‘We Now Encounter A Grim Reality’: IMF Sees Worst Downturn Since Depression In ‘The Great Lockdown’

It’s certainly not unusual for the IMF to cut its forecast for global economic growth. In fact, it’s been a quarterly tradition for quite some time.

But the fund’s latest downgrade is dramatic. The IMF now expects the global economy to contract a whopping 3% in 2020, far worse than anything witnessed during the GFC.

You should note that this projection represents a 6.3% swing from the previous outlook delivered in January, when the fund forecast 3.3% growth this year.

Note that the January projection was hardly rosy. Indeed, 3.3% growth would have represented just a slightly better outcome than 2019, which was the worst year for the global economy since the aftermath of the last crisis.

The fund is calling this the “Great Lockdown”.

“It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago”, chief economist Gita Gopinath writes. “The Great Lockdown, as one might call it, is projected to shrink global growth dramatically”.

Although the fund’s baseline scenario sees growth rebounding sharply in 2021 (to 5.8%, the briskest pace in decades), Gopinath cautions that a “V-shaped” recovery is far from certain.

“A partial recovery is projected for 2021, with above trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound”, she goes on to write, adding that “much worse growth outcomes are possible and maybe even likely”.

She warns that “if the pandemic and containment measures last longer, emerging and developing economies are even more severely hit, tight financial conditions persist, or if widespread scarring effects emerge due to firm closures and extended unemployment”, the malaise could persist beyond 2020.

The IMF echoes recent commentary from analysts and economists across the globe in noting that this crisis really is unique. To wit:

This crisis is like no other. First, the shock is large. The output loss associated with this health emergency and related containment measures likely dwarfs the losses that triggered the global financial crisis. Second, like in a war or a political crisis, there is continued severe uncertainty about the duration and intensity of the shock. Third, under current circumstances there is a very different role for economic policy. In normal crises, policymakers try to encourage economic activity by stimulating aggregate demand as quickly as possible. This time, the crisis is to a large extent the consequence of needed containment measures. This makes stimulating activity more challenging and, at least for the most affected sectors, undesirable.

The fund’s projections vary across countries, but they have one thing in common: They are all very, very bad.

Japan escapes with “just” a 5.2% contraction this year. That’s what counts as a benign outcome. Here are the forecasts for advanced economies:

This comes on a day when markets are also ogling at a new projection from Goldman, which now sees advanced economies contracting some 35% in the second quarter from the prior three months. That’s four times the size of the record annualized contraction seen during the GFC.

Jan Hatzius admits that forecasting an end to the downturn is an exercise in futility. He doesn’t put it that way, of course, but that’s the gist of it.

The problem is that the flattening of virus curves is contingent on social distancing and lockdown protocols, and absent sufficient herd immunity, lifting those protocols and restarting economic activity could very well mean the virus begins to spread anew forcing yet another lockdown. (Welcome to Donald Trump’s nightmares.)

Last week, the WTO said one-third of global trade could be lost to the COVID-19 epidemic in a worst-case.

“A pandemic scenario had been raised as a possibility in previous economic policy discussions, but none of us had a meaningful sense of what it would look like on the ground and what it would mean for the economy”, the IMF’s Gopinath said Tuesday.

“We now encounter a grim reality, where exponential growth of contagion means 100 infected individuals become 10,000 in a matter of a few days”, she added.