When coronavirus spread beyond Wuhan, economies crashed in unison. Around the world, output sank at a scale not witnessed in peacetime. Since then an aggressive fiscal and monetary response — and successful containment of the virus in several east Asian economies, including China — has meant that the prognosis now is no longer as bleak as some had feared earlier in the year. The IMF said in its World Economic Outlook, which was released on Tuesday, that the global economy will shrink by 4.4 per cent this year — an awful figure, but not quite as bad as the 5.2 per cent decline forecast in June. The prospects of recovery, however, are far from even.
Of the world’s largest economies, China, buoyed by strong export sales and a reduction in caseloads that has enabled an economic reopening, is set to grow by 1.9 per cent this year — a far more optimistic result than expected. The US and European economies, meanwhile, are still set to experience sharp contractions as a result of not being able to fully remove restrictions on movement.
There are marked differences within the world’s two largest economic blocs. The US, where the Federal Reserve and the Treasury acted swiftly to shore up financial and labour markets, will perform much better than Europe. Its economy is seen as shrinking by 4.3 per cent, compared with a deeper contraction of 8.3 per cent in the eurozone. The UK economy, meanwhile, is forecast to shrink by 9.8 per cent — a slight improvement on what the IMF expected in June.
Divergences within the major emerging markets are stark, too. In contrast with China and other east Asian economies such as South Korea, India has struggled to contain the outbreak and is expected to see its economy shrink by 10.3 per cent over the course of 2020. In Latin America, the outlook for Mexico remains bleak, while the fortunes of Brazil have improved substantially.
The composition of economies matters, too. The surge in China’s imports in September highlights that countries that rely more on manufacturing exports to power growth are at an advantage; oil exporters and those that rely on demand for domestic services are not.
In the coming quarters, the recovery will depend largely on countries’ ability to contain the virus. If vaccines come more quickly than expected, or if treatments prove more effective than hoped, then the outlook for next year, when the IMF expects growth of 5.2 per cent, will be stronger still.
If the disease lingers and becomes more difficult to contain, the IMF rightly advises countries to spend whatever it takes to keep healthcare systems afloat and a lid on social tensions. Debt levels in many emerging markets and some advanced economies have shot up to alarming levels. Yet, while countries must draw up plans to lower their debt burdens in the longer term, the focus for now must be on mitigating the impact of Covid-19. Wage subsidies ought to be removed gradually and only when recoveries are on track. Where there is room to, governments should spend on infrastructure and education to further boost growth.
The pandemic is far from over. As the IMF’s chief economist Gita Gopinath correctly states, an uncertain and uneven road lies ahead. Managing director Kristalina Georgieva has warned that there is a possibility of scarring as those without jobs lose skills and hope. The IMF’s forecasts suggest the best means of avoiding that scenario lie in mitigating the spread of the disease through successful track-and-trace policies that will enable economies to reopen more quickly, too. The virus first became widespread in China; the lead set by it and other east Asian countries in controlling it offers the best way out for the global economy.