The IMF is forecasting co-ordinated contractions in both advanced and emerging economies this year — the first time this has happened since the Great Depression.
It has taken a red pen to its April forecasts, marking them down from a forecast 3 per cent contraction in global GDP this calendar year to a forecast 4.9 per cent contraction.
Not only is the IMF expecting a deeper global downturn, but it is decidedly more pessimistic on prospects for recovery.
Three main forces underpin its weaker outlook.
First, even as infections peak and restrictions are lifted in many countries, the IMF expects to see citizens adopting more persist social distancing practices. Where restrictions have lifted, the IMF notes mobility data such as traffic numbers have remained well below pre-crisis levels. Humans are just going to be more reluctant to congregate, and that could last for some time, crimping spending. Consumers are also engaging in more “precautionary saving” as belts tighten.
Second, the bigger-than-expected downturn in the first half of this year means the IMF now expects to see greater “scarring” or “damage to supply potential” in the long term. More firms have gone under. Jobs have been lost that won’t come back. These scars will be permanent for some.
Finally, the IMF expects lower productivity among those who have kept their jobs. As workers return to work, they’re likely to be hampered by more burdensome workplace safety and hygiene practices, including staggered shifts, increase cleaning between shifts and increased distance between workers on production lines.
The long-term ramifications of the crisis are becoming clear.
Indeed, the IMF expects a significant rise in social inequality as lower-skilled workers bear the brunt of job losses. “The adverse impact on low-income households is particularly acute, imperilling the significant progress made in reducing extreme poverty in the world since the 1990s.”
Furthermore, the 1.3 billion school children (70 per cent of the global total) who have been affected by interrupted schooling will suffer a “significant loss of learning, with disproportionately negative effects on earnings prospects for children in low-income countries”.
I did warn you it’s pretty dire.
Worryingly, the IMF says financial markets have yet to grasp the full picture, with a “disconnect” existing between the economic outlook and market sentiment.
“The extent of the recent rebound in financial market sentiment appears disconnected from shifts in underlying economic prospects … raising the possibility that financial conditions may tighten more,” it warns.
There are, however, “some bright spots” to “mitigate the gloom”.
Governments around the world have unleashed unprecedented policy support. All up, two-thirds of governments have unleashed a combined nearly $11 trillion to their support economies, with about half comprising direct spending and tax concessions initiatives and the other half coming in the form of increased liquidity and credit support for business.
As the Australian government mulls the impending end of its extra-ordinary supports, including the JobKeeper wage subsidy, the IMF warns such policies should not be “prematurely withdrawn”.
But nor should they survive in perpetuity.
As economies reopen, the IMF advises the focus must now shift “from protecting jobs and shielding firms to facilitating recovery and removing obstacles to worker reallocation”.
If you didn’t spot it, “worker reallocation” is secret economist code for lots of jobs aren’t coming back and lots of workers are going to need retraining to try to nab some of the new jobs popping up. (And in reality, many won’t make the leap.)
For stimulus-weary governments, the IMF’s main message is that their work has only just begun.
The Fund’s wish list of policy actions includes public investments in areas such as physical and digital infrastructure, health care systems and a transition to a low-carbon economy.
It also wants an “expanded social safety net spending to protect the most vulnerable”.
Taxpayer dollars must also be spent on worker training and hiring subsidies to encourage businesses to pick up workers from sectors “likely to emerge persistently smaller from the pandemic”.
But it’s not just a fistful of dollars that’s needed.
Careful policy work is required to reduce barriers to new entrants in certain industries and remove any other disincentives firms may face that deter them from hiring.
Australia is well placed to continue this work. Globally, government gross debt is poised to top 100 per cent of GDP this year. In the United States, it’s 141 per cent. Japanese government debt is at 268 per cent GDP. In Australia, we are approaching around 60 per cent.
Australians can feel proud of our government’s response to the economic crisis so far. But there is a lot more work to do.
Jessica Irvine is a senior writer.
Jessica Irvine is a senior economics writer with The Sydney Morning Herald.