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Coronavirus-Afflicted Global Economy Is Almost Certainly in Recession – The Wall Street Journal

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Josh Zumbrun

WASHINGTON—The global economy has almost certainly entered a recession affecting most of the world, with a severity unmatched by anything aside from the Great Depression, the International Monetary Fund said Tuesday.

The IMF, in a new outlook, said the world economy is expected to contract by 3% in 2020 as the coronavirus pandemic causes nations around the world to close down, compared with a contraction of 0.1% in 2009, the worst year of the previous recession. This year’s decline amounts to about $2.7 trillion of global losses for the roughly $90 trillion global economy.

“It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago,” Gita Gopinath, the IMF’s chief economist, said in a note introducing the quarterly global growth update. “The great lockdown, as one might call it, is projected to shrink global growth dramatically,” she added.

Unlike in the previous recession, which began in 2007 in the U.S. but was at its worst point in 2009 in most countries, nearly no country will be able to escape the economic fallout this year. Even in the depths of the prior recession, about 40% of countries continued to post per capita growth. In 2020, less than 10% of them will see growth continue, the IMF said.

Though it has been clear for weeks that the global economy was entering a severe downturn, the new outlook gives numerical estimates of the severity of the crisis. The forecasts are fodder for the IMF and World Bank, which are conducting a virtual spring meeting this week after the coronavirus pandemic led to a cancellation of an in-person Washington gathering. The international organizations have been slow to unify around a coordinated approach to confront the pandemic.

‘The great lockdown, as one might call it, is projected to shrink global growth dramatically,’ said Gita Gopinath, the IMF’s chief economist.



Photo:

olivier douliery/Agence France-Presse/Getty Images

As a key part of the response, the IMF and World Bank are pushing the world’s wealthy countries to temporarily suspend debt payments from low-income countries. World Bank President David Malpass has estimated the proposal would free up around $14 billion a year of principal and interest payments.

The proposal won a key endorsement on Tuesday with the Group of Seven—the world’s largest advanced economies of the U.S., Japan, Germany, France, U.K., Canada and Italy—saying that they would endorse the debt suspensions so long as the broader Group of 20 countries signs on. The G-20 also includes China and major emerging markets and is scheduled to meet virtually later this week.

Separately, the IMF announced on Monday that it would suspend $500 million of payments, owed directly to the IMF from 25 low-income countries, to free up funds to fight the pandemic and support nations struggling amid lockdowns.

Even countries expected to still grow this year—such as China, which has reopened its economy after apparently containing the coronavirus—will post their weakest growth in decades. China will expand 1.2% this year, the IMF projects, compared with 6.1% last year.

The American economy will shrink 5.9%, a rate more than twice as severe as the 2.5% decline in 2009. The euro area will suffer more, shrinking 7.5%, compared with a decline of 4.5% in 2009.

The IMF projects that the global economy is likely to rebound in 2021. But even with that rebound, it would be the weakest two-year period since at least the early 1980s, leaving the global economy about 4% smaller at the end of 2021 than the IMF’s forecasts had expected as recently as January,

“Like in a war or a political crisis, there is continued severe uncertainty about the duration and intensity of the shock,” Ms. Gopinath said.

Global trade, already experiencing its weakest growth since the financial crisis because of the two-year-long U.S.-China trade war, is likely to contract by 11% in 2020, a collapse that could strip countries of the ability to boost their recoveries through exports.

And while the IMF’s report said it welcomed the fiscal and monetary policy measures that countries have announced to support economies during the lockdown, it said a lingering question is whether such support continues once the coronavirus has been contained and people begin to return to normal activity.

“Broad-based fiscal stimulus can pre-empt a steeper decline in confidence, lift aggregate demand, and avert an even deeper downturn,” the report said. “But it would most likely be more effective once the outbreak fades and people are able to move about freely.”

President Trump says he — not governors –– makes the final call on reopening the economy, storms and tornadoes in Southern states compound virus efforts, and Amazon adds more staff to handle shipments of nonessential items. WSJ’s Shelby Holliday has the latest on the pandemic. Photo: Curtis Compton/Atlanta Journal-Constitution via AP

The IMF also said in a separate report released Tuesday that central banks and governments had intervened early enough through interest-rate cuts, asset purchases and credit backstops to keep the global financial system from melting down. New bank rules requiring stronger capital buffers also helped.

“Thanks to these efforts, funding markets have remained functional and investor sentiment has shown signs of improvement,” the report said.

Still, the IMF warned countries not to get too complacent. Banks and other financial institutions should be ready to restructure loans and avail themselves of new tools to inject liquidity into the financial system, the report said. Governments should also help struggling businesses and households remain solvent. And emerging markets should intervene where possible to keep exchange rates stable and to keep capital outflows under control.

—David Harrison contributed to this article.

Write to Josh Zumbrun at Josh.Zumbrun@wsj.com

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