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.
