The impact of the coronavirus on world economies will be more devastating than earlier anticipated according to the International Monetary Fund (IMF).

Casting an eye over its World Economic Outlook, the IMF sees a contraction of the global economy by 4.9 per cent this year at a cost of US$12 trillion. It is of the view that we are in Great Depression territory. In April of this year, the IMF forecasted a decline of three per cent.

The IMF’s chief economist, Gita Gopinath, said global cooperation is ever so important in this truly global crisis where all efforts must be made to resolve trade and technology tensions while improving the multi-lateral rules-based trading system.

“This crisis is a crisis like no other and will have a recovery like no other. The unprecedented global sweep of this crisis hampers recovery prospects for export dependent economies and jeopardizes the prospects for income convergence between developing and advanced economies.

“We are projecting a synchronized deep downturn in 2020 for both advanced economies and emerging market and developing economies with over 95 per cent of countries projected to have negative per capita income in 2020,” said Gopinath.

In many countries social distancing and the wearing of masks are not stringently adhered to with infections increasing in many parts of the world.

At the same time, social distancing is having an impact on business activity, slowing it down and hindering protracted recovery. It is unlikely that a successful vaccine will be distributed before the end of this year, thus heightening the damage done by COVID-19.

The IMF is projecting global growth of 5.4 per cent next year, which is below earlier projections.

“…this time, consumption and services output have also dropped markedly.”

IMF

The world is on a long road to recovery and the bright light in all of this has been the robustness of the global financial system which continues to finance recovery. When this pandemic will end and where it will take the global economy is the subject of supposition and
speculation.

“In most recessions, consumers dig into their savings or rely on social safety nets and family support to smooth spending and consumption is affected less than investment. But this time, consumption and services output have also dropped markedly,” said the IMF.

The fall in consumption has to be closely watched. Why? Consumption patterns are the primary determinant of just how well an economy is doing. With people all over the world forced to stay at home and a high unemployment rate, consumption will be depressed.

Gopinath explains this well here pointing out: “As countries reopen the pickup is uneven. On the one hand, pent up demand is leading to a surge in spending in some sectors like retail and on the other hand contact-intensive sectors like hospitality, tourism and travel remain depressed. Countries that rely on these sectors are likely to be deeply impacted for a prolonged period.

“The labour market has been severely hit and at record speed and particularly so for lower income workers and semi-skilled workers who do not have the option of tele-working.”

Countries that are dependent on tourism and hospitality are in for a very rough time. To hope that people will get on an airplane, when there is large scale unemployment and those who do have jobs face an uncertain future, to come to places that have to put in place social distancing protocols and where the virus is still present and healthcare infrastructure is under-resourced and inadequate is to be sanguine indeed.

“With activity in labour intensive sectors like tourism and hospitality expected to remain subdued, a full recovery in the labour market may take a while worsening income inequality and raising poverty,” said the IMF’s chief economist.