(CNN Business) A strong comeback in 2021 is needed to help the global economy heal from the coronavirus pandemic. But the International Monetary Fund is downgrading its forecasts for next year, and warning of a long, slow recovery that will stoke poverty and damage growth.
The IMF predicted on Tuesday that the world economy will shrink by 4.4% in 2020, a less severe contraction than it forecast in June. The improvement is driven by a stronger than expected bounce in the United States and Europe after lockdowns lifted, as well as China’s return to growth.
However, the organization downgraded its outlook for 2021. The IMF now sees a 5.2% increase in global output next year, down from 5.4% in its previous report. Last month, the Organization for Economic Cooperation and Development also lowered its forecast for 2021.
“The ascent out of this calamity is likely to be long, uneven, and highly uncertain,” IMF chief economist Gita Gopinath said in a blog post.
Output in advanced economies, as well as emerging markets — with the exception of China — is projected to remain below 2019 levels next year, she said.
Looking ahead, the IMF offered a bleak look at how the global economy might perform over the medium term, its first such forecast since the outbreak began.
Global growth is expected to slow to roughly 3.5% between 2022 and 2025, leaving the output of most economies below levels that were predicted before the pandemic.
Big consequences
Slow growth over such an extended period will have large aftershocks, the IMF cautioned.
One consequence will be worsening inequality and a “severe setback” for improvements to living standards, both in developed economies like the United States and emerging markets like Mexico and Argentina.
Extreme global poverty is also expected to rise for the first time in more than two decades.
The IMF’s predictions assume that social distancing will continue into next year before fading over time as people get vaccines and Covid-19 treatments improve.
The US economy is expected to shrink by 4.3% in 2020 before expanding by 3.1% in 2021. The IMF thinks the 19 countries that use the euro will experience a harsher contraction but a sharper recovery, with output falling by 8.3% this year before jumping 5.2% next year.
Spain, which has been hard-hit by the virus and relies on service industries like tourism, is due to fare the worst among advanced economies, with output declining by 12.8% in 2020. Among emerging market economies, India — a key engine of global growth before the pandemic — will be especially damaged. The IMF thinks its economy will shrink 10.3% this year.
Britain, which has the added challenge of Brexit to cope with, will see its economy shrink by 9.8% this year.
Among major economies, only China is expected to expand in 2020. The IMF believes the country, which battled Covid-19 earlier than the rest of the world and was quickly able to move out of lockdown due to strict containment measures, will grow by 1.9%.
The IMF emphasized that uncertainty surrounding its projections is “unusually large” given the lack of clarity on the health crisis and the economic response, especially as global debt levels increase.
If new government spending is announced, the outlook could improve, the IMF said. It’s only factored in existing legislation and announcements. On the other hand, a stronger resurgence of the virus or slower-than-expected progress on vaccines could lead to a weaker economy.
