IMF Issues Gloomy World Economic Forecast Update

By Tom Burnett CFA

On June 24, 2020, the International Monetary Fund (“IMF”) issued its World Economic Outlook Update. The negative impact of the Covid-19 outbreak and the countermeasures to control it, is evident in this report. The IMF now expects global GDP to decline by 4.9% in 2020, after growing by 2.9% in 2019. The Update now forecasts a recovery of 5.4% growth in world GDP in 2021, assuming the Covid-19 virus incidence is materially reduced.
Looking at specific regions, the Update sees U.S. GDP weakening from 2.9% in 2019 to negative 8.0% in 2020. A recovery of 4.5% growth is forecast for 2021. In the EU, the Update forecasts a decline of 10.2% in 2020, with a recovery of 6.0% growth in 2021. China is expected to show growth of just 1.0% in 2020, well below the 6.1% rate in 2019. For 2021, China is expected to sow growth of 8.2%. All the 2021 forecasts are dependent on the virus not breaking out again in a resurgence next year.
The slowdown is punishing world trade volumes which are expected to fall 11.9% in 2020, before recovering by 8.0% in 2021.
The Update draws attention to the various fiscal methods employed by the major economies to offset the impact of the virus. Importantly, the U.S. hashed up a lot of its fiscal firepower as combined government deficits will have reached 23.8% of GDP by the end of the year. The comparable figure for the 2019 year was 6.3%. The Update forecasts a debt to GDP ratio of 141% at the end of this year, up from 109% at the end of 2019. The update implies that the global economies may be running out of debt capacity as they work to offset the impact of the virus and the policies necessary to combat it.

Tom Burnett CFA is Director of Research