Covid-19: IMF says global recession imminent, sees recovery in 2021

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global recession, Covid-19, IMF, coronavirus pandemic

The IMF called on members to contribute funds to help the poorest countries.


Issac John

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Published: Tue 24 Mar 2020, 12:07 PM

Last updated: Tue 24 Mar 2020, 7:15 PM

The coronavirus pandemic will lead to an impending worldwide recession that could be worse than the one triggered by the global financial crisis of 2008-2009, but world economic output should recover in 2021, the International Monetary Fund said on Monday as it pledged that it stands ready to deploy all of its $1 trillion in lending capacity in emergency finance.
The IMF's warning came as across the world more and more nations have started intensifying efforts to contain the outbreak with partial or total lock downs. Welcoming the emergency steps taken by the countries to fight Covid-19, the Washington based fund's managing director Kristalina Georgieva praised the initiatives taken by various central banks to ease monetary policy.
"Even more will be needed, especially on the fiscal front," she said in a forecast issued after a conference call of finance ministers and central bankers from the Group of 20 of the world's largest economies.
The Central Bank of the UAE has announced a comprehensive Dh100 billion stimulus package to help retail customers and corporates overcome financial constraints due to coronavirus. The Targeted Economic Support Scheme consists of Dh50 billion from the Central Bank funds through collateralised loans at zero cost to all banks operating in the UAE and of Dh50 billion funds freed up from banks' capital buffers.
Joining central banks in most countries, the US Federal Reserve signaled it will buy unlimited assets to support the economy after a top Fed official said US GDP could contract 50 per cent in the second quarter. Georgieva said the IMF would massively step up emergency finance, noting that 80 countries have already requested help and that the IMF stood ready to deploy all of its $1 trillion in lending capacity.
Advanced economies were generally in better shape to deal with the crisis, but many emerging markets and low-income countries face significant challenges, including outward capital flows. Investors have already removed $83 billion from emerging markets since the start of the crisis, the largest capital outflow ever recorded, Georgieva said.
"The human costs of the coronavirus pandemic are already immeasurable, and all countries need to work together to protect people and limit the economic damage," Georgieva said. More countries are imposing lockdown measures to contain the epidemic, she noted. The IMF chief said the outlook for global growth was negative, and the IMF now expected "a recession at least as bad as during the global financial crisis or worse".
Earlier this month, the IMF chief had warned that 2020 world growth would be below the 2.9 per cent rate seen in 2019 but stopped short of predicting a recession. Trade wars pushed global growth last year to the lowest rate since a 0.7 per cent contraction in 2009. On Monday, Georgieva said a recovery was expected in 2021, but to reach it countries would need to prioritize containment and strengthen health systems.
"The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be," she said.
The IMF is particularly concerned about low-income countries in debt distress and was working closely with them to address those concerns, she added. The IMF called again on members to contribute funds to replenish its Catastrophe Containment and Relief Trust to help the poorest countries. Georgieva said the IMF was exploring other options with its members. Several low- and middle-income countries have asked for an allocation for the Special Drawing Right, an international reserve asset created by the IMF in 1969 to supplement its member countries' official reserves, as was done during the global financial crisis, she said.
IMF members also needed to provide additional swap lines with emerging market countries to address a global liquidity crunch, she said. The IMF was also exploring a proposal that would help facilitate a broader network of swap lines, including through an IMF-swap-type facility. Vicky Redwood, senior economic adviser at Capital Economics, said the global downturn now set to be deeper than the financial crisis.
"What were downside risks to the global economy just a few days ago are fast morphing into our central scenario. We now expect global GDP to fall by about one per cent this year, which would be twice the decline seen in 2009. And while the rebound will hopefully be quicker, downside risks are rising," said Redwood.
Deutsche Bank's team of Global Economists led by Peter Hooper, Global Head of Economic Research, now see a severe global recession occurring in the first half of 2020, with aggregate demand plunging in China in the first quarter by about 32 per cent and in the euro area and US in the second quarter, by 24 per cent and 13 per cent, respectively. The quarterly declines in GDP growth they anticipate substantially exceed anything previously recorded going back to at least World War II. The team points out that the crisis has also engendered unprecedented policy responses.
"The Fed and ECB, already relatively low on ammunition, have gone pretty much all out in their responses. The Fed has moved rates to zero in short order, and both have injected tremendous amounts of liquidity into money and credit markets in an effort to diminish the prospects for another major financial crisis."
The bank's baseline forecast assumes that the severe containment measures being taken will succeed in flattening the epidemic curves by mid-year in the Euro Area and US, and that activity there will begin to bounce back in the third and fourth quarter, supported also by massive policy responses. This baseline view of a "V" shaped recovery is based importantly on clear signs that economic activity in China is quickly returning to normal even as the first quarter is drawing to a close.
"The coronavirus outbreak represents a major external shock to the macro outlook, akin to a large-scale natural disaster," analysts at BlackRock Investment Institute said in a note.

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