‘V’ Is For ‘V-Shaped’: IMF Assumes China Will Be ‘Back To Normal’ In Q2

To be sure, the IMF has a habit of slashing its outlook for global growth.

The fund did so no fewer than a half-dozen times last year in the course of trying to quantify the ultimate impact of trade frictions (among other headwinds) on the global economy. Ultimately, growth was 2.9%, the lowest since the crisis.

In the January update, the IMF said growth would rebound in 2020 to 3.3%. That was on the 20th of last month, right around the time the market started to get nervous about the virus.

Fast forward a month, and Kristalina Georgieva – who’s in Riyadh for the G20 finance ministers meeting – cut the outlook for this year, citing the virus.

“In January, we projected global growth to strengthen from 2.9% last year to 3.3% this year. Since then, COVID-19 – a global health emergency – has disrupted activity in China”, she remarked. After extending her “deepest sympathies” to the Chinese people (and anyone else affected), she unveiled a new baseline:

In our current baseline scenario, announced policies are implemented and China’s economy would return to normal in the second quarter. As a result, the impact on the world economy would be relatively minor and short-lived. In this scenario, 2020 growth for China would be 5.6%. This is 0.4 percentage points lower than the January WEO Update. Global growth would be about 0.1 percentage points lower.

To be clear, that 5.6% figure for China is optimistic by almost anyone else’s estimates. Additionally, I would note the obvious, which is that suggesting things will “return to normal” in the Chinese economy by Q2 might very fairly be described as “wishful thinking”.

A recurring theme over the past two weeks has been a kind of tacit unwillingness from many observers to admit we’re already more than halfway through Q1. Q2 is just six weeks away. It’s not as if all of this commentary is coming out a week into January.

In any event, the point is simply that the IMF is already slashing this year’s growth estimates and the preliminary assessment of the impact from the virus seems optimistic.

Georgieva goes on to say that she talked with PBoC boss Yi Gang and “assured” him of the IMFs support for the “crisis measures, liquidity provision, fiscal measures, and financial support” Beijing intends to roll out in a bid to combat the economic fallout.

Presumably, that means the IMF will look through any currency weakness that happens to accompany relief measures when it comes to assessing whether Beijing is improperly “manipulating” the yuan, which hit the weakest since December this week (bottom pane).

Georgieva did admit that things could get far worse.

“We are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequences are more protracted”, she said, adding that if that turns out to be the case, the IMF can use the Catastrophe Containment and Relief Trust to “provide grants for debt relief to poor and vulnerable members”.

So, at least we’ve got that going for us.

If you ask French Finance Minister Bruno Le Maire, the odds of a sharp inflection for the better are still good.

“The world economy is facing a clear slowdown and this slowdown might be reinforced by the so-called coronavirus”, he said from Riyadh. “The question remains open whether it will be a V-shape with a quick recovery of the world economy, or whether it would lead to an L-shape with a persistent slowdown in world growth”. V-shaped is more likely, he reckons.