UK Edition
The Covid-19 crisis could cost the global economy a staggering $12 trillion (£9.5 trillion) in the biggest hit to growth since the Great Depression, the International Monetary Fund (IMF) has warned.
Already bleak forecasts of a 3pc fall in global growth have been slashed to an even deeper 4.9pc slide in the IMF’s latest World Economic Outlook, as it warned that the pandemic and lockdowns aimed at controlling it had damaged activity far more deeply than expected in April.
The international body’s chief economist Gita Gopinath also said that economic scarring from failed businesses and fears of a disastrous second wave of infections will drag on recovery in the second half of the year.
Ms Gopinath said: “The downgrade reflects worse than anticipated outcomes in the first half of this year, an expectation of more persistent social distancing into the second half of this year, and damage to supply potential.”
Although the world economy is forecast to bounce back by 5.4pc in 2021, the trajectory remains some 6.5 percentage points below the IMF's last pre-Covid forecasts in January.
She said: “These projections imply a cumulative loss to the global economy over two years (2020–21) of over $12 trillion from this crisis."
The world’s debts are predicted to surge above 100pc of global annual economic output for the first time as countries pile on borrowing to pay for the cost of tackling the crisis – up 19 percentage points from 2019 and raising questions about whether the huge bills could themselves pose a serious future economic threat.
Governments have spent more than $10 trillion so far fighting Covid-19. The IMF warned that when the crisis has passed, countries will have to tighten the purse strings to get their finances back on track.
In the UK, where debt as a share of the economy has already passed 100pc, the IMF now expects a far deeper recession.
It expects a contraction of 10.2pc this year despite the unlocking of much of the economy announced by Boris Johnson this week, compared to April’s forecast of a 6.5pc decline.
The IMF’s predictions are slightly less pessimistic on the UK’s prospects than those from the Organisation for Economic Cooperation and Development, which said two weeks ago the country would be the biggest Covid-19 growth victim among developed economies with a decline of 11.5pc.
But it echoed the OECD’s warnings that the biggest economic casualties are likely to be services-based economies reliant on customer contact.
Ms Gopinath said: “On the one hand, pent-up demand is leading to a surge in spending in some sectors like retail, while, on the other hand, contact intensive services sectors like hospitality, travel, and tourism remain depressed.
“Countries heavily reliant on such sectors will likely be deeply impacted for a prolonged period.”
The organisation also stressed that the burden of unemployment has fallen so far on lower-income and semi-skilled workers unable to work at home.
It added: “A full recovery in the labour market may take a while, worsening income inequality and increasing poverty."
The IMF is also concerned about the wider threat that massive central bank support has artificially pumped up financial markets at a time when real economies languish in deep recessions. This creates the risk of further chaos when the support is withdrawn.
It said: “By preventing a financial crisis, policy support has helped avert worse real outcomes. At the same time, the disconnect between real and financial markets raises concerns of excessive risk taking and is a significant vulnerability."