Business

‘The Nice Lockdown’ to be worst recession since Nice Melancholy

The International Monetary Fund said Tuesday that the novel coronavirus will likely push the global economy into its worst recession since the Great Depression, warning that prospects over a global rebound are highly uncertain.

In its biannual World Economic Outlook, the IMF forecasts the global economy contracting by 3% in 2020 as governments around the world shut down economies to contain the spread of the coronavirus. The forecast is the worst print in the report’s history and is a dramatic downturn from the IMF’s January projection for 3.3% growth, published before the virus took full form.

An unprecedented amount of countries are now asking for emergency aid. IMF chief economist Gita Gopinath told Yahoo Finance that about 100 of the IMF’s 189 member countries have asked for help in the last four weeks.

“It’s a truly global crisis and we’re seeing a very large number of countries in distress,” Gopinath said.

International Monetary Fund Chief Economist Gita Gopinath takes questions at the annual meetings of the IMF and World Bank in Washington, U.S., October 18, 2019. REUTERS/James Lawler Duggan
International Monetary Fund Chief Economist Gita Gopinath takes questions at the annual meetings of the IMF and World Bank in Washington, U.S., October 18, 2019. REUTERS/James Lawler Duggan

Gopinath said the IMF has doubled its access to emergency financing, to $100 billion, and has worked with 25 members on debt service relief. She added that the IMF is also considering short-term liquidity lines and increased issuance of special drawing rights (or SDRs, which support countries with dwindling currency reserves).

Among the regions projected to see the hardest hit in 2020: the Euro Area at -7.5%, Mexico at -6.6%, the United Kingdom at -6.5%, and the United States at -5.9%. China is projected to grow by 1.2%, still a noticeable downgrade from its 2019 growth rate of 6.1%.

“Much worse growth outcomes are possible and maybe even likely,” Gopinath said in the report. The IMF forecast assumes the recovery can begin in the second half of the year, but the report cautions that its projections are clouded by difficulty in predicting the pathway of the pandemic and the efficacy of containment measures, among other factors.

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Gopinath told Yahoo Finance that if the pandemic is not contained through 2021, the world could see a contraction of 6% in 2020 with “almost no recovery” in 2021.

A sign explaining that a bookstore will remain closed, due to the outbreak of the coronavirus disease (COVID-19) in the Brooklyn borough of New York City, U.S., March 26, 2020. REUTERS/Stephen Yang
A sign explaining that a bookstore will remain closed, due to the outbreak of the coronavirus disease (COVID-19) in the Brooklyn borough of New York City, U.S., March 26, 2020. REUTERS/Stephen Yang

Calling the current crisis the “Great Lockdown,” the IMF emphasized that policymakers need to tailor the health response and economic policies to first contain the virus and then set the stage for a recovery phase. The report said most of the economic disruptions are assumed to be concentrated in the second quarter of 2020 with the exception of China, where most of the shock was absorbed in the first quarter.

Encouraging signs

The IMF said it was encouraged by governments around the world “swiftly adopting a broad range of measures” to ensure that businesses and households can survive the shock. The report pointed to targeted policies like cash transfers, wage subsidies, tax relief, and postponing debt repayments as examples of fiscal policies that would help. Paid sick and family leave were also recommended as ways to support sick and quarantined workers worried about losing their jobs.

The IMF also applauded central banks for providing liquidity to avoid systemic stress in the financial system.

More specifically, the IMF pointed to the Federal Reserve’s efforts to provide U.S. dollars to nations around the world, through direct swap lines and temporary repurchase agreement facilities. Gopinath told Yahoo Finance countries will still likely need more support than what the Fed has provided.

The IMF also encouraged regulators to encourage banks to allow for loan restructuring as companies mitigate the financial consequences of shutting down.

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“The economic landscape will be altered significantly for the duration of the crisis and possibly longer, with greater involvement of government and central banks in the economy,” Gopinath added.

For its part, the IMF has pledged to actively support national-level policy efforts to address the virus, through its own loans and emergency financing. The IMF, in conjunction with the World Bank, has called on G20 leaders to suspend debt payments from the 76 poorest countries. The G20, representing the most advanced nations, has not yet committed to doing so but the group’s finance ministers and central bank governors are scheduled to meet virtually on April 15.

The World Economic Outlook report was released in sync with the IMF’s pre-scheduled spring meetings, which are now taking place online as shelter-in-place measures continue around the world.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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