How COVID-19 attack to Global Economy?

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The International Monetary Fund (IMF) on Wednesday painted a bleak portrait of the global economy, saying the COVID-19 pandemic has caused more widespread damage than expected and will be followed by a sluggish recovery. 

According to the IMF, the global economy will shrink this year by 4.9 percent, worse than the 3 percent decline predicted in April.

“No major economy is escaping the pandemic. The U.S. economy, the world’s largest, is expected to shrink this year by 8 percent. Countries that use the single European currency are headed for a decline of more than 10 percent while Japanese output will fall by 5.8 percent, the IMF said.”

China situation is worst. They have two major challenges which are the pandemic and the trade challenges of the United States. The Chinese economy is projected to eke out just a 1 percent gain — its worst performance in several decades.

“Maybe we can say the world has bottomed out, for now, and we’re in a recovery phase, But still, the strength of the recovery is highly uncertain because there is no solution yet to the health crisis,”  said Gita Gopinath, the IMF’s chief economist.

IMF predicts a $12.5 trillion of the global economy lost by the end of next year. 

“Today’s IMF report is a warning to the world about what will happen if policymakers take their foot off the gas,” said Josh Lipsky, former IMF senior adviser who is now with the Atlantic Council. “ … The uncertain spread of the virus, risk of rising trade tensions, and debt vulnerabilities in emerging economies all lead to the same conclusion — we have not done enough.”

Meanwhile, a recent world bank report indicated that U.S. GDP is expected to contract by 6.1 percent in 2020—7.9 percentage points below previous forecasts, reflecting the severe consequences of the

pandemic in the first half of the year and an assumed gradual recovery in the second half. It is subsequently projected to rebound to 4 percent in 2021, as large-scale policy support gains traction,

amid an assumed recovery in consumer and investor confidence.

Widespread virus outbreaks throughout the Euro Area have prompted governments to impose various mitigation measures such as nationwide lockdowns, extended school closures, and border

restrictions. These have significantly disrupted domestic economic activity. Many Euro Area members are heavily reliant on tourism, a sector virtually shut down by government policies, and particularly

prone to slow recoveries. In contrast to the United States, the rise in

unemployment has been modest so far, in large part due to the widespread use of short-time work policies. 

The world bank report says Euro Area output is expected to contract by 9.1 percent in 2020—10.1 percentage points below previous projections—with all major member countries experiencing recessions before a gradual recovery gets underway late in the year. Growth is forecast to rebound to 4.5 percent in 2021, reflecting fading pandemic-related drag, and the eventual effects of accommodative fiscal and monetary policy.

In Japan, preventive measures were able to slow the spread of the virus but triggered a fall in economic activity, magnifying acute adverse spillovers via trade and financial channels. The postponement of the Tokyo 2020 summer Olympics has compounded the adverse economic effects of the pandemic. 

“Output is projected to shrink by 6.1 percent in 2020, 6.8 percentage points below previous expectations. Weaker-than-expected outcomes earlier in the year, as well as the severe effects of the pandemic, contribute to the downgrading. Growth is expected to recover to 2.5 percent in 2021, aided by fiscal and monetary support”, World Bank, June 2020

Recently, many countries have responded to increasing domestic demand for food and medical equipment with export restrictions. At the macroeconomic level, these policies, if applied over long periods, are likely to increase price volatility and dampen growth (Barattieri,

Cacciatore and Ghironi 2019; Laborde, Lakatos, and Martin 2019). Authorities need to avoid the temptation of damaging isolationist or tit-for-tat protectionist policies. Critically, governments need

to avoid restricting exports of necessary food and medical products. In view of closely integrated trade in intermediate inputs, such measures can obstruct supply chains for essential items.

Facilitating the flow of remittances is also important. Good outcomes are more likely when countries work together to support increased production and cooperate to ensure that resources flow to where they are most needed. More broadly, upholding a stable rules-based international trading system will be critical to launching a strong and durable global economic recovery (IMF 2020b).

Janaka Edirimanna
By Janaka Edirimanne



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