IMF slashes its forecasts for the global economy and warns of soaring debt levels
The International Monetary Fund slashed its economic forecasts once again on Wednesday and warned that public finances will deteriorate significantly as governments attempt to combat the fallout from the coronavirus crisis.
The IMF now estimates a contraction of 4.9% in global GDP (gross domestic product) in 2020, lower than the 3% fall it predicted back 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 Economy Outlook update.
The Fund also downgraded its GDP forecast for 2021. It now expects a growth rate of 5.4% from the 5.8% forecast made in April (the positive reading reflects that economic activity will be coming from a lower base following 2020′s heavy contraction).
The Washington-based institution explained 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, new labor market dynamics.
‘Catastrophic’ hit to labor markets
“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.
U.S. economy to contract by 8%
Looking at country forecasts, the United States is expected to contract by 8% this year. The Fund had estimated a contraction of 5.9% in April.
Similarly, the Fund also downgraded its forecasts for the euro zone, with the economy now seen shrinking by 10.2% in 2020.
Brazil, Mexico and South Africa are also expected to contract by 9.1%, 10.5% and 8%, respectively.
In order to mitigate some of the economic impact from the pandemic, governments across the world have announced massive fiscal packages and new borrowing. As a result, public finances are seen deteriorating significantly as a result.
“The steep contraction in economic activity and fiscal revenues, along with the sizable fiscal support, has further stretched public finances, with global public debt projected to reach more than 100% of GDP this year,” the Fund said.
Under the IMF’s base case, global public debt will reach an all-time high in 2020 and 2021 at 101.5% of GDP and 103.2% of GDP, respectively. In addition, the average overall fiscal deficit is set to soar to 13.9% of GDP this year, 10 percentage points higher than in 2019.
There have been more than 9 million confirmed infections worldwide from Covid-19, according to Johns Hopkins University. The Unites States, Brazil and Russia are currently the nations with the highest number of cases globally.