IMF May Slash Its Global Economic Forecast Further

Summary

• IMF had projected the world economy to slow down by 3 percent in April
• Its June forecast is expected to be worse than this, given the uncertainty about recovery
• Stock markets might undergo sharp corrections, once complete impact of Great Lockdown is felt
• Equity markets recovery is partially led by strong Government support

It is probably for the first time that national economies across all the seven continents are undergoing a downturn, due to the widespread impact of the corona led pandemic. Many countries went into lockdown, one after the other, beginning February this year.

The International Monetary Fund (IMF), the global monetary agency, headquartered in Washington, the US is expected to downgrade its economic growth forecasts in its upcoming World Economic Outlook Update for the month of June 2020. The update is expected to be announced next week.

The last IMF forecast was announced in April this year when the monetary agency projected the world economy to slow down by 3 percent in 2020.

Gita Gopinath, Chief Economist, IMF has remarked that while lockdown restrictions are getting eased in many nations, and businesses are being permitted to resume economic activity, there remains a "profound uncertainty" regarding the road to recovery. Supply chains for most of the industries and services have been disrupted across the world, with travel restrictions still in place, hence an economic upturn is not going to be an easy task. She lamented that this is the first time since the Great Depression when both the developed as well as the developing set of countries being projected to be in an economic recession for the year 2020. She suspects that the soon to be released World Economic Outlook will show negative growth rates, which would be worse than earlier IMF estimates. The sheer severity and scale of the lockdown across the world in itself is striking, she added.

During the Great Depression period, the manufacturing sector was hardest hit since corporate investments had dried up. But this time around, during the Great Lockdown period, the services sector has got a bigger blow as compared to manufacturing, explained Gopinath.

However, she did add that there is a possibility of a quicker bounce back, with pent-up demand playing its role, once the lockdown restrictions are completely eased off. But there is no guarantee for this as in such a scary health crisis; consumer spending may continue to remain subdued for a long time, adhering to minimal social interaction. This will not encourage private companies to announce big investments either.

Data from the Johns Hopkins University reveals that with 8 million plus corona infections found globally, the infection rates have been highest in Brazil, Britain, India, Russia and the United States of America.

Stock markets are bouncing back, despite the poor economic diagnosis

Gopinath also said that stock markets around the world might undergo sharp corrections, in times to come, once the complete impact of Great Lockdown gets revealed. There is a need to be cautious with equity markets already seen to be bouncing back to earlier levels, with S&P 500 regaining much of its losses since lockdown began, despite a cure for the virus not yet being found. She felt that the depreciation of emerging market currencies was lesser than what was observed during the last financial crisis in the world and might need a downward revision as well.

In fact, a majority of the financial experts are sounding warnings bells that stocks are overvalued, with markets getting detached from the real economy, and unable to incorporate the economic damages which this virus has caused across the world.

FTSE 100, which includes the top hundred LSE-listed companies based on their market capitalization, was up by 1.07 percent at 6290.40 at the day’s closing of June 19. Germany’s Dax index, which consists of 30 German blue-chip companies, also closed higher by 0.69 percentage points. The Dow Jones Industrial Average, that covers the top 30 US companies, traded at 26,224.61 points, up by 0.55 percent on 19 Jun at 11:28 am GMT-4.

Various Government packages trying to aid recovery

Equity markets recovery is partially led by various Government announcement regarding their investment and industry-support plans. For instance, the US central bank recently said that it will purchase the lowest investment-grade bonds, to speed up quantitative easing, which will lead to job and investment growth across the economy. The US Government is also preparing a $1 trillion infrastructure support package, most of which will be spent on building roads and bridges.

UK’s Bank of England is coming out with $125 billion Government stimulus plan to fight coronavirus, by boosting its asset-purchase plan. This will aid the creation of money in the British economy. The country’s Government has already announced $414 billion support in terms of businesses loans to struggling companies, which were likely to go bankrupt.

Earlier this month, the German Government came out with a €130 billion stimulus package to curb rising unemployment numbers. It is expected to boost consumer spending and aid private sector investments. The country is also slashing its VAT (Value Added Tax) rates from 19 to 16 percent this July.

The French Finance Minister has proposed a stimulus package of worth $51 million to boost the economy, to help the vulnerable sectors like aviation, hospitality, and automobiles come out of the gloom.

Australia has announced a $1.02 billion support for fast-tracking 15 infrastructure projects, including dams, powerhouses, water and rail networks, to generate 66,000 jobs.

Despite the fact that market conditions differ significantly across nations and industries, this for sure indicates that a full global economic recovery is unlikely unless the corona pandemic is under complete control, with vaccines and medicines in place. While it seems that the equity markets across the world are yet to take a full stock of the gravity of the entire pandemic situation, and are bouncing back on the hopes of Government stimulus being added, there is a need to be cautious as IMF is likely to further downgrade its world economic forecast next week, claiming that the road to economic recovery remains profoundly uncertain.