Virus resurgence poses biggest risk to US economy, warns IMF

The dominant risk to the US economic recovery is a resurgence of COVID-19 cases that would force renewed business shutdowns, the International Monetary Fund warned on Friday.

The US government will need to do more in coming months to provide support to households and boost demand, as well as address worsening poverty and the shortcomings of the US health system, the IMF said in its annual Article IV report on the world’s biggest economy.

“Even with the unprecedented policy support being provided to the economy,” the US suffered a 37 per cent collapse in GDP in the second quarter, and the economy is expected to contract by 6.6 percent in 2020, the fund said, stressing the “tremendous uncertainties” surrounding the outlook.

“The principal risk, and one that is the most difficult to quantify, is that a resurgence in the number of COVID-19 cases in the US could lead to renewed, partial shutdowns,” the report said.

With case counts spiking in states like Florida, Georgia, Texas and California, local authorities already have reimposed some restrictions.

And the IMF warns that the brunt of the economic impact is being borne by lower income families, predominantly black and Hispanic, who are least able to weather the downturn.

“There are already urgent warning signs that the depth of the economic contraction and the sectoral distribution of economic losses will lead to a systemic increase in poverty,” the IMF said. The Washington-based crisis lender said the recovery “will require a further round of fiscal measures in the coming months that boost demand, increase health preparedness, and support the most vulnerable.”

“The US has fiscal space and it should be deployed quickly to hasten the recovery from the second quarter contraction, permanently improve the social safety net, and facilitate a broader remaking of the US economy,” it said.

The US economy is going to take longer to recover from the hit from the coronavirus pandemic than the market expects, and more stimulus is critical, BlackRock Inc Chief Executive Larry Fink said recently.

“There is a belief that we will have some form of anti-viral that reduces the severity but let’s be clear, if we had this type of infection rate in March the markets would have been down even further,” Fink said.

“Some jobs are going to have a harder time coming back. There is going to be a need for some kind of stimulus for JOB creation,” Fink said.

There were 32 million people receiving unemployment checks under all programs in the last week of June, down 433,005 from the prior week, data on Thursday showed. Economists say unemployment remains uncomfortably high because of a second wave of layoffs, which could intensify as COVID-19 infections rise.

World Bank: Warning that a true economic recovery from the global coronavirus pandemic remains “in the distant future,” a top World Bank official on Friday urged G20 nations to extend debt relief for the poorest nations.

Cautioning policymakers not to “confuse rebound with recovery,” newly-installed World Bank chief economist Carmen Reinhart called for an extension to the existing debt moratorium.

G20 finance ministers are set to hold a virtual meeting Saturday, and are expected to discuss the status of the debt relief initiative.

She called the initial step “useful” but said, “Sadly, that step hasn’t gone as far as it has been hoped.

We are still awaiting private sector participation and the participation of members outside the Paris Club. It also has not been as extensive as hoped.”

Governments in more developed nations need to have “the willingness to do something more encompassing” that includes “a greater share of the emerging markets, as well as the developing countries.”

But Reinhart said she is “somewhat skeptical,” and noted that China is a bigger creditor than the rest of the Paris Club combined, but offers little transparency on the amount of debt or relief being given.

She also called on the private sector to do more.

The Group of 20 governments in April agreed to a one-year debt standstill that the IMF and World Bank had pushed for to help the 76 most vulnerable economies, and called on private creditors to join in.

But the Institute of International Finance, a global private banking group, this week issued a progress report on the debt standstill for private creditors which noted that only a few borrowers have approached creditors with informal requests to avail themselves of the relief.

Reinhart said she also is concerned about “the disconnect between the raging COVID pandemic” with its serious impacts on economic activity and the behavior of financial markets, which have not reflected the “depth and duration of the deep economic downturn that we’re in.”

Stock markets have been buoyed in recent weeks by signs of resurging activity as economies have begun to reopen, but Reinhart said, “I think we have a tendency to confuse rebound, with recovery, a rebound after a collapse.”

Agencies