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    IMF says world set to witness worst recession since 1930s, cuts India's FY21 growth forecast to 1.9%

    economy | IST

    IMF says world set to witness worst recession since 1930s, cuts India's FY21 growth forecast to 1.9%


    IMF in its World Economic Outlook report says that the global economy is expected to witness the worst recession since the Great Depression of the 1930s. It also cut India's growth forecast for FY21 to 1.9 percent.

    The global economy is expected to witness the worst recession since the Great Depression of the 1930s, surpassing what was seen during the global financial crisis over a decade ago, says the International Monetary Fund’s latest World Economic Outlook update.
    “The Great Lockdown, as one might call it, is projected to shrink global growth dramatically. A partial recovery is projected for 2021, with above trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound. Much worse growth outcomes are possible and maybe even likely,” IMF’s Chief Economist Gita Gopinath said in the forward to the report.
    The global economy is projected to contract sharply by 3 percent in 2020 versus a growth of 2.9 percent in 2019, said IMF. Under the baseline scenario, which assumes the pandemic will fade in the second half of 2020, global economy is projected to grow by 5.8 percent in 2021, as economic activity normalises.
    The United States, most notably among advanced economies, is seen contracting by 5.9 percent in 2020, and the Euro Area by 7.5 percent.
    Emerging market and developing economies are also projected to contract by 1 percent in 2020 vs growth of 3.7 percent seen in 2019. By 2021, growth in emerging market and developing economies is projected to rise to 6.6 percent. China is seen growing by 1.2 percent in 2020 and by 9.2 percent in 2021
    India’s growth forecast for FY21 has also been cut steeply to 1.9 percent (as against IMF's previous forecast of 5.8 percent). This would mean the country's growth rate could fall by 230 basis points from FY20's 4.2 percent.
    “This crisis is like no other,” IMF’s report read. First, IMF says "the shock is large. The output loss associated with this health emergency and related containment measures likely dwarfs the losses that triggered the global financial crisis".
    Second, like in a war or a political crisis, “there is continued severe uncertainty about the duration and intensity of the shock”, it added.
    Third, under current circumstances there was a very different role for economic policy to play, where instead of encouraging economic activity by stimulating aggregate demand as quickly as possible, containment measures are the need of the hour.
    It said growth outcomes could be much worse than predicted if (1) the pandemic & containment measures last longer, (2) emerging and developing economies are even more severely hit, (3) tight financial conditions persist, (4) widespread scarring effects emerge due to firm closures and extended unemployment.
    “This crisis will need to be dealt with in two phases: a phase of containment and stabilization followed by the recovery phase. In both phases public health and economic policies have crucial roles to play. Quarantines, lockdowns, and social distancing are all critical for slowing transmission, giving the health care system time to handle the surge in demand for its services and buying time for researchers to try to develop therapies and a vaccine. These measures can help avoid an even more severe and protracted slump, and set the stage for economic recovery,” the report added.
    Emerging market and developing economies are expected to be worse hit than their advanced counterparts, and therefore “global effort must ensure that when COVID-19 vaccines are developed - both rich and poor nations alike have immediate access", the fund appealed in its report.
    The immediate priority is to contain the fallout from the COVID-19 outbreak, especially by increasing health care expenditures, said IMF, adding that economic policies need to cushion the impact of the decline in activity on people, firms, and financial systems alike. Policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures, and fiscal measures will need to be scaled up if the stoppages to economic activity are persistent.
    Broad-based fiscal stimulus can preempt a steeper decline in confidence, lift aggregate demand, avert an even deeper downturn, as per the report. IMF said that the actions of large central banks have supported confidence, contributed to limiting amplification of the shock, and synchronised actions can magnify their impact on individual economies.
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