WASHINGTON – The International Monetary Fund warned on Wednesday that the global economy is facing an even deeper recession than previously projected, as the coronavirus pandemic continues to sow uncertainty and companies around the world are struggling to rid themselves of the virus.
The forecast underscores the scale of the task policymakers face in trying to unearth what the IMF has described as the most severe economic contraction since the Great Depression. Even as countries begin to reopen their economies, it is increasingly clear that the recovery will be uneven and prolonged, particularly until the virus dissipates or a vaccine is available.
In an update to its Outlook for the World Economy, the IMF said it expected the world economy to shrink 4.9 percent this year, a sharper contraction than the 3 percent it forecast in April. The fund noted that, even when companies began to reopen, voluntary social distancing and better workplace safety standards weighed on economic activity. Furthermore, the “scarring” of the workforce from massive job cuts and business closings means the world economy will recover much more slowly, with the IMF projecting global growth of 5.4 percent in 2021, well below their projections prior to the pandemic.
The pandemic has spared no expense in advanced or developing economies. The IMF now projects that the U.S. economy will shrink 8 percent this year before expanding 4.5 percent next year. Eurozone economies are forecast to contract 10.2 percent this year and expand 6 percent next year. China’s economy, where the virus originated and imposed draconian containment measures, is expected to expand 1 percent this year and 8.2 percent in 2021.
The prediction of a gradual and halted recovery is less optimistic than Trump administration officials have been predicting. Treasury Secretary Steven Mnuchin said Tuesday he anticipated a “spectacular rebound” in the second half of the year, and Larry Kudlow, director of the National Economic Council, said he expected a V-shaped recovery, which means an economy strong and stable. increased heels from the recession.
But the report notes that even in countries where infection rates are declining, the main obstacles to resuming normal activity persist. Travel and mobility remain depressed, and the virus has dealt a blow to consumption and business investment.
“In most recessions, consumers dig into their savings or rely on social safety nets and family support to smooth spending, and consumption is affected relatively less than investment,” said the IMF. “But this time, consumption and production of services have also decreased markedly.”
The pandemic has also reduced the flow of world trade, which the fund said had contracted 3.5 percent in the first quarter of the previous year.
That is in line with an estimate by the World Trade Organization, which said Tuesday that world trade had fallen sharply in the first half of the year. On the plus side, that trajectory didn’t seem as bad as the group had previously projected.
Trade in goods decreased 3 percent year-on-year in the first quarter, while initial estimates indicate that it fell 18.5 percent in the second quarter, the largest decline on record. But those declines could have been much worse, the organization said. Trade should grow only modestly for the rest of the year to meet the organization’s most optimistic outlook for a 13 percent contraction in 2020, versus a more pessimistic potential decline of 32 percent.
Roberto Azevêdo, director general of the World Trade Organization, called development as a “positive side”, but said that governments must be on guard and continue to stimulate the economy.
“This is really positive news, but we cannot afford to be complacent,” he said.
The IMF warned that its forecast was more uncertain than normal because the pandemic’s trajectory remained difficult to predict. He praised strong fiscal and monetary policy responses around the world for helping to contain the economic consequences, but cautioned that rising debt could restrict additional support as governments began to worry about the growing deficit.
Ana Swanson contributed reporting.