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IMF: ‘The Great Lockdown’ Could Lead to Coordinated Global Economic Policy & Debt Moratoria

The IMF calls the quarantines and social distancing practices to contain the coronavirus pandemic “The Great Lockdown.” In a recent blog post, the Fund discussed the effects.

“The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes,” writes Gita Gopinath for the IMF.  “This is a crisis like no other, and there is substantial uncertainty about its impact on people’s lives and livelihoods.”

The article states that many countries are facing a health crisis, a financial crisis, and a collapse in commodity prices. Bailout money has been given out to Wall Street and Main Street.  “[T]here is considerable uncertainty about what the economic landscape will look like when we emerge from this lockdown.”

Assuming the pandemic and containment measures peak in the second quarter globally, the IMF’s World Economic Outlook anticipates a negative global growth in 2020 of -3 percent. 

“This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis,” writes Gopinath, who keeps the door open to possible, “widespread firm bankruptcies, extended job losses, and system-wide financial strains.”

The loss to global GDP in 2020 and 2021 could be 9 trillion dollars, which is greater than the economies of Japan and Germany combined, Gopinath notes. Countries with tourism, travel, hospitality, and entertainment based economies have been hard hit, and emerging and developing economies must endure “unprecedented reversals in capital flows as global risk appetite wanes, and currency pressures, while coping with weaker health systems, and more limited fiscal space to provide support.” Many economies had already sluggish growth and high debt levels heading into the coronavirus crisis. 

“For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession,” writes Gopinath. “For this year, growth in advanced economies is projected at -6.1 percent. Emerging market and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0 percent in 2020, and -2.2 percent if you exclude China.” Income per capita could fall in 170 countries. 

These predictions are if unprecedented quantitative easing policies allay the crisis. What if the pandemic does not recede in the second half of this year, and we see longer containment, worsening financial conditions, and further breakdowns of global supply chains? 

“Global GDP would fall even further: an additional 3 percent in 2020 if the pandemic is more protracted this year, while, if the pandemic continues into 2021, it may fall next year by an additional 8 percent compared to our baseline scenario,” writes Gopinath. 

New economic measures will need to meet new economic policy, including coordinated global monetary policy. “Fiscal stimulus that is coordinated across countries with fiscal space will magnify the benefit for all economies,” Gopinath writes. “Moratoria on debt repayments and debt restructuring may need to be continued during the recovery phase.”

The International Monetary Fund has deployed its 1-trillion-dollar lending to vulnerable countries. Historically, these loans have come with considerable strings attached; namely, austerity measures. The IMF says we still face uncertainty about what is next. 

“Commensurate with the scale and speed of the crisis, domestic and international policy responses need to be large, rapidly deployed, and speedily recalibrated as new data becomes available,” Gopinath writes. “The courageous actions of doctors and nurses need to be matched by policymakers all over the world so we can jointly overcome this crisis.”

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