News & Politics

IMF Dramatically Cuts World Economic Forecast

The International Monetary Fund has slashed its economic forecast for the world economy and said job losses will be “catastrophic.”

The IMF also said that the U.S. economy was expected to contract by 8 percent this year, up from a forecast of 5.9 percent in April.

The fund added that their numbers are uncertain given all the variables at work in individual countries.

CNBC:

The IMF now estimates a contraction of 4.9% in global gross domestic product in 2020, lower than the 3% fall it predicted in April.

“The Covid-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast,” the IMF said Wednesday in its World Economic Outlook update.

The IMF’s reasoning is sound, even if their forecast is fraught with uncertainty.

The Washington-based institution explained that the downward revisions were due to social distancing measures likely remaining in place during the second half of the year, with productivity and supply chains being hit. And in those nations still grappling with high infection rates, the fund expects that longer lockdowns will dent economic activity even more.

The IMF cautioned that the forecasts are surrounded with unprecedented uncertainty and economic activity will depend on factors such as the length of the pandemic, voluntary social distancing, changes to global supply chains and new labor market dynamics.

Of course, all bets are off if some nations return to a lockdown status. A second nationwide lockdown in the U.S. is highly unlikely, but states or parts of some states may be ordered back into quarantine and some businesses may be forced to close again.

Worldwide, the hit to workers is nothing short of catastrophe.

“The steep decline in activity comes with a catastrophic hit to the global labor market,” the IMF said Wednesday, indicating that the global decline in work hours in the second quarter of the year is likely to be equivalent to a loss of more than 300 million full-time jobs.

“The hit to the labor market has been particularly acute for low-skilled workers who do not have the option of working from home. Income losses also appear to have been uneven across genders, with women among lower-income groups bearing a larger brunt of the impact in some countries,” the IMF said.

In poor countries where subsistence living is the norm, people can’t afford to take off from work. Knowing this, governments may have lockdowns in place but aren’t enforcing them very vigorously given that it would lead to mass starvation. But this is contributing to the rapid spread of the virus in areas that are least able to deal with it.

The 8 percent contraction of the economy is in line with the Federal Reserve’s estimate of around 7 percent contraction. But the Fed forecasts a boom in the 3rd and 4th quarters this year, which, if the indicators are any sign, may be coming to pass.

Other nations are expected to contract even more, meaning they will have a long road back. The fall-off in GDP also means record-setting debt levels for 2020 and 2021. The IMF projects debt at 100 percent of GDP this year, rising to 103 percent in 2021. It also says that budget deficits will hit 13.9 percent of GDP this year, 10 points higher than in 2019.

Much will depend on the recovery of the United States and China. Those two nations drive the world economy forward and a better than expected recovery in those two countries could mean a more rapid recovery for the rest of the world.

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