The International Monetary Fund said the global economy would contract by 3 percent in this year, worse than during the 2008 – 2009 financial crisis - Photo by IMF Office

JAKARTA (TheInsiderStories) – The International Monetary Fund said the global economy would contract by 3 percent in this year, worse than during the 2008 – 2009 financial crisis. The Fund also projected the world economy to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support.

Gita Gopinath, economic counselor and director research department of IMF stated, now the world has changed dramatically since the last update of the World Economic Outlook in January. A rare disaster by the COVID-19 has resulted in a tragically large number of human lives being lost.

She said, to control the pandemic the world has been put in a great lockdown and a lot will depend on the epidemiology of the virus, the effectiveness of containment measures, and the development of therapeutics and vaccines, variables which are very hard to predict.

In addition, many countries face multiple crises, health and financial crises, collapse in commodity prices, especially exporters, and all of these interact in complex ways. The policymakers, she noted, are responding in unprecedented manner by helping households, firms and financial markets, however, there is still considerable uncertainty about what the economic landscape will look like when we emerge from this lockdown.

“Under the assumption that the pandemic required containment peaks in the second quarter in most countries in the world, and then recede in the second half of this year, we are projecting global growth in 2020 to fall to minus 3 percent,” Gopinath told media via a video conference on Tuesday (04/14).

She continued, this is a downgrade of 6.3 percentage points from January 2020, a major revision over a very short period of time. This makes the great lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis.

Assuming the pandemic fades in the second half of 2020, and that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains, we project global growth in 2021 to rebound to 5.8 percent.

“Now this recovery in 2021 is only partial, and the level of economic activity is projected to remain below the level we had projected for 2021 before the virus hit,” adds by Gopinath.

The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around US$9 trillion, greater than the economies of Japan and Germany combined. She noted, “This is a truly global crisis, as no country is spared.”

The economist continued, countries reliant on tourism, travel and entertainment for their growth are experiencing major disruptions and emerging countries will face additional challenges like unprecedented reversals in capital flows, major currency pressures, while at the same time coping with weaker health systems and much lower fiscal space to support their economies.

For the first time since the Great Depression, both advanced economies are in recession, she adds. For 2020, said Gopinath, growth in advanced economies is projected at minus 6 percent, emerging market and developing economies which typically have normal growth levels.

Above, advanced economies are also projected to have negative growth of minus 1 percent, and minus 2.2 percent, exclude China. Income per capita is projected to shrink for over 170 countries.

“We’re projecting recoveries for advanced economies, emerging and developing economies in 2021, but that again is partial. what I have described is baseline scenario but given the extreme uncertainty around the duration and intensity of the health crisis, we also explore alternative more adverse scenarios,” she said.

Gopinath rated, the pandemic may not recede in the second half of this year, leading to longer containment periods, worsening financial conditions, and further breakdowns in global supply chains. In such cases global GDP will fall even further by additional 3 percent in 2020 and if the health crisis rolls over in 2021 it can reduce level of global GDP by an additional 8 percent compared to the baseline.

Moving on to what are the important policy actions that countries need to take, she noted. Firstly, on the health front, flattening the spread of COVID-19 using lockdowns, allows health systems to cope with this crisis, which then permits a resumption of economic activity.

In the sense there is no tradeoff between saving lives, and saving livelihoods, countries should continue to generously support their health systems, perform widespread testing, and refrain from trade restrictions on medical supplies. A global effort must ensure that when therapies and vaccines are developed both rich and poor nations alike have immediate access.

While the economy is in shutdown, policymakers will need to ensure that people are able to meet their basic needs and their businesses can pick up once the acute phases of the pandemic pass, she explained. The large, timely and targeted fiscal, monetary and financial policies already taken by many policymakers have been lifelines to households and businesses.

This support should continue throughout the containment phase to minimize persistent scars that could emerge from subdued investment and job losses during this deep recession. In addition, policymakers must also plan for the recovery, as containment measures come up, policies should shift swiftly to supporting demand, incentivizing from hiring and repairing balance sheets on private and public sectors to aid the recovery.

“Fiscal stimulus that is coordinated across countries that have fiscal space will magnify the benefits for all economies. The moratoria on debt payments and debt restructuring may need to be continued during the recovery phase,” said Gopinath.

According to her, multilateral cooperation is vital 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.

Collaborative effort is needed to ensure that the world does not deglobalize, so that the recovery is not damaged by further losses to productivity. She concluded, “At the International Monetary Fund, we are doing our part. We are actively deploying $1 trillion lending capacity to support vulnerable countries.”

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