggest that the U.S. economy will contract by 5.9% this year. In comparison, the euro zone is expected to shrink by 7.5%, but China is seen growing by 1.2% in 2020.

The economic situation will be particularly difficult in Italy and Spain, where GDP is set to contract by 9.1% and 8%, respectively. These two countries are the worst hit in Europe by Covid-19. Both have higher numbers of infections and deaths than China, where the virus first emerged in late 2019.

How should governments react?

The IMF is advising countries to focus on the health crisis first, by spending on testing, medical equipment and other health care related costs.

It also said that governments should provide tax deferrals, wage subsidies and cash transfers to the most-affected citizens and firms; as well as to prepare for the lifting of lockdown measures.

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