World economy could suffer significant scarring: IMF

The economic fallout from the coronavirus pandemic could inflict “significant scarring” worldwide and the outlook for recovery remains highly uncertain, IMF chief economist Gita Gopinath said on late Friday.

The fund in April projected a global economic contraction of 3.0 per cent, but Gopinath said the updated forecasts due out June 24 “will be very likely worse.” “There is profound uncertainty of recovery,” she said in a virtual address to the 7th Asian Monetary Policy Forum.

Noting the damage done in particular sectors like transportation, as well as the growing risk of bankruptcies and persistent job losses, coupled with expected changes in consumer behaviour “one has to be concerned about the path of recovery.” “Many of these variables point to significant scarring effects,” she said, which would leave lasting damage on the global economy.

In its World Economic Outlook in April, the Washington-based crisis lender warned that the downturn could be worse if the pandemic was prolonged or saw a resurgence.

The World Bank last week said it expects the global economy to contract by 5.2 per cent, in the most widespread crisis in 150 years.

The head of the International Monetary Fund said on Thursday that governments around the world have spent $10 trillion in fiscal actions to respond to the novel coronavirus pandemic and its economic fallout, but significant further efforts are needed.

New estimates suggested that up to 100 million people could fall into extreme poverty as a result of the crisis, IMF Managing Director Kristalina Georgieva said, noting this would erase the past three years of gains made in poverty reduction.

The World Bank this week forecast the coronavirus would shrink global output by 5.2% in 2020, the deepest contraction since World War Two.

The IMF is due to update its forecasts on June 24. Georgieva has said that further cuts are “very likely” to the Fund’s April forecast for a 3% contraction in global output.

To promote a more inclusive recovery, “substantial fiscal stimulus” should focus on minimizing job losses and preventing a rise in inequality, she wrote in a blog on the IMF’s website.

Investments should focus on improving access to health care and education, strengthening climate protections and broadening the access of low-income households and small business to financial products and technology, she wrote.

“The COVID-19 crisis is inflicting the most pain on those who are already most vulnerable. This calamity could lead to a significant rise in income inequality,” she said.

Policymakers should act quickly and deliberately to promote a more inclusive recovery, she said, noting that new research by the IMF and World Bank showed that more equitable access was associated with stronger and more sustainable growth.

Prime Minister Giuseppe Conte: called on Saturday for a “courageous plan” when he launched virtual talks with EU and IMF leaders to rescue Italy’s economy and society from the “uprecedented shock” triggered by the coronavirus pandemic.

Conte said the plan was needed to surmount the nation’s crisis as Italian opposition figures shunned the hastily organised and roundly criticised emergency talks.

European Union leaders “must show that they have understood that it is about defending mutual interests,” Conte said in an opening speech transmitted to leading executives in Brussels.

“We are in the process of living an unprecedented shock with very high human, social and economic costs,” Conte said.

The EU’s third largest economy is expected to contract by at least 8.3 percent in 2020, under the most optimistic estimate from Italy’s national statistics agency.

To stimulate activity in EU countries most affected by the COVID-19 crisis, the European Commission has proposed a 750-billion-euro ($847-billion) recovery plan -- 500 billion euros in grants and 250 billion euros in loans.

Italy is expected to receive around 172 billion euros of this sum.

“We must also take advantage of (the moment) to transform the crisis into an opportunity to eliminate all the obstacles that slowed (the country) down for the last 20 years,” Conte said.

He said he shared European Commission President Ursula von der Leyen’s view that “we cannot allow ourselves to return to the pre-crisis status quo”.

The talks venue is a 17th century palace, the Casino del Bel Respiro, which Conte called a rare choice “to pay tribute to Italian beauty.

“At a time when we conceive the revival, we must make sure the whole world focuses on our country’s beauty.”

Agencies