Great Lockdown Depression will be the worst in a century and could get worse, IMF warns

In its first World Economic Outlook report since spread of virus, IMF estimates that global gross domestic product will shrink 3% this year.

Signage displayed outside the IMF | Alex Wroblewski | Bloomberg

Washington: The International Monetary Fund predicted the “Great Lockdown” recession would be the steepest in almost a century and warned the world economy’s contraction and recovery would be worse than anticipated if the coronavirus lingers or returns.

In its first World Economic Outlook report since the spread of the virus and subsequent freezing of major economies, the IMF estimated on Tuesday that global gross domestic product will shrink 3% this year.

That compares to a January projection of 3.3% expansion and would likely mark the deepest dive since the Great Depression. It would also dwarf the 0.1% contraction of 2009 amid the financial crisis.

While the fund anticipated growth of 5.8% next year, which would be the strongest in records dating back to 1980, it cautioned risks are tilted to the downside. Much depends on the longevity of the pandemic, its effect on activity and related stresses in financial and commodity markets, it said.

Even if the IMF’s forecast proves accurate, it said output in both advanced and emerging markets would undershoot their pre-virus trends through 2021, seemingly dashing any lingering hopes of a V-shaped economic rebound from the health emergency. The cumulative loss in global GDP this year and next could be about $9 trillion — bigger than the economies of Japan and Germany combined, IMF chief economist Gita Gopinath said.

“This is a crisis like no other, which means there is substantial uncertainty on the impact it will have on people’s lives and livelihoods,” Gopinath said in an online briefing. In a Bloomberg TV interview, she said that a worse-than-expected impact in emerging markets is a major downside risk to the IMF’s baseline scenario.

In its forecasts, the IMF assumes that countries experiencing severe epidemics will lose about 8% of working days this year during containment efforts and the loosening of restrictions.

In a further sign of pessimism, the IMF sketched out three alternative scenarios in which the virus lasted longer than expected, returned in 2021 or both. A lengthier pandemic would wipe 3% off GDP this year compared to the baseline, while protraction plus a resumption next year would mean 8% less output than projected in 2021, it said.

As with the virus’s reach, the economic hit is sweeping. In the U.S., GDP is expected to contract 5.9%, compared with a 2% expansion in the fund’s last global outlook in January. It may grow 4.7% next year, the IMF said. The euro area will probably shrink 7.5% in 2020 and expand 4.7% in 2021, it said.

“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,” the IMF said. “Risks of a worse outcome predominate.”

The grim projections are a stark reversal from the IMF’s outlook less than two months ago. On Feb. 19, the fund told Group of 20 finance chiefs that “global growth appears to be bottoming out.” Three days later, Managing Director Kristalina Georgieva predicted the virus would likely cut just 0.1 percentage point from the fund’s global growth forecast for this year, although she acknowledged “more dire scenarios” were being studied.

The fund sees advanced economies shrinking the most, contracting 6.1%. Emerging-market and developing economies will see a 1% drop. Growth in China and India will decelerate but their economies will still manage to expand 1.2% and 1.9% respectively, the fund said.

The IMF’s baseline scenario assumes that the pandemic fades in the second half of this year and that containment measures can be gradually wound down.

Global trade volume in goods and services will probably tumble 11% this year, the fund said.

Growth in consumer prices in advanced economies may average 0.5% this year before accelerating to 1.5% in 2021, it said. The U.S. jobless rate, which was at a half-century low before the pandemic, may swell to 10.4% in 2020, the IMF said.

In a separate report, the IMF warned that the coronavirus crisis also “presents a very serious threat to the stability of the global financial system.”

While forceful government and central-bank actions have stabilized investor sentiment, “there is still a risk of a further tightening in financial conditions” that could expose cracks in the system, the fund said in its Global Financial Stability Report.

Should that happen, central banks may need to consider further measures to support the flow of credit to their economies, it said.

Most central banks have cut interest rates to around or below zero to blunt the effect of the coronavirus, with the Federal Reserve launching an unprecedented range of emergency programs to support as much as $2.3 trillion in loans. Fiscal stimulus packages have varied more. The U.S. is providing about 10% of GDP in support and Germany about 4.5%, while Japan’s program is worth about 20% of GDP, according to Bloomberg Economics.

The IMF said that fiscal measures will need to increase if stoppages to economic activity persist, or if the pickup in activity once restrictions are lifted is too weak. Economies with financing constraints may also require external support, the fund said. Georgieva had repeatedly pledged to use the IMF’s $1 trillion in loan capacity to help its members.

The IMF and World Bank are holding their spring meetings via video conference for the first time ever this week. Their normal in-person meetings typically draw thousands of delegates, observers and journalists from 189 member countries. The program has been pared down to mostly media briefings and private meetings, skipping the typical seminars and public discussions.-Bloomberg