IMF: New predictions suggest a deeper recession and a slower recovery

The IMF has reduced its growth predictions for the global economy for the second time this year against the backdrop of the Covid-19 pandemic.  In January the IMF expected that global growth would be 3.3%, in April it was revised to -3.0. In late June 2020, these figures were revised down again to -4.9. This global growth rate is expected to result in the worst recession since the Great Depression in 1920s.

The Covid-19 pandemic pushed economies into a Great Lockdown, which helped contain the virus and save lives, but also triggered the worst recession since the Great Depression. Over 75% of countries are now reopening at the same time as the pandemic is intensifying in many emerging market and developing economies. Several countries have started to recover. However, in the absence of a medical solution, the strength of the recovery is highly uncertain and the impact on sectors and countries uneven.
Second, as countries reopen, the pick-up in activity is uneven. On the one hand, pent-up demand is leading to a surge in spending in some sectors like retail, while, on the other hand, contact-intensive services sectors like hospitality, travel, and tourism remain depressed. Countries heavily reliant on such sectors will likely be deeply impacted for a prolonged period.
Third, the labour market has been severely hit and at record speed, and particularly so for lower-income and semi-skilled workers who do not have the option of teleworking. With activity in labour-intensive sectors like tourism and hospitality expected to remain subdued, a full recovery in the labour market may take a while, worsening income inequality and increasing poverty.
On the positive side, the recovery is benefiting from exceptional policy support, particularly in advanced economies, and to a lesser extent in emerging market and developing economies that are more constrained by fiscal space. Global fiscal support now stands at over $10 trillion and monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases. In many countries, these measures have succeeded in supporting livelihoods and prevented large-scale bankruptcies, thus helping to reduce lasting scars and aiding a recovery.
This exceptional support, particularly by major central banks, has also driven a strong recovery in financial conditions despite grim real outcomes. Equity prices have rebounded, credit spreads have narrowed, portfolio flows to emerging market and developing economies have stabilized, and currencies that sharply depreciated have strengthened. By preventing a financial crisis, policy support has helped avert worse real outcomes. At the same time, the disconnect between real and financial markets raises concerns of excessive risk taking and is a significant vulnerability.

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