IMF: We Expect Deeper Recession in 2020 - Latest Assessment in June

According to the latest forecast released by the International Monetary Fund (IMF) on the 24th, the global GDP in 2020 is not optimistic, with a worse contraction of -4.9% compared to the April forecast of -3%. Furthermore, the recovery forecast for 2021 has also been revised down from +5.8% to +5.4%. However, China is the only country showing a positive value in the IMF's estimates for this year: +1%. On the evening of the 24th, the US stock indices all showed a decline of over 2%. Bitcoin, which has a slight positive correlation with the S&P 500, dropped from the 9500 level to the 9200 level.

Here is the full text of the IMF article:

The COVID-19 pandemic has plunged economies into a "Great Lockdown." Lockdown measures have helped control the spread of the virus, saving lives, but they have also triggered the worst economic downturn since the Great Depression. As the pandemic worsens in many emerging markets and developing countries, more than 75% of countries are now reopening. Some countries have started to recover. However, the strength of the recovery is highly uncertain and varies greatly across sectors and countries in the absence of a medical solution.

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Compared to the April 2020 World Economic Outlook forecast, we now expect a deeper contraction in 2020 and a slower recovery process in 2021. Global output in 2020 is projected to shrink by 4.9%, which is 1.9 percentage points lower than our April forecast, followed by a partial recovery with a growth rate of 5.4% in 2021.

These projections imply that the crisis will lead to a cumulative loss of over $12 trillion to the global economy over two years (2020-2021).

The downward revision in growth forecasts compared to April reflects several factors: weaker-than-expected economic outcomes in the first half of the year, the expectation that social distancing practices will continue into the second half of the year, and the disruption of supply potential.

High Uncertainty

This forecast carries a high degree of uncertainty, with economic prospects facing both upside and downside risks simultaneously. On the upside, if vaccines and treatments bring better news and policy support is further enhanced, economic activity could recover more quickly. On the downside, if a new wave of infections emerges, trends of increased mobility and spending may reverse, financial conditions could quickly tighten, leading to debt pressures. At a time when global trade is expected to decline by about 12%, geopolitical and trade tensions could disrupt fragile global relationships.

An Unusual Recovery

Following this unprecedented crisis, an unusual recovery is expected.

First, this unprecedented global crisis hinders the recovery prospects of export-dependent economies and jeopardizes the income convergence between developing and advanced economies. We expect a synchronized deep recession in the global economy in 2020, with advanced economies contracting by 8%, emerging markets and developing economies contracting by 3% (5% if China is excluded), and over 95% of countries experiencing negative per capita income growth in 2020. The cumulative impact on GDP growth for emerging markets and developing economies (excluding China) from 2020 to 2021 is expected to exceed that of advanced economies.

Second, as countries reopen, the recovery of economic activity is uneven. Suppressed demand leads to a surge in spending in some sectors (such as retail), while contact-intensive services (such as hotels, travel, and tourism) remain subdued. Countries highly reliant on these sectors are likely to be severely affected for a longer period.

Third, the pandemic has severely impacted the labor market at an unprecedented speed, especially for low-income, semi-skilled workers who cannot work remotely. Activities in labor-intensive sectors (such as tourism and hospitality) are expected to remain weak, which means the labor market may take a longer time to fully recover, exacerbating income inequality and increasing poverty.

Unconventional Policy Support Has Been Effective

From a positive perspective, economic recovery has benefited from unconventional policy support, especially in advanced economies. In emerging markets and developing countries with more significant fiscal space constraints, the impact of this policy support is smaller. The global fiscal support currently exceeds $10 trillion, with measures such as rate cuts, liquidity injections, and asset purchases significantly easing monetary policy. In many countries, these measures have effectively supported livelihoods, prevented widespread bankruptcies, reduced lasting economic scars, and promoted recovery.

Despite poor performance in the real economy, this unconventional support (especially unconventional support provided by central banks) has driven a strong recovery in financial conditions. Stock prices have rebounded, credit spreads have narrowed, securities investments flowing to emerging markets and developing economies have stabilized, and currencies that had depreciated significantly have rebounded. By preventing a financial crisis, policy support has helped the real economy avoid worse outcomes. However, the disconnect between the real economy and financial markets has raised concerns about excessive risk-taking and posed significant vulnerabilities.

We Are Not Out of the Crisis Yet

Given the considerable uncertainty, policymakers should remain vigilant and be prepared to adjust policies as the situation evolves. Continued substantial joint support through fiscal and monetary policies is needed, especially in countries where inflation is expected to remain low. Countries should ensure proper fiscal accounting and transparency, and safeguard the independence of monetary policy.

A priority is managing health risks during the economic reopening process. This requires continued efforts to enhance healthcare capacity, conduct widespread testing, tracing, isolation, and maintain safe distancing (as well as mask-wearing). These measures help control virus spread, instill public confidence in orderly responses to new outbreaks, and minimize economic disruptions. The international community must further expand funding and technical support for countries with limited healthcare capacity. More measures are needed to ensure sufficient and affordable production and distribution once vaccines and treatments are available.

In countries where economic activities are severely restricted due to health crises, income support should be provided to affected groups through unemployment insurance, wage subsidies, and cash transfers; support should be extended to affected businesses through deferred taxes, loans, credit guarantees, and grants. In countries with a large informal sector, enhancing digital payment methods is necessary to support the unemployed more effectively, while physical support in the form of food, medicine, and other essential items should be provided by local governments and community organizations.

In countries that have begun reopening and are experiencing economic recovery, policy support needs to gradually shift towards encouraging reemployment and facilitating the reallocation of labor from shrinking sectors to growing sectors. Measures can include increasing spending on worker training and providing recruitment subsidies for workers more likely to face long-term unemployment. To support economic recovery, actions to repair balance sheets and address debt overhang issues are necessary. Strong bankruptcy frameworks and mechanisms to restructure and dispose of distressed debt are needed for this purpose.

Policy support should gradually transition from targeted to comprehensive support. Where fiscal space allows, countries should engage in green public investments to accelerate economic recovery and support long-term climate goals. To protect the most vulnerable groups, social safety net spending needs to be expanded for some time.

The international community should provide concessional financing, debt relief, and grants to ensure that developing economies have funding for critical expenditures; in addition, ensuring financial market stability, establishing central bank swap arrangements, and deploying a global financial safety net are essential to ensure international liquidity for emerging markets and developing economies.

This crisis will pose medium-term challenges. Public debt-to-GDP ratios are expected to reach record highs this year in both advanced economies and emerging markets and developing economies. Countries need to cut wasteful spending, broaden their tax bases, minimize tax evasion, and some nations may need to increase the progressivity of their tax systems to establish robust fiscal frameworks for medium-term fiscal consolidation.

At the same time, this crisis also presents an opportunity to invest in new green and digital technologies, expand social safety nets, and accelerate the transition to more productive, sustainable, and equitable growth.

This is a truly global crisis, and global cooperation is crucial. Efforts should be made to resolve trade and technology tensions, as well as improve rule-based multilateral trading systems. The International Monetary Fund will continue to ensure adequate international liquidity, provide emergency financing, support the G20 Debt Service Suspension Initiative, and offer advice and assistance to countries during this unprecedented crisis.

Gita Gopinath is the Economic Counsellor and Director of the Research Department at the International Monetary Fund. Prior to joining public service, she was the John Zwaanstra Professor of International Studies and Economics at Harvard University.

Ms. Gopinath's research focuses on international finance and macroeconomics and has been published in numerous top economics journals. She has written extensively on exchange rates, trade and investment, international financial crises, monetary policy, debt, and emerging market crises.

She is a co-editor of the current Handbook of International Economics and has previously served as co-editor of the American Economic Review and editor of the Review of Economic Studies. She has also been Co-Director of the International Finance and Macroeconomics Program at the National Bureau of Economic Research, a visiting scholar at the Federal Reserve Bank of Boston, and a member of the Economic Advisory Panel of the Federal Reserve Bank of New York. From 2016 to 2018, she served as the Chief Economic Advisor to the Chief Minister of Kerala. She has also been a member of the Eminent Persons Advisory Group on G-20 Matters for India's Ministry of Finance.

Ms. Gopinath has been elected a Fellow of the American Academy of Arts and Sciences and the Econometric Society, and received the Distinguished Alumnus Award from the University of Washington. In 2019, she was named one of Foreign Policy magazine's Global Thinkers; in 2014, she was named one of the 25 economists under 45 shaping the way we think about the global economy by the International Monetary Fund; in 2011, she was chosen as a Young Global Leader by the World Economic Forum. The Indian government honored her with the Pravasi Bharatiya Samman, the highest honor conferred on overseas Indians. Before joining Harvard University in 2005, she was an assistant professor of economics at the University of Chicago's Booth School of Business.

Ms. Gopinath was born in India and is a U.S. citizen and an Overseas Citizen of India. She received her Ph.D. in economics from Princeton University in 2001. Prior to that, she earned a Bachelor's degree in economics from Delhi University and master's degrees from the Delhi School of Economics and the University of Washington.

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