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MARKET TRENDS IMF says global recession imminent, sees recovery in 2021

Mar 27, 2020

The IMF called on members to contribute funds to help the poorest countries.

The International Monetary Fund (IMF) recently pledged that it stands ready to deploy $1 trillion in lending capacity in emergency finance as the coronavirus pandemic will lead to an impending worldwide recession. Moreover, according to IMF, the world economic output should recover in 2021.

Welcoming the emergency steps taken by the countries to fight Covid-19, Kristalina Georgieva, MD, IMF, praised the initiatives taken by various central banks to ease monetary policy in a forecast issued after a conference call of finance ministers and central bankers from the Group of 20 of the world's largest economies.

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Joining central banks in most countries, the US Federal Reserve signalled it will buy unlimited assets to support the economy after a top Fed official said US GDP could contract 50% in the second quarter. Advanced economies were generally in better shape to deal with the crisis, but many emerging markets and low-income countries face significant challenges, including outward capital flows. Investors have already removed $83 billion from emerging markets since the start of the crisis, the largest capital outflow ever recorded, Georgieva said.

"The human costs of the coronavirus pandemic are already immeasurable, and all countries need to work together to protect people and limit the economic damage," Georgieva said. More countries are imposing lockdown measures to contain the epidemic, she noted.

Earlier this month, the IMF chief had warned that 2020 world growth would be below the 2.9% rate seen in 2019 but stopped short of predicting a recession. Trade wars pushed global growth last year to the lowest rate since a 0.7% contraction in 2009. Georgieva said a recovery was expected in 2021, but to reach it countries would need to prioritise containment and strengthen health systems.

"The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be," she said.

The IMF called again on members to contribute funds to replenish its Catastrophe Containment and Relief Trust to help the poorest countries. Georgieva said the IMF was exploring other options with its members. Several low- and middle-income countries have asked for an allocation for the Special Drawing Right, an international reserve asset created by the IMF in 1969 to supplement its member countries' official reserves, as was done during the global financial crisis, she said. IMF members also needed to provide additional swap lines with emerging market countries to address a global liquidity crunch, she said. The IMF was also exploring a proposal that would help facilitate a broader network of swap lines, including through an IMF-swap-type facility.

Deutsche Bank's team of Global Economists led by Peter Hooper, Global Head of Economic Research, now see a severe global recession occurring in the first half of 2020, with aggregate demand plunging in China in the first quarter by about 32% and in the euro area and US in the second quarter, by 24% and 13%, respectively. The quarterly declines in GDP growth they anticipate substantially exceed anything previously recorded going back to at least World War II. The team points out that the crisis has also engendered unprecedented policy responses.

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