IMF sees less severe global contraction but worsening outlook for many emerging markets

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Economy2 hours ago (Oct 13, 2020 08:45AM ET)

© Reuters. FILE PHOTO: Gita Gopinath, Economic Counsellor and Director of the Research Department at the International Monetary Fund (IMF), speaks during a news conference in Santiago

WASHINGTON (Reuters) – The International Monetary Fund on Tuesday said forecasts for the global economy were “somewhat less dire” as wealthy countries and China rebounded more quickly than expected from coronavirus lockdowns but warned that the outlook was worsening for many emerging markets.

The IMF forecast a 2020 global contraction of 4.4% in its latest World Economic Outlook, an improvement over a 5.2% contraction predicted in June, when business closures reached their peak. It is still the worst economic crisis since the 1930s Great Depression, the Fund said.

The global economy will return to growth of 5.2% in 2021, the IMF said, but the rebound will be slightly weaker than forecast in June, partly due to the extreme difficulties for many emerging markets and slowing reopening momentum as the virus continues to spread.

The forecasts reflect revised foreign exchange weightings for purchasing power parity that slightly increase the influence of advanced economies on global output.

IMF chief economist Gita Gopinath said some $12 trillion in fiscal support and unprecedented monetary easing from governments and central banks helped to limit the damage, but employment remains well below pre-pandemic levels, with low-income workers, youth and women hardest hit.

“The poor are getting poorer with close to 90 million people expected to fall into extreme deprivation this year,” Gopinath said in a blog posting. “The ascent out of this calamity is likely to be long, uneven, and highly uncertain. It is essential that fiscal and monetary policy support are not prematurely withdrawn.”

The IMF said that the United States will see a 4.3% contraction in GDP during 2020, considerably less severe than the 8% contraction forecast in June.

But the U.S. rebound in 2021 will be somewhat smaller at 3.1% – a forecast that assumes no additional federal aid beyond around $3 trillion approved by Congress in March.

The euro zone’s economy will shrink by 8.3% in 2020, an improvement from a 10.2% contraction predicted in June, but there is wide divergence within the group. Export powerhouse Germany will see a contraction of 6.0% in 2020, while Spain’s economy, more dependent on tourism, will contract 12.8%. The Eurozone will resume growth of 5.2% in 2021, the IMF said.

China, which saw a strong early reopening and rebound from the pandemic, will be the only economy to show positive growth in 2020, of 1.9% – nearly double the rate predicted in June – and reach 8.2% growth in 2021, its highest rate in nearly a decade, the IMF said.

China had reopened most of its economy by April and has seen strong demand for exports of its medical supplies and technology products needed to aid remote working, the IMF said.

But emerging markets other than China will see a 2020 contraction of 5.7%, worse than the 5.0% predicted in June. The IMF said the virus was continuing to spread in large countries including India and Indonesia, and these economies are far more dependent on hard-hit sectors including tourism and commodities as well as on remittances and other sources of external finance.

The IMF also warned that economic ‘scarring’ from job loss, bankruptcies, debt problems and lost schooling will hold back medium-term global growth after 2021 to about 3.5%, with a cumulative loss in output of up to $28 trillion from 2020 to 2025 compared to pre-pandemic growth paths.

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