‘Long ascent’ to recovery of global growth

Deep recession gives way to growth, but not for long

By Carly Fields

The global economy has so far avoided a “financial catastrophe” but growth projections from the International Monetary Fund’s latest World Economic Outlook remain stunted. 

Global growth is projected to be -4.4 percent this year, which is a small upgrade from the IMF’s June report, due to better-than-expected outcomes from the second quarter, as well as signs of a stronger recovery in the third quarter. However, this is offset partially by downgrades in some emerging and developing economies.

Gita Gopinath, chief economist and director of the Research Department at the IMF, said that the Fund continues to project “a deep recession in 2020”. 

Growth in 2021 is projected to rebound to 5.2 percent, slightly below the IMF’s June projection.

While China stands alone with predicted output in 2020 that is expected to exceed 2019 levels, all other advanced economies and emerging and developing economies are projected to stay below 2019 levels well into 2021. In particular, countries that rely heavily on contact-intensive services and oil exports face weaker recoveries compared with manufacturing-led economies.

“We are upgrading our forecast for advanced economies for 2020 to -5.8 percent followed by a rebound in growth to 3.9 percent in 2021,” said Gopinath. “This is a partial recovery. For emerging markets and developing economies, excluding China, instead we have a downgrade, with growth projected to be -5.7 percent in 2020 and then rebounding to 5 percent in 2021.”

IMF managing director Kristalina Georgieva explained that while the picture over the last couple of months has become “less dire”, the IMF continues to project the worst global recession since the Great Depression. Over the next five years, the crisis is predicted to cost an estimated $28 trillion in output losses. “All countries now face a long ascent, a journey that will be difficult, uneven, uncertain, and prone to setbacks,” Georgieva said.

Growth setbacks

Beyond the forecast rebound in growth in 2021, global growth is then expected to gradually slow to about 3.5 percent in the medium term – which actually means that there is a projection of permanent loss in output pretty much everywhere in the world after 2021. Gopinath explained that the cumulative loss in output relative to the pre-pandemic projected path will grow from 11 trillion over 2020 and 2021 to 28 trillion by end 2025. “This represents a serious setback to improvements in average living standards pretty much everywhere in the world,” she said.

There is also “tremendous uncertainty” around the outlook, admitted the IMF, both downside and upside. With the virus resurging around the world, localised lockdowns will take their toll on economic activity. “The growing restrictions on trade and investment and rising geopolitical uncertainty could harm the recovery,” said Gopinath. On the upside, faster and better news on treatments and vaccines or further policy stimulus can significantly improve the outlook, she added.

The IMF’s oil price projections have also been downcast with a 2020 year-end forecast of $41 per barrel, rising by just $5 per barrel for 2021. This compares unfavourably to the $61 per barrel prices in 2019. 

Global trade growth is also projected to weaken significantly in line with the economic growth projections. Global trade is expected to contract by over 10% this year, which is a pace similar to that seen during the global financial crisis in 2009. “The expected decline in trade volumes largely reflects weak final demand from consumers and firms in the synchronised global downturn,” said the report. “Trade restrictions (for example on medical supplies) and supply chain disruptions are expected to play limited roles in accounting for the collapse.” 

Looking to 2021, trade volumes are expected to grow by about 8% and then by slightly more than 4% on average in subsequent years. “Subdued trade volumes also reflect, in part, possible shifts in supply chains as firms reshore production to reduce perceived vulnerabilities from reliance on foreign producers.”

China was an important contributor to the slight recovery in global trade from June this year as lockdowns were eased. “Its exports recovered from deep declines earlier in the year, supported by an earlier restart of activity and a strong pickup in external demand for medical equipment and for equipment to support the shift to remote working.”

Trade mix

The World Trade Organisation has also revised its world merchandise trade forecast for 2020, predicting a more optimistic 9.2% decline, followed by a 7.2% rise in 2021. The 2020 decline in its October forecast is less severe than the 12.9% drop predicted in its April trade forecast because strong trade performance in June and July “brought some signs of optimism for overall trade growth in 2020”, according to the WTO. But this optimism is tempered by a more pessimistic forecast for 2021, which was previously expected to see growth or 21.3%.

“The performance of trade for the year to date exceeded expectations due to a surge in June and July as lockdowns were eased and economic activity accelerated,” said the WTO. However, it warned that the pace of expansion could slow sharply once pent up demand is exhausted and business inventories have been replenished. 

Of note, the predicted trade decline in Asia of 4.5% for exports and 4.4% for imports in 2020 will be smaller than in other regions, the IMF said. 

Given the predictions for the global economy and trade volumes, it comes as little surprise that the IMF expects world market-weighted GDP in 2020 to be -4.8%. GDP growth is expected to pick up to 4.9% in 2021, but the Fund notes that this is highly dependent on policy measures and on the severity of the continued pandemic.