IMF revises its global GDP forecast higher, but warns the economy 'remains prone to setbacks'
- The IMF's projection assumes that social distancing due to the coronavirus pandemic will continue into 2021, and that local transmission will fall everywhere by the end of 2022.
- National debt in advanced economies is set to reach 125% of GDP by the end of 2021 and to rise to about 65% of GDP in emerging markets during the same period.
The International Monetary Fund on Tuesday turned slightly more positive on the global economy for this year, but warned of a "long, uneven and uncertain" recovery.
The global economy is now projected to contract by 4.4% in 2020 — an upward revision from an estimate of -4.9% made in June (which has now also been revised to -5.2% due to a new methodology used by the IMF). The IMF's forecast assumes that social distancing due to the coronavirus pandemic will continue into 2021, and that local transmission will fall everywhere by the end of 2022.
"We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast," the IMF's chief economist, Gita Gopinath, said in the latest World Economic Outlook.
She added that the revision was driven by better-than-expected growth in advanced economies and China during the second quarter of the year and signs of a more rapid recovery in the third quarter.
However, the outlook warned that the coronavirus crisis is far from over.
The IMF projected "only limited progress" going forward and cut its gross domestic product growth expectations for next year to 5.2%, from an estimate of 5.4% made in June.
"While the global economy is coming back, the ascent will likely be long, uneven, and uncertain," Gopinath said, while adding that "prospects have worsened significantly in some emerging market and developing economies."
Emerging market and developing economies are seen contracting by 3.3% this year, but in places like India, GDP is seen falling by more than 10%.
Meanwhile, the United States economy is set to fall by 4.3% this year, but the economic contractions in the U.K., France, Italy and Spain are around 10%.
The recovery "is not assured while the pandemic continues to spread," the IMF said in its latest economic analysis.
"With renewed upticks in COVID-19 infections in places that had reduced local transmission to low levels, re-openings have paused, and targeted shutdowns are being reinstated. Economies everywhere face difficult paths back to pre-pandemic activity levels," the IMF said.
This is the case in many European nations, which eased lockdowns and restrictions at the start of the summer, but have tightened rules once again as infections rose sharply in September.
The IMF has advised governments to keep some degree of accommodative policies to prevent a wider gap in income distribution, despite growing levels of public debt.
National debt in advanced economies is set to reach 125% of GDP by the end of 2021 and to rise to about 65% of GDP in emerging markets during the same period.
However, the fund is not particularly worried about soaring debt for now as interest rates are low and the economic rebound in 2021 should help in repaying some of the new debt.
"To ensure that debt remains on a sustainable path over the medium-term, governments may need to increase the progressivity of their taxes and ensure that corporations pay their fair share of taxes while eliminating wasteful spending," the IMF suggested.
In addition, the IMF mentioned that geopolitical tensions, trade friction, natural disasters, changes to financing conditions and further outbreaks remain downside risks to its projections.