It’s time to think different about your Contracting and Financial workflow...

For the first time since the Great Depression, both advanced and emerging market economies will be in recession in 2020. The recently published June World Economic Outlook Update of IMF shows negative growth rates even worse than previously estimated:

Global output is projected to decline by 4.9 percent in 2020, 1.9 percentage points below the IMF’s April forecast, followed by a partial recovery, with growth at 5.4 percent in 2021.

Aside from its unprecedented scale, the Global Lockdown is playing out in ways that are very different from past crises, according to the IMF’s article.

It is possible that with pent-up consumer demand there will be a quicker rebound, unlike after previous crises – photo: blogs.imf.org
A crisis like no other

First, this crisis has dealt a uniquely large blow to the services sector. In typical crises, the brunt is borne by manufacturing, reflecting a decline in investment, while the effect on services is generally muted as consumption demand is less affected. This time is different.

In the peak months of the lockdown the contraction in services has been even larger than in manufacturing,

with a few exceptions like Sweden, which is known for adopting a different approach to the health crisis, with limited government containment measures.

It is possible that with pent-up consumer demand there will be a quicker rebound, unlike after previous crises. However, this is not guaranteed as consumers may change spending behaviour to minimize social interaction, and to save more. Of particular concern is the long-term impact on economies that rely significantly on such services—for example, tourism-dependent economies.

Contact-intensive services sectors like hospitality, travel, and tourism remain depressed – photo: bloombergquint.com

Second, despite the considerable monetary and fiscal support across the globe, aggregate demand remains subdued and is weighing on inflation, alongside lower commodity prices. With high unemployment projected to stay for a while, countries with monetary policy credibility will likely see small risks of spiraling inflation.

And finally, we see striking divergence of financial markets from the real economy, with financial indicators pointing to stronger prospects of a recovery than real activity suggests.

A recovery like no other

This crisis like no other will have a recovery like no other, according to the IMF’s article.

First, the unprecedented global sweep of this crisis hampers recovery prospects for export-dependent economies and

jeopardizes the prospects for income convergence between developing and advanced economies.

Second, as countries reopen, the pick-up in activity is uneven from sectors to sectors. While pent-up demand is leading to a surge in spending in some sectors like retail, contact-intensive services sectors like hospitality, travel, and tourism remain depressed. Countries heavily reliant on such sectors will likely be deeply impacted for a prolonged period.

A full recovery in the labor market may take a while, worsening income inequality and increasing poverty – photo: businessinsider.com

Third, the labor market has been severely hit and at record speed, and particularly so for lower-income and semi-skilled workers who do not have the option of teleworking. With activity in labor-intensive sectors like tourism and hospitality expected to remain subdued, a full recovery in the labor market may take a while, worsening income inequality and increasing poverty.

The IMF also draws attention to medium-term challenges.

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, through cutting back on wasteful spending, widening the tax base, minimizing tax avoidance, and greater progressivity in taxation in some countries.

 

 

 

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