The International Monetary Fund (IMF) believes that the ‘Great Lockdown’ recession will drag global GDP lower by 3% in 2020. FILE PHOTO. Picture Henk Kruger/African News Agency (ANA).

How lockdown will impact the global economy

High unemployment is projected to stay for a while, countries with monetary policy credibility will likely see small risks of spiraling inflation.

DURBAN – The International Monetary Fund (IMF) believes that the ‘Great Lockdown’ recession will drag global GDP lower by 3 percent in 2020.

According to IMF’s Gita Gopinath the impact of the Great Lockdown is expected to play out in three phases; first as countries enter the lockdown, then as they exit, and finally as they escape the lockdown when there is a medical solution to the pandemic.

“We are now in the early stages of the second phase as many countries begin to ease containment policies and gradually permit the resumption of economic activity. But there remains profound uncertainty about the path of the recovery. As the recovery progresses, policies should support the reallocation of workers from shrinking sectors to sectors with stronger prospects,” she said.

First, this crisis has dealt a uniquely large blow to the services sector, explains Gopinath. “In a typical crisis, the brunt is borne by manufacturing, reflecting a decline in investment, while the effect on services is generally muted as consumption demand is less affected. This time is different. In the peak months of the lockdown, the contraction in services has been even larger than in manufacturing, and it is seen in advanced and emerging market economies alike.”

As uncertainty around the virus’ future has left the world’s experts in the dark, Gopinath says with high unemployment projected to stay for a while, countries with monetary policy credibility will likely see small risks of spiralling inflation.

“Secondly, despite the large supply shocks unique to this crisis, except for food inflation, we have thus far seen, if anything, a decline in inflation and inflation expectations pretty much across the board in both advanced and emerging market economies.

“Thirdly, we will see a striking divergence of financial markets from the real economy, with financial indicators pointing to stronger prospects of a recovery than real activity suggests. With few exceptions, the rise in sovereign spreads and the depreciation of emerging market currencies are smaller than what we saw during the global financial crisis,” she added.

The organization has pledged to use its $1 trillion lending capacity to aid nations through the health crisis.

 

For LIVE updates on the Coronavirus pandemic, follow us on Twitter: @sacoronamonitor

 CORONAVIRUS MONITOR