IMF Says Global Economic Contraction To Be Less Severe Than Previously Feared

The global economy is set to contract less severely than initially feared due to better-than-expected outcomes in the main economies in the second quarter despite the lockdowns to battle the coronavirus pandemic, but the outlook remains clouded with uncertainty, especially for emerging markets, the International Monetary Fund said Tuesday.

In its latest World Economic Outlook, the lender forecast a 4.4 percent contraction for the world economy this year, which is less severe than the 5.2 percent decline seen in June.

“This upgrade owes to somewhat less dire outcomes in the second quarter, as well as signs of a stronger recovery in the third quarter, offset partly by downgrades in some emerging and developing economies,” IMF Chief Economist Gita Gopinath said.

The global economy is expected to rebound with 5.2 percent growth next year, which is less than the 5.4 percent expansion seen earlier.

Economic output is forecast to be below 2019 levels even next year in both advanced economies and emerging markets. However in China, output is expected to exceed last year’s level.

Advanced economies are expected to shrink 5.8 percent this year, which is much less than the June prediction of an 8.1 percent contraction. They are forecast to grow 3.9 percent next year.

Emerging market and developing countries, excluding China, are expected to have a contraction of 5.7 percent versus the 5 percent seen in June. They are expected to grow 5 percent next year.

China is expected to register growth of 1.9 percent this year, which is better than the 1 percent expansion forecast in June. Next year, growth is expected to zoom to 8.2 percent.

India is set to witness the worst contraction this year, shrinking 10.3 percent due to a collapse in consumption and investment. The forecast was sharply revised from a 4.5 percent decline seen in June. The economy is expected to rebound with 8.8 percent growth next year.

The outlook for the U.S. and the euro area for this year was upwardly revised, but the projections for next year were downgraded. The U.S. economy is forecast to shrink 4.3 percent this year and grow 3.1 percent next year.

The Eurozone is expected to contract 8.3 percent and expand 5.2 percent next year.

The U.K. economy is projected to shrink 9.8 percent this year, which is better than the June prediction. However, the outlook for next year was lowered to 5.9 percent.

“There remains tremendous uncertainty around the outlook with both downside and upside risks,” Gopinath said, citing a resurgence in coronavirus infections that is leading to the re-institution of localized lockdowns.

“If this worsens and prospects for treatments and vaccines deteriorate, the toll on economic activity would be severe, and likely amplified by severe financial market turmoil,” she warned.

The IMF also cautioned about the harm that growing restrictions on trade and investment and rising geopolitical uncertainty could cause to the recovery.

Gopinath expressed hope that faster and more widespread availability of tests, treatments, vaccines, and additional policy stimulus can significantly improve outcomes.

She expects the crisis to leave scars well into the medium term as labor markets take time to heal, investment is held back by uncertainty and balance sheet problems, and lost schooling impairs human capital.

Consequently, the IMF expects global growth to cool to about 3.9 percent beyond 2021.

The lender estimates the cumulative loss in output relative to the pre-pandemic projected path to grow from $11 trillion over 2020-21 to $28 trillion over 2020-25, representing a severe setback to the improvement in average living standards across all country groups.

The IMF said there is a lot to be done to ensure a sustained recovery and sought significant innovation on the policy front, at both the national and international levels to recover from the crisis.

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