The great escape from the great lockdown

30 June 2020

Few could have anticipated the spread and impact of the novel coronavirus outbreak at the start of the year, as a result of which the global economy is expected to see its worst recession since the Great Depression. Letters of the alphabet or symbols such as a tick or ‘swoosh’ are often used as a means of classifying the shape of the recovery, although a question mark might be more appropriate. In the International Monetary Fund’s latest update of global growth projections1, the first half contraction is now expected to be worse than initially forecast, followed by a more gradual recovery. In this Macro Flash Note, Gabrielle Steele summarises the IMF's latest thoughts on global growth.

In the IMF’s World Economic Outlook June update, global growth is forecast to contract by 4.9% in 2020, 1.9 percentage points lower than the April forecast. All countries faced downgrades to their outlook for this year. For 2021, global output is forecast to grow by 5.4%, 0.4% lower than in April forecast. The IMF noted that there is a higher-than-usual degree of uncertainty around the forecasts, with both upside and downside risks. For comparison, the World Bank and OECD are expecting contractions of 5.2% and 6% respectively in 2020.

Table 1. The IMF’s latest World Economic Outlook projections (% change)

Source: IMF as at 24.06.2020.

Downgrades across the board

Since April, economic data releases have pointed to deeper recessions than the IMF had previously expected, causing them to downwardly revise their forecasts. First quarter GDP estimates have been worse than feared, although some notable exceptions include China, Australia, Germany and Japan. With many countries only just beginning their lockdown periods at the end of the first quarter, second quarter GDP is likely to show a much sharper contraction. Lockdowns have seen consumer spending and business investment stall, whilst labour markets have crumbled on an unprecedented scale.

Advanced economies are expected to bear the brunt of the downturn and are forecast to contract 8% in 2020 with sharp downturns across all regions. The euro area economy was showing signs of fatigue before the virus hit. France experienced the biggest downgrade to its growth outlook, with GDP now expected to plunge 12.5% this year, 5.3% lower than the April projection. The US economy had been one of the better performers pre-virus and, although its period of lockdown has been briefer than many, US GDP is still forecast to fall 8% in 2020. 2021 could see a slightly stronger rebound for advanced economies than the April WEO at 4.8%, due to upgrades for the euro area and the UK.

The downgrade to emerging markets reflects large spill-overs from weaker external demand as well as domestic disruptions with growth forecast at -3% for this year. China, which was first to enter and emerge from the pandemic, is the only economy expected to see growth this year. The contraction in Asia is more modest than others, although India is forecast to lag. Latin America is expected to see the most severe downturn as countries have been struggling to contain infections. Meanwhile the slump in the oil price will weigh heavily on the likes of Russia and Saudi Arabia. A less severe drop this year for emerging markets compared to developed economies also means a less pronounced rebound overall in 2021, with some regional and country variance.

While the primary focus of the WEO is the pandemic, a related factor that has had an impact on economic growth is global trade. Trade contracted by around 3.5% year-on-year in the first quarter due to supply chain disruptions and a collapse in tourism. The volume of goods and services traded globally is forecast to fall 11.9% this year followed by a subsequent rebound. However, even before the pandemic, trade volumes had been slowing thanks to the current US administration’s fondness for tariffs and countries retaliating. Since the last update the US has been increasing its anti-China rhetoric, blaming it for not containing the virus and using the situation to leverage its own trade advantages. As the US presidential election gathers pace Donald Trump may try and take a hard line with China to appeal to voters although ultimately it is in the interests of both China and the US to reach an agreement.

Risks to the outlook

While GDP numbers for this year will be deeply in the red, the remarkable global monetary and fiscal stimulus efforts will mitigate the downside. Fiscal measures are estimated to be worth almost $11 trillion globally since the start of the crisis, $3 trillion more than estimated in the IMF’s Fiscal Monitor in April. Roughly one half is in the form of loan support although this could eventually add to government debt levels. The fiscal deficits of advanced economies are expected to widen to 16.5% of GDP on average in 2020 with government debt set to exceed 130% of GDP in 2021. The IMF calls for fiscal policies to adapt and gradually transition to targeted household support as lockdown conditions ease, noting that policymakers should consider strengthening mechanisms for automatic and timely support in downturns to counter further shocks.

In addition to the WEO, the IMF also published its Global Financial Stability Update. Unlike the 2008 financial crisis, central banks wasted no time in actioning precautionary measures. Those central banks with space to do so lowered rates while some emerging market central banks have engaged in asset purchase programmes for the first time. The vast monetary easing has managed to shore up investor sentiment and helped equity markets bounce back from a sharp correction in March as confidence built in the economic recovery. Even portfolio flows for emerging markets have stabilised. However, the report also highlights the disconnect between risk asset prices and the real economy. This raises the risk of another correction in asset prices that could threaten the economic recovery.

The worst of the crisis is likely behind us, but the outlook remains highly uncertain. In just a few months the outlook has deteriorated sharply although governments, investors, businesses and households need to look forward as economies re-open. Things may not turn out as bad as envisioned should vaccines be developed sooner than expected. Furthermore, the IMF calls for multilateral cooperation to make sure that countries with limited healthcare capacity receive financial assistance and expertise. There is cause for some tentative optimism with regard to recent economic data, although mobility data has shown that even in areas where stay at home orders are being lifted, consumers remain cautious.

On the downside, there may well be a second outbreak. Over the past few weeks there has been an uptick in daily cases causing some regions to reassess their plans to relax restrictions. A prolonged decline in economic activity could cause scarring, while a tightening of financial conditions could tip some emerging economies into a debt crisis. Aside from Covid we also need to be wary of technology and trade tensions which could thwart any recovery. In standard fashion the IMF calls for greater cooperation in resolving such issues. The recovery is sure to be uneven and uncertain - as the IMF states - but as we enter the second half of the year there will hopefully be more signs of life in the global economy to back up the stock market recovery.  

1 See