The International Monetary Fund predicted the “Great Lockdown” recession would be the steepest in almost a century and warned the global economy’s contraction and recovery would be worse than anticipated if the coronavirus lingers or returns.
The grim forecast accentuated the magnitude of the shock that the pandemic has inflicted on both advanced and developing economies and therefore the daunting task that policymakers face in containing the fallout. With countries already hoarding medical supplies and international travel curtailed, the I.M.F. warned that the crisis threatened to reverse decades of gains from globalization.
This is a crisis like no other and there’s substantial uncertainty about its impact on people’s lives and livelihoods. A great deal depends on the epidemiology of the virus, the effectiveness of containment measures, and the development of therapeutics and vaccines, all of which are hard to predict. Besides, many countries now face multiple crises—a health crisis, a financial crisis, and a collapse in commodity prices, which interact in complex ways. Policymakers are providing unprecedented support to households, firms, and financial markets, and while this is crucial for a robust recovery, there’s considerable uncertainty about what the economic landscape will seem like after we emerge from this lockdown.
Deep Global Recession
In its World Economic Outlook, the I.M.F. projected that the world economy would contract by 3 percent in 2020 as the coronavirus pandemic causes nations around the world to shut down, and an unmatched reversal from early this year when the fund forecasted that the global economy would outpace 2019 and grow by 3.3 percent.
This year’s fall in output would be much more severe than the last recession when the world economy contracted by less than 1 percent between 2008 and 2009. This makes the Great Lockdown the worst recession since the Great Depression, and much worse than the Global Financial Crisis.
This is indeed a global crisis or call it the Great Lockdown Recession as no country is spared. Countries reliant on tourism, travel, hospitality, and entertainment for their growth are experiencing particularly large disruptions. Emerging market and developing economies face additional challenges with unprecedented reversals in capital flows as global risk appetite wanes, and currency pressures, while dealing with weaker health systems, and more limited fiscal space to provide support. Moreover, several economies entered this crisis during a vulnerable state with sluggish growth and high debt levels.
For the first time since the Great Depression, both advanced economies and emerging market and developing economies are in a recession. For this year, growth in advanced economies is projected at -6.1 percent. Emerging market and developing economies with normal growth levels well above advanced economies are projected to have negative growth rates of -1.0 percent in 2020, and -2.2 percent if you exclude China. The income per capita is projected to shrink for over 170 countries. Both advanced economies and emerging market and developing economies are expected to partially recover in 2021. In 2020, the I.M.F. projects the euro-area economy will shrink by 7.5 percent, led by steep declines in Italy and Spain.
According to the I.M.F., 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 might be about $9 trillion — bigger than the economies of Japan and Germany combined.
In a further sign of pessimism, the IMF has 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.
An 11% decline in global trade volumes this year is also projected. The impact is already evident in trade data, where slowing economic activity has caused global commerce to plummet. Consumer goods have been hit particularly hard, with shipments of furniture, apparel, steel, and electronics falling by over 15 percent last month compared with one year ago.
The U.S. jobless rate, which was at a half-century low before the pandemic, may swell to 10.4% in 2020. The International Labour Organisation last month warned almost 25 million jobs are going to be lost if the virus isn’t controlled. Rising unemployment will intensify pressure on governments and central banks to hurry delivery of programs to either compensate workers who are made redundant, or attempt to persuade employers to hoard staff until the virus fades. Failure would risk an even deeper recession or weak recovery that would require policymakers to consider yet more stimulus on top of that already deployed. All in all this indeed as predicted by IMF may very well be called the Great Lockdown Recession.
Exceptional Policy Actions
Flattening the spread of COVID-19 using lockdowns allows health systems to handle the disease, which then permits a resumption of economic activity. in this sense, there’s no trade-off between saving lives and saving livelihoods. Countries should still spend generously on their health systems, perform widespread testing, and refrain from trade restrictions on medical supplies. a worldwide effort must make sure that when therapies and vaccines are developed both rich and poor nations alike have immediate access.
While the economy is closed down, policymakers ought to make sure that people can meet their needs and that businesses can pick up once the acute phases of the pandemic pass. The large, timely, and targeted, fiscal, monetary, and financial policies are already taken by many policymakers—including credit guarantees, liquidity facilities, loan forbearance, expanded unemployment insurance, enhanced benefits, and tax relief—have been lifelines to households and businesses. This support should continue throughout the containment phase to reduce the scars that might emerge from subdued investment and job losses during this severe downturn.
Policymakers must also plan for the recovery. As containment measures come off, policies should shift swiftly to supporting demand, incentivizing firm hiring, and repairing balance sheets in the private and public sectors to assist the recovery. The fiscal stimulus that’s coordinated across countries with fiscal space will magnify the benefit for all economies. Moratoria on debt repayments and debt restructuring may have to be continued during the recovery phase.
Multilateral cooperation is imperative to the health of the global recovery. To support needed spending in developing countries, bilateral creditors and international financial institutions should provide concessional financing, grants, and debt relief. The activation and establishment of swap lines between major central banks have helped ease shortages in international liquidity and may need to be expanded to more economies. A collaborative effort is required to make sure that the world doesn’t de-globalize, so the recovery isn’t damaged by further losses to productivity.
Commensurate with the size and speed of the crisis, domestic and international policy responses ought to be large, rapidly deployed, and speedily recalibrated as new data becomes available. The courageous actions of doctors and nurses need to be matched by policymakers all over the world to jointly overcome this Great Lockdown Recession.