A new wave of the COVID-19 pandemic may significantly disrupt domestic economic activity across the globe, the International Monetary Fund (IMF) said in its updated World Economic Outlook (WEO) on Wednesday.
“While the baseline does not rule out a possible resurgence in cases in some countries, the first scenario assumes instead that a second major global outbreak takes place early in 2021," the IMF said. “The disruptions to domestic economic activity in each country in 2021 - resulting from measures taken to contain this second outbreak - are assumed to be roughly one-half the size of what is already in the baseline for 2020.”
In such a scenario, the fund does not rule out the possibility of additional tightening in financial conditions in 2021.
“The additional tightening is about one-half of the increase in sovereign and corporate spreads seen since the beginning of the pandemic,” the IMF said. “In the second scenario, it is assumed that the recovery is faster than expected, as greater confidence in efficient post-lockdown measures lead to effective containment and less precautionary behavior by households and firms once the lockdowns are lifted."
Faster recovery will soften financial conditions next year, the report added.
“It is important to stress the considerable uncertainty surrounding these scenarios, especially Scenario 1. The second outbreak could take place in the fall, in which case the negative impact on activity in 2020 would be even larger than in the current baseline,” WEO said.
The IMF stressed the unprecedented character of the current situation.
“For the first time, all regions are projected to experience negative growth in 2020,” it said.
The fund has forecasted significant downside risks, specifically, in case of recurring waves of the pandemic.
“A more prolonged decline in activity could lead to further scarring, including from wider firm closures, as surviving firms hesitate to hire jobseekers after extended unemployment spells, and as unemployed workers leave the labor force entirely,” it said. “Financial conditions may again tighten as in January – March, exposing vulnerabilities among borrowers.”
The IMF slashed its 2020 global growth forecast by 1.9 percent to -4.9 percent.