The COVID-19 pandemic is inflicting high and rising human costs worldwide, and the necessary protection measures are severely impacting economic activity.
As a result of the pandemic, according to the IMF, the global economy is projected to contract sharply by –3% in 2020, much worse than during the 2008–09 financial crisis. In a baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound, the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalises, helped by policy support.
For us in the UK, the drop is forecast to be 6.5% in 2020 with a recovery of 4% in 2021. These forecasts assume that virus is under control and we are back to something approaching normality by the end of the year.
The risks for even more severe outcomes, however, are substantial, and the IMF has also run three scenarios (see page 17 of its report).
The first alternative estimates the impact of the fight against the spread of the virus in 2020 taking roughly 50% longer than assumed in the baseline. The second alternative considers the impact of a second, but milder, outbreak occurring in 2021. The third alternative estimates the potential impact of both the outbreak taking longer to contain in 2020 and a second outbreak occurring in 2021.
All three scenarios contain four common elements: the direct impact of measures to contain the spread of the virus; tightening in financial conditions; discretionary policy measures to support incomes and ease financial conditions; and scarring resulting from the economic dislocation that policy measures are unable to fully offset.
Under the worst scenario we, in the advanced economies, will see the economy drop by a further 8% by the end of 2021 with that improving to 4% below the base scenario by 2025. That means the advanced economies would not be back to where they were at the end of 2019 until the sometime in 2026 or beyond.
So, whilst we are all hoping for the best, it would be prudent to prepare for alternative scenarios. Cash will remain King for some time yet.
As a result of the pandemic, the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis