The International Monetary Fund has just released its World Economic Outlook
and its latest forecasts are dramatic.
The global economy is expected to contract by 3% in 2020, which would make the coronavirus crisis
the worst recession since the Great Depression in the 1930s.
So what are the main takeaways? Is there any light at the end of the tunnel?
I spoke with the IMF’s chief economist to learn more.
The IMF’s economic forecasts are a regular event in financial journalists’ calendars.
Normally, I’d be in Washington D.C. with other journalists for a big press conference.
But like so many other aspects of our lives, this year’s spring meetings have moved online.
Which is why chief economist Gita Gopinath and I connected via video conference to discuss
the organization’s latest predictions.
I know this is a very busy week for you.
A lot going on, yes.
Economists' expectations for the economy have plummeted since the start of the year.
In January, just weeks after the first report of a new coronavirus,
the IMF predicted the economy would grow by 3.3% in 2020.
Just three months later, that has been revised down to negative 3%.
An adjustment of this scale in such a short period is exceptionally rare.
I was just wondering, what went through your head when you first looked at the figures.
We see these figures building up at every stage so it’s not like there is an ‘ah ha’ moment.
We know when we see individual country estimates coming through, what’s going on.
It’s a truly global crisis. And the speed and the scale of it is really quite unparalleled.
In an effort to contain the deadly virus, governments around the world have called on
their citizens to stay home and effectively shut down the economy.
The Great Lockdown, as Gita and her team have called it, is a crisis like no other.
Why? Well, it is first and foremost a health emergency. Governments need to step up their
support to their respective health systems so they can cope with the outbreak.
Because this is a health emergency, policymakers can’t stimulate the economy in ways they normally would.
Encouraging people to go out and spend their money isn’t what you want
when you need them to stay home.
Uncertainty is also a factor. Just like a war, there is no clear end date for the pandemic
and the subsequent economic shock we’re experiencing.
So, you can see why this is a different crisis to the one seen in 2008.
Back then, the epicentre of the problem was the financial system, but now every single industry is being impacted.
In the past when it was a collapse in housing prices or the bursting of the financial bubble,
it would be quick and then it would go away and economic policy would start fixing the problem.
But this time around it’s a pandemic and a lot is going to depend on what happens in
public health, what happens with vaccines and therapeutics. And we’ve been talking
to epidemiologists and public health officials, and nobody can really tell us exactly
what will happen in the next few months.
According to the IMF, emerging markets and low-income nations in regions such as
Latin America, Africa and much of Asia will be hit the hardest.
With weaker healthcare systems and large populations packed into dense cities, social distancing
and life-saving treatments are less of an option for these countries.
Investors have also been pulling their money out of emerging markets, about $100 billion
in the last two months, leaving their financial systems in vulnerable positions.
Even within developed economies, the pandemic is putting massive pressure on labor markets.
The IMF estimates the unemployment rates will reach 10.4% in both the United States
and the eurozone this year.
What are the risks that we will see inequality becoming even a bigger problem of the aftermath of this crisis?
This is a crisis that’s absolutely impacting poorer workers, daily wage workers,
those who are involved in the restaurant sector, in tourism.
You need countries to provide support to them, to get cash transfers to them. They have to
use whatever social protections exist, scale them up, expand them, make them more unconditional.
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.
To mitigate the economic impact of the virus, governments and central banks have announced
massive stimulus packages.
In the U.S., the Federal Reserve has offered more than $3 trillion in loans and asset purchases.
The U.S. Congress approved a $2.2 trillion stimulus package.
In Japan, the ruling party proposed the biggest ever stimulus program, worth more than $550 billion.
And in Europe, countries have set aside previous fiscal commitments so they can spend without limits.
In addition, the euro zone has also developed financial packages of around half a trillion dollars.
According to IMF figures, globally about $8 trillion have been made available
to support economies.
You have to keep in mind that of this $8 trillion, about $7 trillion is G20 economies
and a lot of this spending is happening in the richer parts of the world while the poorer nations
and the low income and the developing countries are having to battle this with much smaller resources.
So I think the first important step is for the international community to
support the recovery in developing economies and low-income countries.
We don’t know how long this crisis will last, but we do know it will leave us
with a huge amount of debt.
Even prior to the pandemic, the Institute of International Finance warned
that global debt levels had hit a new record of $253 trillion.
What does this mean for future generations and do you think some of this debt could actually
be forgiven in the future?
This crisis calls for a large amount of public intervention, so we do predict that debt levels
will go up in all parts of the world and especially in advanced economies.
Now they are able to borrow at very low interest rates, so if those interest rates stay low
for the foreseeable future and we have the kind of recovery that we are projecting
in our baseline, then we can see sufficient tax revenue coming in that can control the level of debt.
Now on the other hand there will be countries for which these kinds of debt accumulations
will be damaging and for them, official creditors will have to consider forms of debt relief, debt restructuring.
A lot of countries remain in lockdown mode and some fear we could hit a peak in contagion
in the second half of the year.
But, provided countries are able to contain the virus and stabilize their economies
by the end of the year, the Fund is forecasting a “partial recovery” in 2021.
Staring down an economic crisis that could contend with the Great Depression is daunting,
to say the least. But Gita says we do have some things on our side nearly a century later.
We are certainly much better placed to deal with it now because of the kinds of health
systems that we have, they are much stronger in many parts of the world than at that time.
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 to ensure sufficient liquidity in markets,
that fiscal policy is able to play a major role in supporting firms and households.