IMF Upgrades Global Growth Forecast But Still Sees Deep Recession

The International Monetary Fund (IMF) has upgraded its global growth forecast for 2020 from a forecast it released in June, but it still projects a deep recession and warned that it is “essential that fiscal and monetary policy support are not prematurely withdrawn.”

In its October World Economic Outlook, the IMF projects global growth to decline 4.4% this year, compared with a contraction of 4.9% that it forecast in its June outlook. The IMF said the upgrade reflects better-than-anticipated gross domestic product (GDP) outturns during the second quarter, mostly in developed economies where activity improved quicker than expected as coronavirus lockdowns were lifted in May and June. It also attributes the revision to indicators of a stronger recovery in the third quarter.

“With the COVID-19 pandemic continuing to spread, many countries have slowed reopening and some are reinstating partial lockdowns to protect susceptible populations,” the report said. “While recovery in China has been faster than expected, the global economy’s long ascent back to pre-pandemic levels of activity remains prone to setbacks.”

The IMF also projects 2021 global growth at 5.2%. That projection is lower than the 5.4% it forecast in June, but it said the update reflects a more moderate downturn projected for 2020 and is consistent with expectations of persistent social distancing. It also said the level of global GDP in 2021 is expected to be only 0.6% above that of 2019.

“The growth projections imply wide negative output gaps and elevated unemployment rates this year and in 2021 across both advanced and emerging market economies,” said the report.

After the rebound in 2021, the IMF expects global growth to gradually slow to about 3.5% in the medium term. It said this implies only limited progress in catching up to economic activity for 2020–2025 that was projected before the pandemic for both developed and emerging market economies.

“It is also a severe setback to the projected improvement in average living standards across all country groups,” the report said. “The pandemic will reverse the progress made since the 1990s in reducing global poverty and will increase inequality.”

The IMF said workers who rely on daily wage labor and are outside the formal safety net faced sudden income losses, and that close to 90 million people could fall below the $1.90 a day income threshold of extreme deprivation this year.

The baseline projection for the outlook assumes that social distancing will continue into 2021, but will fade over time as vaccine coverage expands and therapies improve. The report said local transmission is assumed to be brought to low levels everywhere by the end of 2022, and that medium-term projections also assume that economies will experience “scarring from the depth of the recession” and the need for structural change.

However, the IMF also said the uncertainty surrounding the baseline projection is “unusually large.” It said the forecast relies on public health and economic factors that are inherently difficult to predict.

“If the virus resurges, progress on treatments and vaccines is slower than anticipated, or countries’ access to them remains unequal, economic activity could be lower than expected,” the IMF warned.

At the IMF’s press briefing to introduce the October outlook, Gita Gopinath, the IMF’s chief economist, said greater international collaboration is needed to end the health crisis.

“Tremendous progress is being made in developing tests, treatments, and vaccines,” Gopinath said, “but only if countries work closely together will there be enough production and widespread distribution to every part of the world to end this pandemic.”

She also said the IMF estimates that if medical solutions can be made available faster and more widely relative to the current baseline, it could lead to a cumulative increase in global income of almost $9 trillion by the end of 2025.

“Policies must focus aggressively on limiting persistent economic damage from this crisis,” Gopinath said. “Governments should continue to provide income support to households and work to preventing rising bankruptcies and job destruction through supporting vulnerable but viable firms.”