IMF says the recession will be deeper and the recovery slower than it predicted

The International Monetary Fund downgraded its outlook for the coronavirus-ravaged world economy, projecting a significantly deeper recession and slower recovery than it anticipated just two months ago. On June 24 it announced that it expected global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April. For 2021, the fund forecast growth of 5.4%, down from 5.8%.

Having already warned of the biggest slump since the Great Depression, the IMF said its increased pessimism reflected scarring from a larger-than-anticipated supply shock during the earlier lockdown, in addition to the continued hit to demand from social distancing and other safety measures. For nations struggling to control the virus spread, a longer lockdown also will take a toll on growth, the IMF said. The IMF also warned that the rebound in global financial-market sentiment “appears disconnected from shifts in underlying economic prospects,” raising the possibility that financial conditions will tighten more than forecast in its core scenario.

The fund lowered its expectations for consumption in most economies based on a larger-than-expected disruption to domestic activity, demand shocks from social distancing and an increase in precautionary savings. The projections assume that countries with declining infection rates don’t need to reinstate the strict lockdowns from the first half of the year and are able to rely on alternative methods such as increased testing, contact tracing and isolation to contain transmission.

One bright spot has been financial conditions, which have eased in advanced economies and to a lesser extent in emerging markets. Announced fiscal measures amounting to about US$11 trillion globally, up from US$8 trillion estimated in April, have helped cushion the blow to workers and businesses. Swift and innovative interventions by central banks have limited the rise in borrowing costs, and portfolio flows into emerging markets have recovered from record withdrawals.

The fund said its new forecast is subject to revision depending on the length of the pandemic and lockdowns, voluntary social distancing and displaced workers’ ability to find jobs.

The forecast could be upgraded if there’s a medical breakthrough or business activity resumes more quickly, but significant downside risks include outbreaks requiring more lockdowns or tightening financial conditions. “This could tip some economies into debt crises and slow activity further,” the IMF said.

The IMF sees advanced economies shrinking the most, contracting 8%, compared with 6.1% previously. Emerging-market and developing economies will see a 3% contraction, compared with the 1% forecast in April. China will still manage to expand 1%, supported by policy stimulus.

Global trade volume in goods and services will probably tumble 11.9% this year, the fund said. The IMF warned that the pandemic’s impact may significantly increase inequality, with more than 90% of emerging-market and developing economies forecast to show declines in per capita income.

The IMF presents two alternative scenarios: In one, there’s a second virus outbreak in early 2021, with disruptions to domestic economic activity about half the size of those assumed for this year. The scenario assumes emerging markets experience greater damage than advanced economies, given more limited space to support incomes. In that case, output would be 4.9% below the baseline for 2021 and would remain below the baseline in 2022. In the second scenario, with a faster-than-expected recovery, global output would be about a half percentage point better than the baseline this year and 3% above the baseline in 2021.

Source: Financial Post


New Bank of Canada governor sees long road ahead for country’s post-coronavirus recovery

The COVID-19 pandemic will leave some long-term economic damage that will only become clearer as the country moves further along a “prolonged and bumpy” course to recovery, Canada’s top central banker says. In his first speech as governor, Tiff Macklem said the central bank expects to see growth in the third quarter of this year as people are called back to work and households resume some of their normal activities as restrictions ease. But he quickly warned Canadians not to expect the short and sharp economic bounce-back expected over the coming months to last.

“It will be a very long period before we start discussions about removing stimulus,” Macklem said in response to questions after his speech. “It’s not a discussion we’re engaged in right now.”

The Bank of Canada took unprecedented actions to make sure businesses, institutions and consumers had access to credit. The bank cut interest rates by 175 basis points to 0.25% and launched a series of programs to inject hundreds of billions of cash into the economy. That includes its first ever large scale asset purchase program to buy government debt — known as quantitative easing.

The central bank will continue to buy government bonds until a rebound is “well underway,” Macklem said, adding that policy makers are worried that demand will be slow in recovering, which could put downward pressure on inflation without the stimulus.

“The expected long road back indicates that the Bank will need to provide more stimulus, likely in the form of a more aggressive quantitative easing program,” Royce Mendes, an economist at CIBC World Markets, said in a report to investors. The Bank of Canada has bought almost $400 billion ($296 billion U.S.) in assets since the crisis began to inject liquidity into financial markets. Macklem highlighted on June 22 how the purpose of that cash injection has been changing, with the focus now on keeping interest rates low rather than ensuring markets are functioning properly. That’s meant more of the liquidity is targeted at buying up government debt, rather than short-term money market instruments held by banks. Macklem reiterated the bank will continue to purchase at least $5 billion of Canadian government bonds a week to help lower long-term borrowing costs for households and businesses and signal that rates will remain low for a long period.

The bank continues to express concern around the potential for lower inflation. Although businesses are reopening, millions of Canadians remain out of work and spending has dropped. The bank expects supply to be restored faster than demand, which could put downward pressure on prices. “Our main concern is to avoid a persistent drop in inflation by helping Canadians get back to work,” Macklem said.

Macklem isn’t a fan of negative rates. The governor made sure to highlight in his speech that low rates could lead to distortions in the behaviour or financial institutions, while reiterating policy makers will using asset purchases until a recovery is underway. He didn’t specify when he expects that will happen.

In July,  the bank will deliver its July Monetary Policy Report which will contain a central planning scenario for output and inflation. Still, the bank says the pandemic has created a ‘fog of uncertainty’ which has made it difficult to give a clear outlook.

“The course of the coronavirus is the biggest source of uncertainty,” Macklem said. “Beyond that, we don’t know how global trade and supply chains will evolve, or what will happen with domestic supply and demand,” or even how spending habits will change or confidence rebounds. Yet, the economy is showing signs of stabilization and as the data comes in, the bank feels more comfortable in its ability to answer some of those questions.

Source: The Star
Source: The Star
Source: Financial Post