IMF expects global economy to contract by a record 4.9% in 2020

The International Monetary Fund further downgraded expectations for the global economy in 2020 and 2021, projecting negative growth for all regions of the world for the first time in the history of its forecasts.

The IMF on Wednesday released an update of its World Economic Outlook, in which it projected the global economy contracting by 4.9% in 2020, a downward revision from its April forecast of a 3% contraction. A -4.9% print on global output is now the worst in the WEO’s history.

“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 report reads. The IMF said consumption and services dropped beyond expectations and described the hit to the global labor market as “catastrophic.”

The report forecasts US growth of -8.0% in 2020, a notable downgrade from its April forecast of -5.9%. But the IMF noted that positive economic data, such as the surprising jobs gains in May, points to the possibility of activity having “troughed” in April. 

The IMF expects the U.S. economy to rebound by 4.5% in 2021, a tick down from its April projection of 4.7%.

The IMF projects a global rebound of 5.4% in 2021, which assumes persistent social distancing and “scarring” from lower productivity (due to a shifting of resources toward workplace safety and hygiene). 

The report warned that its forecasts face a number of uncertainties concerning the spread of the virus itself, urging countries to prioritize ample resources for the health system and then economic support through “sizeable, well-targeted” fiscal policies.

Broadly, the IMF applauded central banks like the Federal Reserve for its “swift” actions to ensure liquidity in the financial markets and keeping borrowing costs low. However, the IMF warned that monetary policymakers may not be out of the woods yet and called attention to the possibility of tightening financial conditions in the future.

International Monetary Fund Chief Economist and Director of the Research Department Gita Gopinath leads a presentation of the IMF World Economic Outlook Update, in Santiago, Chile, Tuesday, July 23, 2019. (AP Photo/Esteban Felix)

Downgrades in Asia, Latin America 

The IMF had previously projected positive growth in Asia, led by output growth in India and China. But the worsening situation with COVID-19 cases in India led the IMF to dramatically lower its forecast for India to -4.5%, pulling down expectations for the emerging and developing Asia region to -0.8% for 2020. 

The revision means that the IMF now expects every region of the world to contract this year, although individual countries may still see growth. 

The IMF expects China to grow by 1.0% in 2020, a tick down from its April forecast of 1.2%. As the first country impacted by the virus, China reportedly saw a “stronger than anticipated” recovery in investment and services, supporting the IMF’s projection of a sharp rebound in GDP of 8.2% in 2021.

In Latin America, on the other hand, the IMF said most countries are “still struggling to contain infections” and issued a massive downgrade as cases pick up in Brazil. The IMF now expects the Brazilian economy to pull back by 9.1% in 2020, compared to its April projection of a 5.3% contraction. Mexico is expected to see a 10.5% contraction in 2020.

In the Euro Area, the IMF acknowledged European fiscal support measures like short-term work schemes but lowered its 2020 projection for output to -10.2%, a markdown from its April projection of -7.5%. The United Kingdom similarly saw a downgrade and is also projected to see an economic contraction of 10.2% this year.

The IMF listed several risks to its overall outlook, noting “escalating tensions” between the United States and China, volatile oil prices, and social unrest spurred by movements around the world.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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