The Great Lockdown through a Global Lens
IMF Blog, June 16, 2020
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- Authors: Gita Gopinath
- Published: June 16, 2020
Phases of the crisis
- The Great Lockdown is expected to play out in three phases:
- enter the lockdown,
- exit the lockdown,
- escape the lockdown when there is a medical solution to the pandemic.
- Many countries are now in the second phase, as they reopen, with early signs of recovery, but with risks of second waves of infections and re-imposition of lockdowns.
- For individual countries, minimizing health uncertainty using the least economically disruptive approaches such as testing, tracing, and isolation, tailored to country-specific circumstances with clear communication about the path of policies, should remain a priority to strengthen confidence in the recovery.
Scale and global reach
- This is a truly global crisis:
- For the first time since the Great Depression, both advanced and emerging market economies will be in recession in 2020.
- The forthcoming June World Economic Outlook Update is likely to show negative growth rates even worse than previously estimated.
- The crisis will have devastating consequences for the world’s poor.
- Unlike past crises confined to regions (e.g., Latin America during the 1980s; Asia in the 1990s) or the more modest effects of the global financial crisis 10 years ago, the Global Lockdown is unprecedented in scale.
Sectoral impact: services versus manufacturing
- First, the crisis has dealt a uniquely large blow to the services sector:
- In the peak months of the lockdown the contraction in services has been even larger than in manufacturing.
- This pattern is seen in advanced and emerging market economies alike.
- Exceptions include Sweden and Taiwan Province of China, which adopted limited government containment measures and consequently saw a proportionately smaller hit to services vis-à-vis manufacturing.
- Recovery dynamics:
- It is possible that pent-up consumer demand could produce a quicker rebound, unlike after previous crises.
- This is not guaranteed because consumers may change spending behavior to minimize social interaction, and uncertainty can lead households to save more.
- In China, the recovery of the services sector lags manufacturing as such services as hospitality and travel struggle to regain demand.
- Particular concern for tourism-dependent economies and other economies that rely significantly on services.
Inflation, demand, and monetary credibility
- Second, despite large supply shocks, inflation developments have surprised on the downside:
- Except for food inflation, we have thus far seen, if anything, a decline in inflation and inflation expectations pretty much across the board in both advanced and emerging market economies.
- Aggregate demand remains subdued and is weighing on inflation, alongside lower commodity prices.
- With high unemployment projected to stay for a while, countries with monetary policy credibility will likely see small risks of spiraling inflation.
Financial markets versus the real economy
- Third, there is a striking divergence of financial markets from the real economy:
- Financial indicators point to stronger prospects of a recovery than real activity suggests.
- Despite the recent correction, the S&P 500 has recouped most of its losses since the start of the crisis.
- The FTSE emerging market index and Africa index are substantially improved.
- The Bovespa rose significantly despite the recent surge in infection rates in Brazil.
- Portfolio flows to emerging and developing economies have stabilized.
- With few exceptions, the rise in sovereign spreads and the depreciation of emerging market currencies are smaller than during the global financial crisis, notable given the larger scale of the shock to emerging markets during the Great Lockdown.
- This divergence may portend greater volatility in financial markets; worse health and economic news can lead to sharp corrections.
- One likely factor behind the divergence is the stronger policy response during this crisis:
- Monetary policy has become accommodative across the board, with unprecedented support from major central banks, and monetary easing in emerging markets including through first time use of unconventional policies.
- Discretionary fiscal policy has been sizable in advanced economies; emerging markets have deployed smaller fiscal support, constrained to some extent by limited fiscal space.
- The informal sector in emerging markets, typically a shock absorber, has not been able to play that role under containment policies and has instead required support.
Policy priorities and IMF role
- Key policy priorities:
- Ensure adequate production and distribution of vaccines and treatments when they become available — this will require a global effort.
- Use testing, tracing, and isolation as least economically disruptive approaches, tailored to country-specific circumstances with clear communication about the path of policies.
- Support reallocation of workers from shrinking sectors to sectors with stronger prospects as recovery progresses.
- IMF commitments and actions:
- Continue to ensure adequate international liquidity.
- Provide emergency financing.
- Support the G20 debt service suspension initiative.
- Help countries maintain a manageable debt burden.
- Provide advice and support through surveillance and capacity development to help disseminate best practices as countries learn from each other during this unprecedented crisis.
Gita Gopinath, June 16, 2020 — The Great Lockdown through a Global Lens
