The International Monetary Fund (IMF) has just released its World Economic Outlook for 2020 and 2021. To no one's surprise, it states: “The global economy is projected to contract sharply by -3% in 2020, worse than during the 2008-2009 financial crisis.” says. crisis. ” The US economy is expected to contract by 5.9% this year, and the eurozone by 7.5%. China's growth rate will be only 1.2%.
Before you rush to rebuild your retirement portfolio, read what the IMF said in April 2009. Keep in mind that at the time, the world economy was not in the midst of an intentional recession, but in complete freefall.
“Even with decisive action to restore the financial sector to health and continued use of macroeconomic policy tools to support aggregate demand, global activity is projected to contract by 1.3 percent in 2009. …Furthermore, the recession is truly global, with per capita output projected to decline in countries that account for three-quarters of the global economy. Although growth is predicted to accelerate again in 2010, the growth rate will be 1.9%, slowing compared to past recoveries. ”
What actually happened in the next two years? World GDP did contract in 2009, but by 0.7%, half the rate predicted by the IMF. In 2010, he achieved a whopping 5.1% growth (Table 1).
Let's take a closer look at what the IMF announced in April 2009. At the time, IMF economists already knew what happened in the two quarters of the crisis (October-December 2008 and January-March 2009). The numbers for China and India were still wrong. The 2010 numbers were way off the mark. The US economy grew by 3% instead of the expected zero, the German economy grew by 3.5% instead of shrinking by 1, and Japan grew by 4% instead of -0.5%. China and India far exceeded expectations.
Table 1. Shout L, Predict U, Predict V
Source: IMF World Economic Outlook, April 2009 and April 2011.
Encouragingly, IMF economists appear to have learned from their mistakes. This time, they predict a rapid but conditional recovery. “In our base scenario, which assumes the pandemic subsides in the second half of 2020 and containment efforts are gradually lifted, the global economy is projected to grow by 5.8% in 2021.” Economic activity is expected to normalize thanks to policy support. will become. ” Coincidentally, the U.S. economy is expected to grow at about the same rate. IMF economists may have exaggerated the contraction in 2020, but they are likely to be more accurate this time.
The four most dangerous words in development
However, the IMF was not satisfied with letting the numbers speak for themselves. Geeta Gopinath, the IMF's chief economist, warned that the situation is different this time and “an even worse growth outcome is possible, even likely.” Until last week, her boss, IMF Managing Director Kristalina Georgieva, had a calm voice. Here's what she says now (emphasis in original):
“Today, we face an unprecedented crisis. In fact, we are predicting the worst economic impact since the Great Depression. Just three months ago, we announced that in 2020, We had predicted positive per capita income growth in more than 160 countries. But now that number has reversed, and we now predict negative per capita income growth in more than 170 countries this year. A bleak outlook. This applies equally to developed and developing countries. This crisis knows no boundaries.”
These warnings are mild compared to those of the Organization for Economic Co-operation and Development (OECD). On March 23, OECD Secretary-General Angel Gurría warned developed countries to prepare for hardship. If they do everything right, the suffering will last for years. Otherwise, they will never recover.
“I don't subscribe to the idea of a 'V' shaped phenomenon. …At this point, we know it’s not going to be a “V.” Before the recovery period, the best case is more like a “U” shape with a long groove at the bottom. If you make the right decisions today, you can avoid looking like an “L”. ”
I didn't expect the situation to get any worse until I read that Professor Nouriel Roubini does not rule out an “I-shaped” economic trajectory, i.e. eternal freefall.
A cursory review of predictions by the OECD, IMF, and World Bank during past crises suggests that Gurría and other prognosticators are likely to be wrong. People seem to forget John Templeton's maxim that the most dangerous thing to say in investing, in good times and bad, may be, “This time it's different.” That's hardly the case. Right now, the only voice of reason seems to be that of World Bank Group President David Malpass. Last month, he suggested a sensible way forward.
“[Our] The primary goal is to provide rapid assistance in times of crisis, based on a country's needs. It is also important to shorten recovery time and create confidence that recovery is strong. …. [O]official bilateral creditor [should] Suspends debt payments from IDA countries, effective immediately. This will allow time to assess the impact of the crisis and IDA countries' financial needs and determine what debt relief or restructuring is needed. ”
I hope he stays strong. It is good economics to treat the coronavirus shock as temporary. But in the world of international development, that's bad politics. Mr. Malpass is spending a lot of time this week on persuasive policy types, but he's not sure how long he can hold out.
What did the World Bank do in 2009? And what are its economists saying now? The World Bank releases forecasts in January and June, so the global You cannot compare your forecasts with the IMF's forecasts. Instead, we turned to the January 2010 World Economic Outlook report. It took us another nine months to guess what would happen in 2010, and we were still wrong (Table 2).
Table 2. It's not easy to be optimistic.
2010 Forecast Actual Error World 2.7 3.8 -1.1 US 2.5 2.8 -0.3 Eurozone 1.0 1.7 -0.7 China 9.0 10.3 -1.3 Japan 1.3 4.0 -2.7 India 7.5 8.8 -1.3
Source: World Bank World Economic Outlook, January 2010 and January 2011
The World Bank has released projections for Africa and East Asia. The East Asia Update (which has already been revised since it was first published in March) bluntly asserts what Mr. Greer suggested.
“This time is different. The virus and society's response to it have hit economies around the world almost simultaneously, with all countries suffering both demand and supply shocks. In other words, the Great Recession. was a shock even for a large country (the United States). In contrast, COVID-19 was a shock to all countries affected by the virus, including China, East Asia, the United States, Western Europe, and the Middle East. It is a shock to both supply and demand.…Even if containment measures are limited to, say, two quarters, global annual GDP growth is likely to turn negative for the first time in decades.”
Since global GDP shrank for the first time in decades in 2009, it is inconceivable that GDP in 2020 will shrink for the first time in decades. But it's the first sentence that's more concerning, for four reasons:
What is important for governments, and by extension the IMF, World Bank, and OECD, is the policy-related reasons for this recession and whether the response is different from past crises. In fact, they are almost the same. Like the 2009 recession, this crisis started because of flawed government policies. Second, the U.S. government failed to regulate financial markets. This time, the cause was the Chinese government's failure to regulate the food market. As with previous crises, the problem was exacerbated by an initially chaotic policy response that led to an uncontained outbreak. In 2009, there was an inconsistent response to the failure of a major U.S. investment bank, and subsequent communication was chaotic. This time, the Chinese government responded inconsistently, first punishing whistleblowers, then praising them, and then providing bad information that worsened the outbreak. As in the past, international organizations have failed. In 2008, global regulators like the International Monetary Fund failed to warn the world of the vulnerability of the US mortgage market. This time it was the World Health Organization. The reason is the same. Economic powers have veto power over international monitoring bodies and tend to exercise it. In the most basic economic terms, the effects were not similar. The freezing of globally linked financial markets at the end of 2008 led to a sudden decline in economic activity, and the freezing of globally linked commodity and factor markets in the first quarter of 2020 led to a significant drop in production. . While the causes of this crisis may be different from the 2008-2009 crisis, it is also true that the causes of that crisis were not the same as his 1991, 1982, or 1975 crises. Nevertheless, the policy response has always been: In the future, it is likely that policies will continue to be a combination of fiscal, monetary/financial, social, and real sector measures. The combination of the lessons learned from past crises – the recognition that there are well-known remedies for these problems – and the options available to governments – fiscal space, the ability to borrow large amounts of money in times of recession, financial Depends on sector development, monetary policy constraints and reliable social conditions. safety net. We know that economic crises tend to be V-shaped, as most governments tend to respond reasonably well. In other words, policy responses quickly return many countries to pre-crisis economic output and living standards. This short note written by the late Michael Moussa in 2009 illustrates this point well. This is worth repeating. Just as a competent medical response can only restore a country's health to pre-COVID-19 levels, a competent economic response can only restore a country to its pre-crisis economic vitality. The economies of the United States and China fared better last year than the euro zone. The situation will probably be much the same in 2021.
Help the poor, not the delinquents
I think Professor Rudy Dornbusch used to tell scary jokes to educate his students about shock. He says he will be in temporary shock if he finds out his mother-in-law is coming to visit. When she found out that she was an identical twin, she was in eternal shock. This week you will be told by some important people that if you don't listen to them, your twins will be living with you for a long time.
Please don't believe it.
For countries with functioning governments, the coronavirus crisis is a temporary economic shock, not a permanent one. Three-quarters of people in developing countries now live in middle-income economies. It is unreasonable to expect that governments in middle-income countries will be able to cope with this shock with some support to strengthen health systems (public and private) and targeted support programs for the poor. Not. Furthermore, for the poorest countries, a moratorium on debt payments is a good way to increase the resources available to governments. Permanent debt relief for prodigal governments is neither necessary nor economically good. We will discuss this in more detail in a future blog.
