June 25, 2020
The International Monetary Fund (IMF) downgraded its global economic outlook with a significantly deeper recession and a slower than anticipated recovery after that.

What Happened

In its semiannual outlook, the IMF revised its global growth outlook downward for 2020 from -3.0% to -4.9% and for 2021 from 5.8% to 5.4% (Figure 1). Supply shocks that occurred during the lockdown period and the continued hit to demand due to social distancing took a toll on global economic growth. For the first time, every major global region is expected to be in recession. Similar to our projections, especially for the US economy, the IMF’s recovery forecast resembles a “swoosh” shape, with a sharper decline in the current year, followed by a gradual recovery later.

The swift implementation of monetary and fiscal stimulus packages are expected to cushion the blow to businesses and employees. As with the April 2020 economic projection, the IMF still sees a higher than usual degree of uncertainty for its already grim global economic forecast.

Our Take

Since the April 2020 update to the world economic outlook, global economic activity slowed considerably, and IMF estimates are confirming the current reality and an uncertain recovery path.

Many economies with declining COVID-19 infection rates are experiencing a return to some sort of normalcy, albeit significantly different from the pre-COVID period. Unfortunately, for countries that are struggling to contain the spread of the virus or with weaker healthcare systems, lengthier lockdown measures could inflict an additional toll on their economies.

Financial market sentiment appears to be disconnected from underlying economic prospects. Nevertheless, the IMF’s previous dire assumptions of an extreme tightening of financial conditions did not materialize, thanks to the strong backstop from monetary and fiscal authorities, allowing financial markets to function as expected with liquidity enabling fully functioning markets for the most part.

Mobility data suggests that people are voluntarily reducing exposure to one another and generating retail activity close to pre-COVID-19 levels in countries that have passed the peak in infections or with robust healthcare systems. Labor markets, especially in services sectors, got hit disproportionately. According to the International Labor Organization, globally, the decline in work hours is estimated to be equivalent to more than 300 million full-time job losses in the second quarter of 2020. Recent job gains are the beginning signs of a long recovery.

Even with a strong recovery expected in 2021, according to IMF estimates, the World’s total economic output is expected to be 6.5% lower than pre-COVID-19 projections for 2021. With the help of monetary and fiscal packages, financial conditions have eased for major economies including some emerging markets like China and South Korea.

Bottom Line

Global consumers have shown keen interest in returning to some sort of new normal that would allow them to continue to consume and provide support to an eventually healthy global economy. Nevertheless, the road to full recovery could be rocky and more prolonged than many expect. When asked how long the novel coronavirus could affect daily lives, Dr. Anthony Fauci, Director of the US National Institute of Allergy and Infectious Diseases, replied; “You do not make the timeline, the virus makes the timeline”. Much of the same is true for the global economic recovery timeline.

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