IMF warns of lasting damage, long climb out of recession

Published October 14, 2020, 4:15 PM

by Agence France-Presse

 WASHINGTON, Oct  13, 2020 (AFP) – The global economic crisis will not  be quite as grim as feared this year, but GDP will still contract 4.4 percent  and the damage inflicted by the pandemic will be felt for years, the IMF said  Tuesday.

                   Massive injections of government aid kept economies from plunging further  in 2020, but the continued presence of Covid-19 means the outlook is highly  uncertain, the IMF said in its latest World Economic Outlook.

Gita Gopinath, the Chief Economist of the International Monetary Fund, speaks with AFP outside of their headquarters in Washington, DC on October 13, 2020. – A US stimulus package in the order of the $2.2 trillion CARES act approved in March would increase growth by two percentage points next year, the IMF’s chief economist told AFP on October 13, 2020. (Photo by ANDREW CABALLERO-REYNOLDS / AFP)

                   The recession was less severe but still deep and “the ascent out of this  calamity is likely to be long, uneven, and highly uncertain,” IMF chief  economist Gita Gopinath said in the report released ahead of the annual  meetings of the IMF and World Bank.

                   The result “would have been much weaker if it weren’t for sizable, swift  and unprecedented” response from governments and central banks, amounting to  $12 trillion, she said, again warning of the dangers of removing support too  quickly.

                   The IMF upgraded the global GDP forecast for this year by 0.8 percentage  points, but trimmed the 2021 growth outlook to 5.2 percent.

                   The upgraded outlook compared to the dire forecast in June reflects the  fact the downturn in the second quarter “was awful but it was the less awful  than we expected,” Gopinath said in an interview with AFP.

                   In the United States, the growth estimate saw a major upgrade after $3  trillion in stimulus spending was deployed in the early weeks of the pandemic.

The economy is now expected to decline 4.3 percent this year, and post growth  of 3.9 percent in 2021.

                   China, where the virus originated, has recovered faster and will see growth  of 1.9 percent this year, accelerating to 8.2 percent next year, according to  the report.

                   However, Gopinath said that if China is excluded, global growth next year would be negative.

                   While most countries will see their economies return to pre-pandemic levels

by 2022, some, like those in Latin America, will not see a recovery until 2023,  she told reporters.

                   Countries like India, Spain and Italy will suffer double digit economic  declines in 2020, while Britain just misses that threshold with a 9.8 percent  contraction, the IMF said.

 Continued aid critical

                   Gopinath again hammered home the IMF’s message that governments must  continue to provide support given the depth of the damage from the virus, which  caused massive unemployment as well as more than a million deaths.

                   She told AFP that another US stimulus package on the order of the $2.2  trillion CARES Act approved in March would increase growth in the world’s  biggest economy by two percentage points next year, over the 3.1 percent GDP  rise currently forecast.

                   And that could have “significant benefits for the world” as well.

                   Gopinath said defeating the virus remains critical “But if we can end the  health crisis sooner, and we can continue to provide income support to  households, and we can prevent excessive bankruptcies and job destruction, then  we can have a somewhat faster recovery.”

                   In addition, poor countries will need concessional financing as well as

debt relief.

 Economic scars

                   Even once the immediate crisis has passed, the IMF warned that “most  economies will experience lasting damage to supply potential, reflecting scars  from the deep recession this year.”

                   Global growth is expected to slow to 3.5 percent in the medium term, a  stunning $28 trillion in lost output in the five-year period through 2025  compared to the pre-pandemic expectations, according to the report.

                   The World Bank said up to 150 million more people may be pushed into  extreme poverty by 2021, the first time it has worsened in more than two  decades, while the IMF warns the crisis will exacerbate inequality, especially  for women.

                   However the global banking system is considered “stable,” Tobias Adrian,  director of the IMF’s monetary and capital markets department told reporters.

                   But its stability varies by region, with emerging markets home to more  institutions that could face capital challenges should the downturn intensify,  and European banks generally more vulnerable than North American ones, he said.

                   The IMF called on governments to rethink their spending priorities and  direct funding to projects that will boost productivity, including green energy  investments and education.

                   And with debt on the rise, policymakers may need to increase taxes on the  highest earners, cut out loopholes and deductions, “and ensure that  corporations pay their fair share of taxes while eliminating wasteful spending.”

                   “This is the worst crisis since the Great Depression, and it will take  significant innovation on the policy front, at both the national and  international levels, to recover from this calamity,” Gopinath said.

 
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