Spotlight: IMF revises down global economy forecast amid mounting COVID-19 fallout, warning of record debt levels

The International Monetary Fund (IMF) on Wednesday revised down its forecast for the global economy amid mounting COVID-19 fallout, warning of record debt levels in both advanced and emerging markets and developing economies.

Global output is projected to decline by 4.9 percent in 2020, 1.9 percentage points below the IMF's April forecast, followed by a growth at 5.4 percent in 2021, indicating a grimmer economic outlook as the pandemic continues to ripple across the globe.

"Compared to our April World Economic Outlook forecast, we are now projecting a deeper recession in 2020 and a slower recovery in 2021," IMF Chief Economist Gita Gopinath said in a virtual news conference, noting that these projections imply a cumulative loss to the global economy over two years of over 12 trillion U.S. dollars from the crisis.

"The downgrade from April reflects worse than anticipated outcomes in the first half of this year, an expectation of more persistent social distancing into the second half of this year, and damage to supply potential," Gopinath said.

SYNCHRONIZED DEEP DOWNTURN

The multilateral lender is projecting a synchronized deep downturn in 2020 for both advanced economies, and emerging market and developing economies, noting that over 95 percent of countries are projected to have negative per capita income growth this year.

Advanced economies are projected to contract 8 percent this year, 1.9 percentage points lower than the forecast in the April WEO, according to the updated report.

The U.S. economy is expected to shrink 8 percent, the Euro Area is on track to contract 10.2 percent, and the Japanese economy could decline 5.8 percent.

Emerging markets and developing economies, meanwhile, are projected to shrink by 3 percent this year, 2 percentage points below the April WEO forecast, the report showed.

Brazil and Mexico are projected to contract by 9.1 and 10.5 percent respectively, while India's economy could see a contraction of 4.5 percent. China is expected to grow by 1 percent, the only major economy that could see growth this year.

The latest report also showed that global growth is projected at 5.4 percent in 2021, which would leave 2021 gross domestic product (GDP) some 6.5 percentage points lower than in the pre-COVID-19 projections made in January 2020.

"The unprecedented global sweep of this crisis hampers recovery prospects for export-dependent economies and jeopardizes the prospects for income convergence between developing and advanced economies," Gopinath said.

The IMF chief economist also noted a high degree of uncertainty surrounds this forecast, with both upside and downside risks to the outlook. On the upside, better news on vaccines and treatments, as well as additional policy support, could lead to a quicker resumption of economic activity, she said.

On the downside, further waves of infections could reverse increased mobility and spending, and rapidly tighten financial conditions, triggering debt distress, she said, adding that geopolitical and trade tensions could damage fragile global relationships at a time when trade is projected to collapse by around 12 percent.

In its latest Global Economic Prospects released early this month, the World Bank Group said the global economy is on track to shrink by 5.2 percent in 2020 amid the pandemic. A downside scenario could lead the global economy to shrink by as much as 8 percent this year.

RECORD DEBT LEVELS

Sizable fiscal and financial sector countermeasures deployed in several countries since the start of the crisis have forestalled worse near-term losses, according to the updated WEO report, which noted that fiscal measures amounting to about 11 trillion dollars have been announced worldwide.

"It's important for us to recognize that when confronted with a deep downtown of this kind, something we've never seen before the magnitude and the breadth of this downtown, that policies should respond aggressively to prevent that even worse outcome from happening," Malhar Nabar, division chief of the World Economic Studies Division in the IMF's Research Department, told Xinhua in a video interview Wednesday.

Nabar, however, noted it could be an issue going forward. "It's true that with the elevated debt levels and if financial conditions were to tighten again," it could create some problems for some economies, especially emerging markets and developing economies, and "tip them into a very difficult situation."

Warning that the crisis will also generate medium-term challenges, Gopinath said that public debt this year is projected to reach the highest level in recorded history in relation to GDP, in both advanced and emerging markets and developing economies.

"Countries will need sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries," she said.

Nabar said the IMF has been very aggressively calling for international support from the international community to be directed to some of the more vulnerable economies, which will face rising crisis costs and should be provided with the support in the form of debt relief, grants and concessional financing.

The updated WEO report also pointed out that the "disconnect" between real and financial markets raises concerns of excessive risk taking and is a significant vulnerability.

Nabar told Xinhua that the improvement in financial conditions reflected strong policy support in response to the crisis. "With major central banks acting very quickly to cut interest rates ... to increase asset purchases, to provide liquidity support in various ways, all of this has translated into a rebound in financial sentiment," he said.

Nabar, however, said it's very hard to predict which way financial markets can turn "with the huge uncertainty that we have in this current environment."

MULTILATERAL COOPERATION ESSENTIAL

Over 75 percent of countries are now reopening at the same time as the pandemic is intensifying in many emerging market and developing economies, and several countries have started to recover, Gopinath told reporters.

"However, in the absence of a medical solution, the strength of the recovery is highly uncertain and the impact across sectors and countries highly uneven," she said.

Stressing that this is a crisis like no other, the IMF said in the report that "strong multilateral cooperation remains essential on multiple fronts."

"Liquidity assistance is urgently needed for countries confronting health crises and external funding shortfalls, including through debt relief and financing through the global financial safety net," the report said.

"Beyond the pandemic, policymakers must cooperate to resolve trade and technology tensions that endanger an eventual recovery from the COVID-19 crisis," according to the report.

Nabar told Xinhua that the global economy will come out of this deep slump, but looking ahead to the recovery, it will be very important to ensure that "there are as few obstacles as possible in the recovery path."

By that, he means, factors that can generate uncertainty, can weigh on business confidence, and have a negative impact on productivity "because it forces businesses to make decisions based on anticipation of difficulties in sourcing parts and components."

"We are calling for countries to address the economic grievances that are behind the tension that we see, to address the gaps in the multilateral rules-based trading system, to adapt it to the changing global economy," Nabar said.

He urged countries to ensure that the benefits of trade that "we've all seen for the last several years" continue to support the recovery going forward.