Reopening from the Great Lockdown: Uneven and Uncertain Recovery
IMF Blog, June 24, 2020
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- Authors: Gita Gopinath
- Published: June 24, 2020
Overview and headline projections
- Over 75 percent of countries are now reopening while the pandemic is intensifying in many emerging market and developing economies.
- Global output is projected to decline by 4.9 percent in 2020, 1.9 percentage points below the April World Economic Outlook forecast, followed by growth at 5.4 percent in 2021.
- These projections imply a cumulative loss to the global economy over two years (2020–21) of over $12 trillion.
- The downgrade from April reflects: worse than anticipated outcomes in the first half of this year, an expectation of more persistent social distancing into the second half of this year, and damage to supply potential.
Uncertainty and risk scenarios
- High degree of uncertainty with both upside and downside risks:
- Upside: better news on vaccines and treatments, and additional policy support leading to a quicker resumption of economic activity.
- Downside: further waves of infections reversing mobility and spending, rapid tightening of financial conditions triggering debt distress.
- Geopolitical and trade tensions could damage fragile global relationships at a time when trade is projected to collapse by around 12 percent.
Character of the downturn and distributional effects
- Synchronized deep downturn in 2020:
- Advanced economies: -8 percent.
- Emerging market and developing economies: -3 percent; -5 percent if excluding China.
- Over 95 percent of countries are projected to have negative per capita income growth in 2020.
- The cumulative hit to GDP growth over 2020–21 for emerging market and developing economies, excluding China, is expected to exceed that in advanced economies.
- Sectoral and labor-market impacts:
- Reopening sees uneven pick-up: pent-up demand drives spending in some sectors (e.g., retail), while contact-intensive services (hospitality, travel, tourism) remain depressed.
- Labor markets hit at record speed, especially lower-income and semi-skilled workers without teleworking options.
- With labor-intensive sectors expected to remain subdued, a full labor-market recovery may take a while, worsening income inequality and increasing poverty.
Policy response to date and financial-market developments
- Exceptional policy support has helped, particularly in advanced economies:
- Global fiscal support now stands at over $10 trillion.
- Monetary policy eased dramatically: interest rate cuts, liquidity injections, and asset purchases.
- These measures have supported livelihoods, prevented large-scale bankruptcies, and helped reduce lasting scars.
- Financial conditions have recovered strongly despite weak real outcomes:
- Equity prices rebounded, credit spreads narrowed, portfolio flows to emerging market and developing economies stabilized, and some sharply depreciated currencies strengthened.
- The disconnect between real and financial markets raises concerns of excessive risk taking and is a significant vulnerability.
- By preventing a financial crisis, policy support has helped avert worse real outcomes.
Policy recommendations and priorities
- Remain vigilant: substantial joint fiscal and monetary support must continue for now, especially where inflation is projected to remain subdued.
- Ensure proper fiscal accounting and transparency, and protect monetary policy independence.
- Manage health risks while reopening:
- Continue building health capacity, widespread testing, tracing, isolation, safe distancing, and wearing masks.
- Expand financial assistance and expertise to countries with limited health care capacity.
- Ensure adequate and affordable production and distribution of vaccines and treatments when available.
- Income and firm support where activities are severely constrained:
- Income support through unemployment insurance, wage subsidies, and cash transfers.
- Firm support via tax deferrals, loans, credit guarantees, and grants.
- Scale up digital payments to reach the unemployed in countries with large informal sectors, complemented with in-kind support for food, medicine, and other household staples via local governments and community organizations.
- In economies reopening, shift policy toward:
- Encouraging people to return to work and facilitating reallocation of workers to growing sectors.
- Spending on worker training and hiring subsidies targeted at those at greater risk of long-term unemployment.
- Actions to repair balance sheets and address debt overhangs, including strong insolvency frameworks and mechanisms for restructuring and disposing of distressed debt.
- Gradually shift policy support from targeted to more broad-based measures where fiscal space permits:
- Undertake green public investment to accelerate recovery and support longer-term climate goals.
- Expand social safety net spending to protect the most vulnerable for some time.
- International support and cooperation:
- Ensure developing economies can finance critical spending through concessional financing, debt relief and grants.
- Ensure emerging market and developing economies have access to international liquidity via financial market stability, central bank swap lines, and deployment of a global financial safety net.
- Resolve trade and technology tensions and improve the multilateral rules-based trading system.
Medium-term challenges and opportunities
- Public debt is projected to reach this year the highest level in recorded history in relation to GDP, in both advanced and emerging market and developing economies.
- Countries will need sound fiscal frameworks for medium-term consolidation, including cutting wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.
- Opportunity to accelerate a shift to more productive, sustainable, and equitable growth through investment in new green and digital technologies and wider social safety nets.
Source: IMF blog post "Reopening from the Great Lockdown: Uneven and Uncertain Recovery" by Gita Gopinath, June 24, 2020.