The International Monetary Fund (IMF) released its latest forecasts for the global economy this week. The institution’s estimate was more optimistic than before, although the focus was on the recovery of rather heterogeneous economies.
The IMF now predicts that the global economy will shrink by 4.4% this year, which is less than the previously forecasted 5.2%. For the next year, the IMF expects the world to grow by 5.2%, compared to 5.4% in the previous forecast.
It must be concluded that, at least for the time being, the basic assumption that this year’s economic planning will be replaced by a rather rapid recovery has not changed. Basically, the forecast has been revised upwards, as China has returned to the path of growth faster, according to available information. It has also been better, at least so far, for the United States and Europe.
The US economy is expected to shrink by 4.3% this year. Earlier, the IMF estimated that they will be a healthy 8%. In turn, next year this growth may be 3.1%. Eurozone GDP is expected to fall by 8.3% this year, up from a previous forecast of 10.2%.
China, whose economy could even grow this year – by almost 2% and next year – by 8.2%, could do much better. India’s growth forecasts have been cut quite sharply – its economy could collapse by more than 10% this year, according to the IMF (the previous forecast was -4.5%).
In general, it must be said that some kind of forecasting is already able to earn quite a lot of (and reasonable) skepticism even in relatively “normal” times. At the moment, this could probably be compared in part to shooting in the dark.
This whole saga will be followed by a significant increase in debt. For developed economies, it will rise by 20 percentage points and reach 125% of their GDP next year.
The standard of living in much of the world has been hit hard, with the number of cases of extreme poverty rising for the first time in two decades. Most of the world’s economies, even in the face of lasting damage to their supply potential and scars from this deep recession, say IMF officials and warn that whole sectors may not be viable in the medium term.
The decline in travel and bankruptcies would also lead to “significant output losses” even after the pandemic subsided. “Countries in a particularly difficult place” will be countries that depend on tourism and raw material sales. “It will be slow. Therefore, we describe it as a long, uneven and vague rise. Low-skilled workers, young people and women are doing worse in the labor market. That’s why we see growing inequality as the poor become even poorer. ” Bloomberg stated by the IMF’s chief economist.
She also added that countries should not stop stimulating. It is the actions of governments and central banks that have so far been responsible for the downturn in softer economies. Namely, in the short term, countries that can access finance should borrow as much as necessary to protect their citizens from the health crisis and limit the scale of economic challenges, the IMF stressed.
According to the IMF, governments around the world have implemented $ 6 trillion in economic assistance (in terms of tax changes and additional own spending). The authority also outlined that it is very likely that taxes on the rich and businesses as such will have to be raised in order to make up for the economic damage. Namely, while it will be difficult to adopt new government revenue measures during a crisis, they may also have to consider progressive tax increases for the wealthy and those relatively less affected by the crisis. Property taxes, capital gains and other wealth may also be subject to additional taxes.
The IMF also highlights that the Covid-19 pandemic could be a major test for the global financial system. Some new virus outbreaks, policy mistakes and other shocks may interact with past “weaknesses”, which in turn could pose additional risks to the economy as a whole. For example, existential problems can affect companies that are heavily indebted and depend on low interest rates. Smaller companies, which have difficulty accessing much cheaper capital or the capital market as such, can also have particularly dangerous times. The IMF does not rule out that a significant increase in the number of bankruptcies could lead to even tighter lending conditions, which will be a headwind in the sails of economic recovery. Moreover, this situation may be particularly acute in Europe, where small and medium-sized enterprises have a high proportion and are responsible for two thirds of jobs.
In any case, at least one other interesting aspect can be highlighted in everything that is happening. The fact that the same China, which was the focal point of the pandemic and has engaged in a rather sharp confrontation with the West, may be in a much stronger position after this crisis. According to IMF estimates, global GDP is projected to be 0.6% higher at the end of next year than at the end of 2019. However, China will be responsible for much of this increase.
Also, for example, Financial Times reports that the pandemic highlights the divergence between Western and Asian countries: while the uncertainty in Europe is enormous, much of Asia has returned much less to its usual path (there are no such threats to the internal market). Of course, even in the case of Asia, it is not clear where the demand for sustaining the global recovery in 2021 and beyond will come from. Asia is largely dependent on the same Western demand.
–
