In January, the IMF forecast the global economy to expand at the ‘sluggish’ pace of 3.3% in 2020. But less than three months later, amid COVID-19 containment measures, the IMF now forecast the global economy to contract by 3% this year. This would mark the first decline since 2009 and the deepest since the Great Depression. China and India are expected to grow by less than 2%, and the ASEAN region to contract. Indeed, income per capita is projected to shrink for over 170 countries. Early indications of the severity of the economic fallout are palpable: for instance, 22 million were made jobless in the US within 4 weeks of lockdown restrictions (1.6 times the total Australian labour force).
In the IMF’s upside scenario, assuming the pandemic fades in the second half of 2020, and unprecedented policy support prevents widespread bankruptcies, job losses and system-wide financial strains, the world economy is expected to rebound by 5.8% in 2021. Similarly, world trade volumes are forecast to rebound by over 8% in 2021 after falling 11% in 2020. Still, compared to the pre-COVID-19 forecast, US$9 trillion of output will be lost this year and next, greater than the economies of Japan and Germany, combined.
And all the risks are to the downside. If this were a garden-variety financial crisis, the unprecedented injection of stimulus from governments and central banks would no doubt prove effective in boosting demand and activity. But this episode differs to others in that the shock is to supply as well as demand. Economies and financial markets will not recover until the pandemic is contained and social distancing measures relaxed. But little is known about the epidemiology of the virus or the development of therapeutics and vaccines. As such, economic forecasts are laden with uncertainty. In the worst-case scenario, the IMF sees the pandemic continue into 2021, leading to longer containment durations, worsening financial conditions, and further breakdowns of global supply chains that sees global GDP fall next year by an additional 8% compared to the baseline. Such a downturn would likely see lingering structural damage to businesses, causing indeterminate social and political reverberations.
