COVID-19 Effect: World economy bound to suffer 'severe recession', says IMF chief

The world economy, already "sluggish" before the coronavirus outbreak, is now bound to suffer a "severe recession" in 2020, IMF chief Kristalina Georgieva has warned and said the current crisis posed "daunting challenges" for policymakers in many emerging markets and developing economies.

Follow latest updates on the COVID-19 pandemic here

Addressing the Development Committee Meeting during the annual Spring Meeting of the International Monetary Fund (IMF) and the World Bank, the IMF Managing Director said a large global contraction in the first half of this year was inevitable.

She said the coronavirus pandemic hit the world economy when it was already in a fragile state as it was weighed down by trade disputes, policy uncertainty and geopolitical tensions.

"The global coronavirus outbreak is a crisis that is like no other and poses daunting challenges for policymakers in many emerging market and developing economies (EMDEs), especially where the pandemic encounters weak public health systems, capacity constraints, and limited policy space to mitigate the outbreak's repercussions," Georgieva said.

She said that the world economy was in a "sluggish" recovery before the coronavirus outbreak, warning that it is now bound to suffer a "severe recession" in 2020.

She said the medium termed projections were clouded by uncertainities.

"Medium-term projections are clouded by uncertainty regarding the pandemic's magnitude and speed of propagation, as well as the longer-term impact of measures to contain the outbreak, such as travel bans and social distancing," she said.

However, most EMDEs are already suffering from disruptions to global value chains, lower foreign direct investment, capital outflows, tighter financing conditions, lower tourism and remittances receipts, and price pressures for some critical imports such as foods and medicines, she said.

"The world economy was in a sluggish recovery before the coronavirus outbreak… and is now bound to suffer a severe recession in 2020," Georgieva added.

According to Johns Hopkins University data, the number of confirmed coronavirus cases surpassed two million globally and 144,000 people have died so far. The US is the worst hit with more than 700,000 COVID-19 cases and 35,000 deaths.

Also Read: Coronavirus India update: State-wise total number of confirmed cases, deaths

Rising malnutrition is expected as 368.5 million children across 143 countries who normally rely on school meals for a reliable source of daily nutrition must now look to other sources, the IMF official said.

Georgieva said that prospects had deteriorated sharply with the spread of the COVID-19 pandemic.

Countries that were affected early—such as China, South Korea, and Italy—have suffered large contractions in manufacturing activity and services, exceeding the losses recorded at the onset of the global financial crisis, Georgieva said.

She said retrenchments in activity have been accompanied by a sharp re-pricing of financial assets amid rapidly deteriorating risk sentiment, large equity sell-offs, widening risk spreads, and reversals of portfolio flows to EMDEs.

Many commodity prices have fallen sharply, notably for oil.

"A large global contraction in the first half of 2020 is inevitable. Prospects thereafter depend on the intensity and efficacy of containment efforts, progress with developing vaccines and therapies, the extent of supply disruptions, shifts in spending patterns, the impact of tighter financial conditions on activity, and the size of the policy response," Georgieva said.

There is an assumption the global economy would start recovering from the third quarter—as public health measures are scaled back and the impact of policy support materializes.

"While the recovery is expected to pick up in 2021, by end-2021 global output would remain significantly below the pre-crisis trend," she said. The IMF Managing Director said that the immediate priority is to minimise the pandemic's human toll and economic disruption.

"Bold action from the international community is needed to help LIDCs cope with the pandemic and its economic and social repercussions," she said.

"The first priority must be to limit the human toll from the pandemic. Policymakers must use all instruments at their disposal to slow the pandemic's spread and prevent overloading their health systems—the idea of a tradeoff between saving lives and saving livelihoods is a false dilemma," she added.