Updated: Jul 1, 2020
We had, in 1929 the “Great Depression”, in 2008 the “Great Recession” and now we have the “Great Lockdown”. During this recession the International Monetary Fund (IMF) projects a fall in the GDP of over 170 countries worldwide. If this crisis is short-lived, the IMF predicts that the world GDP will shrink 3%, much worse then the 2008-2009 crisis.
This scenario is a very different one compared to the one that we saw in the World Economic Outlook Report that the International Monetary Fund published, back in January 2020. Some might say that they should know better than to predict a continuous growth for the time that they have. The economy is a cycle. Sometimes we are in recessions, and other times we experience great surplus. That is a clear fact that all economists have accepted. Our job is to be prepared to when the crisis hits and clearly, we are not prepared for this one. Regardless, I think that their clear error was not predictable.
The FRED data had predicted a while back that a crisis would be to come and that banks and governments should act upon it in order to prevent one to happen. Those directions were followed, and the crisis talk went away. And then… Coronavirus. This crisis put together epidemiologists and economists for the first time to work together on a major global matter. Predicting how this will play out is quite complicated because it depends on vaccine. A lot depends on the epidemiology of the virus, the effectiveness of containment measures, and the development of therapeutics and vaccines, all of which are hard to predict. Also, to add to this great mess, many countries are facing an economic crisis, commodity prices collapsing and an obvious health crisis.
This month a new report from the IMF came out and the contrast is clear. It is expected that the world GDP is to fall by 3%. This is a downgrade of 6.3 percentage points from January 2020, a major revision over a very short period, thus making the Great Lockdown worse than the Great Depression of 1929 and far worse than the 2008-2009 Financial crisis. The Financial Crisis of 2008 damaged the world GDP with -0.1% and the Great Lockdown is predicted to damage in -3.0%.
Even in a perfect scenario, where the pandemic fades in the second half of 2020, the measures implemented by the governments are effective all over the world to prevent job losses, companies going bankrupt and given the spread of the virus, the economy is only projected to rebound 5.8% in 2021.
IMF adds that “Countries reliant on tourism, travel, hospitality, and entertainment for their growth are experiencing particularly large disruptions”. This crisis is clearly global and will affect anyone, as it has We are, for the first time since the Great Depression, witnessing a crisis that is affecting both the Emerging Markets and Developing Economies. For this year, growth in advanced economies is projected at -6.1%. Emerging market and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0% in 2020, and -2.2% if you exclude China. The income per capita is projected to shrink for over 170 countries. Both advanced economies, emerging market and developing economies are expected to partially recover in 2021.
As I have mentioned before this is if the situation is ideal. If the pandemic goes longer than expected or is not controlled correctly by the governments, the world GDP will fall further than the expected 3% and will not rebound the expected 5.8% the next year.
This goes without saying but the April report, if you decide to read it, as I did, you will find a good projection made by the best of the best in a time of crisis such as this one. I believe that it is a bit bold to say that a fall of 3% will occur. However, this all depends a lot on the time we develop a vaccine and if the virus is controlled in the second half of the year. 3% projection could be them trying to present the public with a worst-off scenario than what they actually trust will occur. Regardless, this is clearly showing that we must prepare for a crisis never witnessed before by most of the people that will suffer it.