IMF warns of deepest economic plunge since 1930s
Pandemic could expose ‘cracks’ in global financial system, says fund
IMF warns of deepest plunge since 1930s
The loss in global economic output caused by the coronavirus pandemic will “dwarf” that of the 2008 financial crisis, the IMF warned today, forecasting the worst contraction since the Great Depression of the 1930s.
Most economies will shrink by 5 per cent, even after a potential sharp recovery in 2021, the fund said. World output will decline by 3 per cent this year, more than six percentage points down from the IMF growth forecast of 3.3 per cent made in late January. Public finances will be shredded, unemployment will rise sharply and in 90 per cent of the IMF’s 189 member countries incomes per person will fall.
It is emerging economies, however — with neither the necessary health or economic resources — that will suffer the most, the IMF acknowledged.
Yesterday it announced a write-off of $214m in debt for the world’s poorest countries. It has also backed efforts by the G20 group of nations to reach a deal on a much broader suspension of debt payments hanging over low-income nations — a plan that received a boost today when G7 finance ministers and central bank governors endorsed the idea.
Debt crises in the developing world — alongside high levels of corporate indebtedness and weaknesses in the investment industry — could also expose “cracks” in the global financial system, according to a separate IMF report.
Martin Wolf, the FT’s chief economics commentator, argues against “negative-sum economic nationalism,” making a plea for richer countries to help their poorer counterparts. “We must remember above all that in a pandemic, no country is an island. We do not know the future. But we do know how we should try to shape it. Will we? That is the question. I greatly fear our answer.”
Markets
The world’s diamond sector has ground to a halt because of the exodus of 200,000 migrant workers from Surat in India — the global hub of diamond manufacturing — to their rural hometowns. India processes 90 per cent of the world’s stones.
The US Federal Reserve decision to help states and large cities but not smaller localities with emergency funding is facing strong criticism. Some say the plan — purchasing up to $500bn of short-term debt directly from states, counties with at least 2m residents and cities with a population of at least 1m — fails to recognise the role that small municipalities can play in keeping people employed. Some believe the Fed will intervene further if outflows from municipal funds pick up again or if issuers are unable to sell new debt.
Mohamed El-Erian, chief economic adviser at Allianz and an FT contributing editor, says markets and economists are far too bullish about the prospects for global economic recovery. They have failed to recognise the severity of the shutdown, an inherently messy restart, and consequent changes to the post-crisis landscape. The US earnings season will show how big companies remain in the dark on what lies ahead, he writes. A decisive rebound will only come with firm medical progress.