The Great Lockdown: Worst Economic Downturn Since the Great Depression

IMF Blog, April 14, 2020

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Bibliographic details

• Authors: Gita Gopinath
• Published: April 14, 2020

Overview and context

• Author: Gita Gopinath
• Date: April 14, 2020
• Context: Rapid onset of a global coronavirus pandemic and extensive quarantines/social distancing have produced a "Great Lockdown" with unprecedented collapse in economic activity.

Core projections and quantification of the shock

• April World Economic Outlook projection: global growth in 2020 to fall to -3 percent.
• Revision magnitude: downgrade of 6.3 percentage points from January 2020.
• 2021 baseline projection: global growth to rebound to 5.8 percent (assuming pandemic fades in the second half of 2020 and policy actions prevent widespread bankruptcies, extended job losses, and system-wide financial strains).
• Cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis: could be around 9 trillion dollars.
• Geographic and income impacts:
  • Both advanced economies and emerging market and developing economies in recession for the first time since the Great Depression.
  • Advanced economies projected growth in 2020: -6.1 percent.
  • Emerging market and developing economies projected growth in 2020: -1.0 percent.
  • Emerging market and developing economies projected growth in 2020 excluding China: -2.2 percent.
  • Income per capita is projected to shrink for over 170 countries.

Alternative adverse scenarios (tail risks)

• If the pandemic is more protracted in 2020: global GDP would fall an additional 3 percent in 2020 relative to baseline.
• If the pandemic continues into 2021: global GDP may fall an additional 8 percent in 2021 relative to baseline.

Key channels of vulnerability

• Severe disruption to countries reliant on tourism, travel, hospitality, and entertainment.
• Emerging market and developing economies face:
  • Unprecedented reversals in capital flows.
  • Currency pressures.
  • Weaker health systems.
  • More limited fiscal space to provide support.
• Several economies entered the crisis with sluggish growth and high debt levels, increasing fragility.

Policy lessons and recommended actions

• Public health priorities:
  • Flatten the spread using lockdowns to allow health systems to cope.
  • Continue to spend generously on health systems, perform widespread testing.
  • Refrain from trade restrictions on medical supplies.
  • Global effort to ensure immediate access to therapies and vaccines for both rich and poor nations.
• While containment persists:
  • Maintain large, timely, and targeted fiscal, monetary, and financial policies to support households, firms, and financial markets.
  • Examples of policy measures already used: credit guarantees, liquidity facilities, loan forbearance, expanded unemployment insurance, enhanced benefits, and tax relief.
  • Continue support throughout the containment phase to minimize persistent scars from subdued investment and job losses.
• Recovery phase policy priorities:
  • Shift policies swiftly to support demand, incentivize firm hiring, and repair balance sheets in the private and public sectors.
  • Coordinate fiscal stimulus across countries with fiscal space to magnify benefits.
  • Consider continued moratoria on debt repayments and debt restructuring during recovery.
• Multilateral and international cooperation:
  • Bilateral creditors and international financial institutions should provide concessional financing, grants, and debt relief to support spending in developing countries.
  • Expand swap lines between major central banks to ease international liquidity shortages.
  • Collaborative effort needed to prevent de-globalization and protect productivity during recovery.
• IMF actions:
  • The IMF is actively deploying its 1-trillion-dollar lending capacity to support vulnerable countries, including through rapid-disbursing emergency financing and debt service relief to poorest member countries, and calls on official bilateral creditors to do the same.

Outlook and uncertainty

• Recovery is partial: 2021 level of economic activity projected to remain below pre-virus projections for 2021.
• Tremendous uncertainty remains about the epidemiology of the virus, effectiveness of containment measures, and timing of therapeutics and vaccines.
• Domestic and international policy responses need to be large, rapidly deployed, and speedily recalibrated as new data becomes available.

IMF Blog — The Great Lockdown: Worst Economic Downturn Since the Great Depression; Gita Gopinath; April 14, 2020

References

• World Economic Outlook
• https://www.imf.org/wp-content/uploads/2020/04/eng-apr-12-weo1.png
• https://www.imf.org/wp-content/uploads/2020/04/eng-apr-12-weo2.png
• https://www.imf.org/wp-content/uploads/2020/04/eng-apr-12-weo3-1.png
• https://www.imf.org/wp-content/uploads/2020/04/WEO-FINAL-projections-table.png