IMF Says COVID-19 to Cause Worst Recession Since Great Depression

In its latest revision to the World Economic Outlook (WEO), the International Monetary Fund (IMF) estimates that global gross domestic product (GDP) will fall by 3.0% in 2020. Just three months ago, the agency estimated that global GDP would rise by 3.3% this year.

The IMF does not sugarcoat its outlook: “It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.”

U.S. GDP growth is now estimated at negative 5.9%, compared with the IMF’s earlier projection for 2.0% growth. As a group, the world’s advanced economies, earlier projected to post 2020 GDP growth of just 1.6%, are now expected to shrink by 7.7%.

The world’s emerging economies, including China and India, are now forecast to grow by just 1.0% in 2020, compared with a previous forecast for growth of 4.4%. The forecast for China’s growth has dropped from 6.0% to 1.2%, while the forecast for growth in India has fallen from 5.8% to 1.9%.

From the WEO:

There is extreme uncertainty around the global growth forecast. The economic fallout depends on factors that interact in ways that are hard to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, the extent of supply disruptions, the repercussions of the dramatic tightening in global financial market conditions, shifts in spending patterns, behavioral changes (such as people avoiding shopping malls and public transportation), confidence effects, and volatile commodity prices. Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices. Risks of a worse outcome predominate.

The IMF’s forecasts are based on a set of assumptions that may be too optimistic. In the baseline scenario, the coronavirus pandemic is expected “to fade in the second half of 2020, allowing for gradual lifting of containment measures.” Countries hit hardest by COVID-19 are expected to lose about 8% of working days in 2020, while other countries are expected to lose about 5% of working days. That’s about 21 days in the first case and 13 days in the second.

Global financial conditions are expected to remain tight in the first half of this year before easing in the second half.

The IMF expects the average spot price for a barrel of crude oil this year to be $35.60, rising to $37.90 in 2021. The agency further expects Brent crude oil prices to rise over time to $45, but remain below the 2019 average of $61.40. Commodity metal prices are forecast to decline by 15% this year and a further 5.6% in 2021. Food prices are projected to fall by 1.8% this year and rise by 0.4% next year.

The IMF notes that effective policy responses to the pandemic are essential in order to avoid worse outcomes:

The immediate priority is to contain the fallout from the COVID-19 outbreak, especially by increasing health care expenditures to strengthen the capacity and resources of the health care sector while adopting measures that reduce contagion. Economic policies will also need to cushion the impact of the decline in activity on people, firms, and the financial system; reduce persistent scarring effects from the unavoidable severe slowdown; and ensure that the economic recovery can begin quickly once the pandemic fades.