To be sure, it’s no surprise that the IMF slashed its outlook for global growth on Wednesday.
The downgrade was a foregone conclusion as the world comes to grips with the impact of the pandemic. And even if it weren’t for the virus, cuts to the fund’s forecast have been a quarterly tradition for quite some time.
The new projections show the global economy contracting 4.9% in 2020, down sharply from the 3% seen in the April update. In addition, the rebound is expected to be less robust, with growth running at 5.4% in 2021, down from 5.8%.
“The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast”, the fund says, adding that if the projections pan out, 2021 GDP would be “some 6½ percentage points lower than in the pre-COVID-19 projections [from] January”.
The fund calls this “a crisis like no other”. Estimates for advanced economies were slashed across the board, with only Japan escaping relatively unscathed.
China is still seen eking out growth this year, albeit a meager 1%. If you had projected a pace that sluggish for the world’s second-largest economy five months ago, you’d have been laughed out of the room.
Brazil and Mexico are both seen in huge contractions of 9.1% and 10.5%, respectively. Brazil is coping with a public health crisis of epic (and tragic) proportions, blamed largely on Jair Bolsonaro’s bungled response to the virus.
The IMF warns of “scarring” and potential structural damage. To wit:
In economies with declining infection rates, the slower recovery path in the updated forecast reflects persistent social distancing into the second half of 2020; greater scarring (damage to supply potential) from the larger-than-anticipated hit to activity during the lockdown in the first and second quarters of 2020; and a hit to productivity as surviving businesses ramp up necessary workplace safety and hygiene practices. For economies struggling to control infection rates, a lengthier lockdown will inflict an additional toll on activity.
It’s not clear where that leaves the US, which is seeing rising infections even as the Trump administration insists the nation (the global epicenter) is somehow out of the woods when it comes to COVID-19.
The IMF’s new outlook also warns that the assumptions baked into the figures shown above depend on the persistence of loose financial conditions. The fund notes that risk assets may be out of touch with economic reality:
Moreover, the forecast assumes that financial conditions—which have eased following the release of the April 2020 WEO—will remain broadly at current levels. Alternative outcomes to those in the baseline are clearly possible, and not just because of how the pandemic is evolving. The extent of the recent rebound in financial market sentiment appears disconnected from shifts in underlying economic prospects raising the possibility that financial conditions may tighten more than assumed in the baseline.
Of course, those two risks (i.e., the evolution of the virus and the prospective tightening of financial conditions in the event asset prices converge to “reality”) are inextricably bound up with one another.
The rate of infection and hospitalizations across key US states is disconcerting, and although markets have generally shrugged that off over the past two weeks, the fact that tech and growth shares stateside have led the market higher are indicative of investor sentiment shifting back in favor of “stay-at-home trades“, which also benefit from the flood of Fed liquidity.
The final paragraph of the IMF’s executive summary reads like an explicit rebuke of the Trump administration’s entire global agenda. To wit:
Strong multilateral cooperation remains essential on multiple fronts. Liquidity assistance is urgently needed for countries confronting health crises and external funding shortfalls, including through debt relief and financing through the global financial safety net. Beyond the pandemic, policymakers must cooperate to resolve trade and technology tensions that endanger an eventual recovery from the COVID-19 crisis. Furthermore, building on the record drop in greenhouse gas emissions during the pandemic, policymakers should both implement their climate change mitigation commitments and work together to scale up equitably designed carbon taxation or equivalent schemes. The global community must act now to avoid a repeat of this catastrophe by building global stockpiles of essential supplies and protective equipment, funding research and supporting public health systems, and putting in place effective modalities for delivering relief to the neediest.
If you’re wondering what the downside looks like, the IMF also presents a scenario analysis that includes a second outbreak of the virus in 2021. Here’s what happens then, according to the fund:
In the event of a second outbreak, the resulting containment measures lead to a decrease in world output of about 4.9 percent in 2021, relative to the baseline. As in the scenarios presented in the April 2020 WEO, the decrease in activity is broadly similar for advanced and emerging market economies in the short term (2021): on one hand, advanced economies have a relatively larger share of services and are thus more directly exposed to social-distancing measures; on the other hand, tighter financial conditions and more limited fiscal responses in emerging markets amplify the impact in those economies. The hit to activity in 2021 is only partially corrected in 2022, with global output still 3.3 percent below the baseline, partly due to the additional supply-side scarring.
Obviously, this is all just guesswork. The takeaway (in case this is news to anyone) is that no matter how robust the recovery turns out to be in the third and fourth quarters, 2020 is a historic year — and in this situation “historic” is not a good thing.
One final chart I’d highlight from the new outlook (you can read to your heart’s content below) shows the expected expansion of government debt and deficits during the COVID panic versus the financial crisis.
As you can see, there really is no comparison.