IMF Lowers the 2020 World’s GDP Estimate

The IMF June 2020 World Economic Outlook (WEO) released this week reveals a new, more realistic forecast of the world’s economic growth. Affected by the COVID-19 pandemic, the world’s economy is expected to go down in 2020 and recover in 2021. 

The IMF’s new economic outlook lowered the estimate for 2020 to -4.9% from the previous -3% published in April – a reminder that the crisis is much deeper than many assume.

Sluggish and Uneven Recovery Ahead

Moreover, the IMF considers a sluggish and uneven economic recovery ahead, with a rise in unemployment when public wave payments end. Also, non-performing loans are expected to rise too, creating problems for the banking sector next year.

While noticing that the pandemic has leveled off in some countries, but worsened in others, the IMF paper reveals a synchronized, deep downturn. An interesting point made by the IMF is that this recession is different from other recessions, reflecting the complexity of the problem. A comparison is given in relation to consumer spending habits.

In a normal, economic recession, consumer habits do not change dramatically, as consumers dig into savings and also rely on social safety nets. As a result, consumption is affected much less than investment.

This time is different. Both consumption and services output dropped significantly.

The labor market took a serious hit and is expected to have a gradual recovery – different from country to country. The International Labor Organization points out that the global decline in work hours in the first quarter of 2020 was the equivalent of the loss of 130 million full-time jobs. It shows the extent of the economic crisis, as output falls in line with weaker demand.

As a result, weaker inflation is expected in most of the world. Downward price pressures threaten deflation in the developed world and acute disinflation in emerging and frontier markets.

For the first time since the IMF delivers its forecast, all regions are projected to experience negative growth in 2020. Here are some of IMF projections for 2020 and 2021 economic growth in different countries around the world:

  • United States
    • 2020 – 8%
    • 2020 +4.5%
  • Euro area
    • 2020 –10.2%
    • 2021 +6%
  • Russia
    • 2020 -6.6%
    • 2021 +4.1%
  • South Africa
    • 2020 -8%
    • 2021 +3.5%
  • Japan
    • 2020 -5.8%
    • 2021 +2.4%

The new outlook, grimmer than the previous one, does not consider a second wave of infections in Q2 2020. With some countries already experiencing an increase in the infection rate after economies reopened, the likelihood is that the IMF outlook for global economic growth will be revised lower in the period ahead.

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