Covid-19 downturn not as bad as feared; crisis not over: IMF chief

The global downturn caused by the coronavirus pandemic will not be as bad as originally feared thanks to a flood of government spending, but the crisis is far from over, IMF chief Kristalina Georgieva said Tuesday.

“The picture today is less dire… allowing for a small upward revision to our global forecast for 2020,” she said in a speech ahead of IMF-World Bank fall meetings next week, where the IMF is due to present its updated forecasts.

In June, the Washington-based crisis lender projected a nearly five per cent contraction of global GDP, but results in the second and third quarters were better than expected.

Georgieva credited the improvement to “extraordinary policy measures that put a floor under the world economy,” which amounted to $12 trillion in fiscal support to households and firms.

But she warned that “less dire is not sunny,” and governments should not prematurely withdraw the help they have provided, since the outlook for next year is mixed and rife with uncertainties and risks.

After more than a million deaths, “this calamity is far from over. All countries are now facing what I would call ‘The Long Ascent’ — a difficult climb that will be long, uneven, and uncertain,” Georgieva said, stressing the need to help the weakest nations.

Pulling back on government aid risks “massive bankruptcies and massive unemployment. And that can be so tragic for the world economy that we have to do everything we can to prevent from it,” she said in a virtual discussion at the London School of Economics.

In the United States and Europe, the downturn, though painful, was not as severe as economists feared at the outset, while China is seeing “a faster-than-expected recovery.”

But the news elsewhere is indeed bad: “In low-income countries, the shocks are so profound that we face the risk of a ‘lost generation,'” she said.

“There is also now the risk of severe economic scarring from job losses, bankruptcies, and the disruption of education” worldwide, she said.

Forging a better world

Low-income countries have not had the ability to spend as much to support jobs and businesses, and will also need help to deal with their debt burdens, including through increased grants and debt restructuring.

The IMF late Monday approved a six-month extension of its suspension of debt service payments to 28 of the world’s poorest countries.

Georgieva said the pandemic crisis presents an opportunity to create a better, more equitable economic system.

Likening the crisis to World War II when leaders “forged a better world in the worst possible moment,” she called for governments to continue extending lifelines to workers and businesses as long as they are needed.

“Cut the lifelines too soon, and the Long Ascent becomes a precipitous fall.”

But she noted, “We cannot afford simply to rebuild the old economy, with its low growth, low productivity, high inequality, and worsening climate crisis,” and called for more spending on green jobs which can generate even greater employment.

“This will require both stimuli for job creation, especially in green investment, and cushioning the impact on workers,” she said. “Safeguarding social spending will be critical for a just transition to new jobs.”

She referred to an IMF report released Monday showing that increasing spending by just one per cent of GDP could create 33 million new jobs.

The World Trade Organization likewise said Tuesday that the devastation of global trade during the pandemic will not be as bad as originally forecast, contracting by just 9.2 per cent this year, rather than 12.9 per cent.

“World trade shows signs of bouncing back from a deep, Covid-19-induced slump, but WTO economists caution that any recovery could be disrupted by the ongoing pandemic effects,” the global trade body said in a statement.

(Source: BSS)