Pessimistic forecasts from the IMF

The worlds economy is going to shrink significantly in 2020 because of the pandemic

Mihai Pelin, 25.06.2020, 13:50

The International Monetary Fund has substantially lowered its estimates regarding the world economy this year. The change was prompted by a stronger than anticipated negative impact of the pandemic on the economy in the first half of this year, and the recovery expected in 2021 will be more gradual than originally hoped for.

According to the latest report on global economy, the unfavourable impact on households is particularly significant, in that it jeopardises the progress made in the 1990s in curbing extreme poverty worldwide. Whereas in April the IMF estimated the global economy to go down 3% this year, the new forecasts point to a 5% contraction. The US economy is expected to fall by 8%, while the rate for the Eurozone may reach 10.2%.

Spain and Italy will be among the worst hit countries. The IMF expects insolvency numbers to go up 22% in Spain and 37% in Italy by 2021, compared to 2019. Companies in the 2 countries are doing better than in the period preceding the global financial crisis of 2009. By the 3rd quarter of last year, Spanish companies had managed to substantially reduce their debt, by 20%, with similar, although slightly lower financial performances reported in Italy.

As far as Romania is concerned, in April the IMF expected the national economy to shrink by 5% this year and to recover in 2021, when the growth rate was expected to reach 3.9%. On the other hand, the IMF forecasts also suggested Romanias unemployment rate would rise steeply, from 3.9% in 2019 to 10.1% in 2020, and fall to 6% in 2021.

The labour market was severely disrupted worldwide following the pandemic. The International Labour Organisation says that out of the around 2 billion undocumented workers at global level, around 80% have been affected critically.

But there are encouraging signs as well, the IMF says. The fiscal and financial measures implemented in order to mitigate the effects of the pandemic in some countries at the onset of the crisis helped avoid worse losses in the short run.

Reducing working hours and the assistance provided to employees through furlough and temporary suspension schemes lowered the unemployment rate, while at the same time the financial support granted to companies and the measures taken by regulatory authorities prevented the escalation of bankruptcies.

In some cases, central banks moved to improve cash flows and limit borrowing costs, the IMF also says.

(translated by: Ana-Maria Popescu)