Global economy recovering faster than expected, IMF says

DUBAI: The world’s economy is recovering faster than expected from the ravages of the COVID-19 pandemic, the International Monetary Fund said on Tuesday.

The IMF now expects global gross domestic product to fall by 4.4 per cent this year — better than the forecast of a 5.2 per cent contraction the Fund made in June — and sees a 5.2 per cent recovery for 2021.

The IMF also revised its estimates for the Saudi economy. It is now expected to slow by 5.4 per cent this year — significantly less than the 6.8 per cent drop the Fund predicted in the summer. The IMF said Saudi growth would be flat next year.

Saudi officials have contested the IMF’s pessimistic projections on the Kingdom’s economy.

Gita Gopinath, the IMF’s economic counselor and director of research, said; “We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast. The revision is driven by second quarter GDP out-turns in large advanced economies, which were not as negative as we had projected.”

The better outlook was also due to China’s return to growth, which was stronger than expected, and signs of a more rapid recovery in the third quarter, she said.

China is the only major economy forecast to grow this year, with GDP adding 1.9 per cent before a significant 8.2 per cent jump in 2021. The US will see a 4.3 per cent fall this year, and a 3.1 per cent recovery in 2021.

The Middle East and Central Asia — grouped together by the IMF — are expected to contract by 5.7 per cent this year but bounce back to 3.2 per cent. 

The IMF warned that the recovery would be “a long and difficult ascent,” especially in some of the poorer parts of the world. “While the global economy is coming back, the ascent will likely be long, uneven, and uncertain. Indeed, compared to our forecast in June, prospects have worsened significantly in some emerging market and developing economies where infections are rising rapidly,” Gopinath said.

The IMF predicted that crude oil prices would average $41.7 per barrel in 2020, down 32 per cent from 2019, and recover to $46.7 in 2021, but said “elevated uncertainty” clouded the picture.

“Upside risks to prices include escalating geopolitical events in the Middle East and faster containment of the pandemic as well as excessive cuts in oil and gas upstream investments and further bankruptcies in the energy sector. The biggest downside risk is a renewed slowdown in global economic activity as large inventories remain a concern,” the Fund said.

“Frayed ties among the OPEC+ coalition of oil producers pose risks for global oil supply. A renewed plunge in prices as seen in March would severely hurt activity in oil exporters and lead to weaker growth than projected.”

The pace of economic recovery could be threatened by “second wave” infections, the Fund said. “With renewed upticks in COVID-19 infections in places that had reduced local transmission to low levels, re-openings have paused, and targeted shutdowns are being reinstated. Economies everywhere face difficult paths back to pre-pandemic activity levels. “

The economic downturn of 2020 would have been worse if it had not been for the big stimulus packages almost every country has implemented, and the avoidance so far of a financial crisis in world markets.

“Out-turns would have been much weaker if it weren’t for sizable, swift, and unprecedented fiscal, monetary, and regulatory responses that maintained disposable income for households, protected cash flow for firms, and supported credit provision. Collectively these actions have so far prevented a recurrence of the financial catastrophe of 2008-09,” Gopinath said.

“Preventing further setbacks will require that policy support is not prematurely withdrawn.”

But virtually all national economies will witness some “scarring” from the deep falls in activity. “The persistent output losses imply a major setback to living standards relative to what was expected before the pandemic,” the Fund said.

“Sovereign debt levels are set to increase significantly even as downgrades to potential output imply a smaller tax base that makes it harder to service the debt.”