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IMF sees shallower recession, tough path back to full recovery

Washington

THE International Monetary Fund warned that the world economy still faces an uneven recovery until the coronavirus is tamed even as it offered a less dire view of this year's recession following massive stimulus from central banks and governments.

The fund now forecasts world gross domestic product to shrink 4.4 per cent this year, compared with the 5.2 per cent drop seen in June, according to the latest World Economic Outlook released on Tuesday.

For 2021, the IMF sees growth of 5.2per cent, down from 5.4 per cent. The report includes revisions to June's forecasts and other historical data to reflect updated country weightings.

The contraction would still be the deepest since the Great Depression, with Covid-19 having killed more than one million people and shut down large swathes of business. The report sets the tone for this week's annual meetings of the IMF and World Bank - being held virtually, like April's spring meetings, due to the pandemic - as global policy makers discuss how to avert a wave of debt defaults in poorer nations resulting from the virus's impact.

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"Recovery is not assured while the pandemic continues to spread," chief economist Gita Gopinath wrote in the report. "Economies everywhere face difficult paths back to pre-pandemic activity levels."

The impact of the downturn has been cushioned by policy initiatives, including a European pandemic-recovery package, and large-scale central bank asset purchases, the fund said. Such unprecedented support helped ease financial conditions since June in advanced economies and in most emerging and developing economies, the fund said.

Policy makers must avoid prematurely withdrawing support in order to avoid setbacks, Ms Gopinath said. The forecasts assume monetary policy is maintained at current settings through 2025, helping to alleviate debt service burdens for many countries. Governments globally have implemented US$6 trillion in direct tax and spending measures, according to the IMF.

The fund's forecast is based on the expectation that social distancing will continue into next year but gradually fade over time as vaccine coverage expands. It also is premised upon local transmission of the virus being brought to low levels everywhere by the end of 2022.

The upward revision in the IMF's 2020 growth forecast reflects in particular better-than-projected second-quarter growth in the US and the euro area, a stronger-than-anticipated return to growth in China and signs of a more rapid recovery in the third quarter.

The US economy is projected to contract 4.3 per cent this year, compared with a previous 8 per cent estimate, the most-improved forecast among major economies. That doesn't factor in potential additional fiscal stimulus, though, as President Donald Trump and Democrats continue to wrangle over measures. Growth is pegged at 3.1 per cent in 2021, down from a prior forecast of 4.5 per cent.

The euro area is estimated to shrink 8.3 per cent this year, compared with the previous 10.2 per cent projection, before expanding 5.2 per cent in 2021, down from 6 per cent. Advanced economies overall are seen declining 5.8 per cent in 2020, compared with 8.1 per cent previously.

By contrast, the outlook for emerging markets, some with rising infections, has worsened slightly, with a 3.3 per cent contraction anticipated for this year, compared with 3.1 per cent previously.

China remains the lone major economy estimated to expand, with 1.9 per cent projected growth this year and an 8.2 per cent boom in 2021.

India saw the steepest forecast reduction, with a 10.3 per cent contraction seen for this year, compared with just 4.5 per cent previously, after a larger-than expected second-quarter contraction. BLOOMBERG

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