Tuesday 13 October 2020 1:30 pm

IMF: Covid cases and support cutbacks threaten global recovery

The global economic recovery is under threat from the resurgence of coronavirus and governments withdrawing economic support too early, the International Monetary Fund (IMF) has warned.

IMF chief economist Gita Gopinath said the crisis is “far from over” and will “likely leave scars”. She said the global economy’s total loss of output would could amount to about $28 trillion (£21 trillion) by 2025. That is more than the size of the US economy.

Read more: IMF and WTO: Economy brighter than expected but big risks remain

Despite this, the organisation revised up its forecast for the global economy. The IMF now thinks global GDP will shrink by 4.4 per cent this year. That is still a record contraction, but 0.8 percentage points better than its June forecast.

The IMF – which lends to countries in trouble – said the improvement reflected a better-than-expected second quarter and signs of a stronger recovery in the third quarter. Yet it said 2021 growth would be 0.2 percentage points lower than expected in June, at 5.2 per cent.

It said the UK economy would shrink by 9.8 per cent in 2020. That was a 0.4 percentage point improvement from the June forecast. But it is expected to grow just 5.9 per cent in 2021, making it one of the worst-performing advanced economies.

China is the only economy that can expect to grow this year, the IMF said. The US will contract by 4.3 per cent and the Euro area will shrink by 8.3 per cent, it predicted.

Second coronavirus wave could take a heavy toll

However, the global economic recovery could be derailed by a resurgence of the virus, the IMF warned.

Covid is spreading rapidly again in countries such as the UK, while more than 1m people have now died around the world.

Gopinath said in a statement accompanying the report that there is “tremendous uncertainty” about the future. Under a second wave, “the toll on economic activity would be severe, and likely amplified by severe financial market turmoil”.

One of the key messages was that the economic recovery would stall if governments cut back their economic support prematurely.

The report said that wage subsidies, enhanced unemployment benefits, and business support should be kept up.

Read more: Rishi Sunak extends furlough scheme for businesses facing lockdown

“Premature scaling back of such lifelines, especially while infections are surging and may require renewed containment measures, risks pushing the economy back into recession,” it said.

The Fund did not name any countries in particular. But many economists in the US say the country is in need of more stimulus. The UK government has also made its flagship wage subsidy scheme much less generous.

Economies face ‘scarring’ from Covid

The report warned that there was likely to be considerable “scarring” on economies around the world.

It said the effects of coronavirus would be felt “well into the medium term as labor markets take time to heal, investment is held back by uncertainty and balance sheet problems, and lost schooling impairs human capital”.

However, it said that a vaccine could change the whole picture. Widespread vaccination would “lift sentiment and yield better growth outcomes than in the baseline, including by allowing for a fuller recovery in contact-intensive sectors and travel”.

Gopinath said that the rebuilding of economies after coronavirus was an opportunity to tackle climate change.

Read more: IMF chief: Climate change poses ‘profound threat’ to global growth

“A public green infrastructure investment push in times of low interest rates and high uncertainty can significantly increase jobs and accelerate the recovery,” she said.

She added it would also serve “as an initial big step towards reducing carbon emissions”.