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IMF World Economic Outlook: Recession scenario confirmed

Tuesday last week, the International Monetary Fund (IMF) presented the spring update of its World Economic Outlook. Due to the novel coronavirus pandemic, the report was widely anticipated and came at a convenient time.

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Overall, the IMF expects the Covid-19 containment measures to lower global gross domestic product (GDP) in 2020 by a whopping 3.0%, an unprecedented deep recession since the Great Depression of the 1930s. The ensuing rebound brings a sequential recovery of global GDP by 5.8% in 2021. The IMF acknowledges the huge uncertainties surrounding current forecasting and assumes in its base case a peak of Covid-19 contagion in Q2 2020, with a gradual unwinding of containment measures lasting well into the second half of 2020.

The new set of IMF forecasts is a tad more pessimistic than our own forecasts, set two weeks ago, comparing with a -2.3% contraction of global growth in our own forecast for 2020 gross domestic product. Furthermore, the IMF is more cautious on the pace of the recovery. Indeed, it is key for the outlook how the gradual drawback of containment measures enables economic momentum to normalise. As countries decide individually on the easing of measures and on timeframes, errors such as an immediate second wave of contagion due to premature local easing cannot
be ruled out, nor an unnecessary prolongation of the measures and second-round growth effects. Probably of even greater importance is the efficacy of the authorities’ stimulus measures. As of now, we assume that monetary policy measures initiated by central banks and fiscal stimuli presented by authorities seem to provide sufficient liquidity to prevent second-round effects through massive bankruptcies and so on. Should signals unfold that the contrary is the case, not only we but also the IMF would lower growth forecasts to a more pessimistic scenario.

Eurozone: Fiscal support is slowly coming
EU finance ministers agreed on a package of measures worth half a trillion euros to cushion the blow of the coronavirus pandemic. With the latest package, EU fiscal support remains smaller than national initiatives, but it is slowly gaining traction.

During the coronavirus crisis, the European Stability Mechanism (ESM) will offer credit facilities without macroeconomic conditionality, and the European Investment Bank will offer guarantees for small- and medium-sized enterprises in the EU. In addition, a temporary EU unemployment insurance fund will provide loans at favourable terms to governments. Disagreement remains over explicit debt mutualisation via the issuance of common bonds. The discussion about a recovery fund, which might be financed with common funds, is ongoing, with the Netherlands and Germany opposing this idea.

As per the eurozone’s design, the dominant force of the fiscalpolicy expansion is at the national level, which makes it difficult to fully utilise the favourable fiscal fundamentals that the eurozone offers as a whole. Hence, any European fiscal package requires politically thorny coordination among member states. The nature of the current crisis as an entire exogenous event reduces concerns that debt mutualisation could result in moral hazard, which makes an agreement easier to achieve than during the euro crisis in 2014. We expect the euro to face downwards pressure whenever member states with weaker fiscal fundamentals are confronted with rising borrowing costs due to the lack of European instruments. A weaker euro and diverging borrowing costs will increase the pressure for joint financing of the EU recovery from the
current crisis.

China: A shattered first quarter
The coronavirus outbreak threw the Chinese economy back to 2018 output levels in the first quarter of 2020, with growth of gross domestic product plunging to -6.8% year-on-year (-9.8% quarter-on-quarter).

While growth in retail sales and fixedasset investment dropped again by double digits, compared to a year ago, industrial production surprised to the upside. Although data for March suggest that the worst is behind us, we are cautiously monitoring the speed of the recovery, as the normalisation of economic activity might be slow amid the global lockdowns. Especially industrial production could take another hit, as external demand is likely to slump. We maintain our view that the rebound in China will start in the second quarter and accelerate in the second half of the year, bringing the economy back to pre-crisis output levels by the end of the year. We stick to our quarter-on-quarter growth forecasts of 3%, 4% and 3.5% in Q2, Q3 and Q4, respectively.

Due to the lower base in the first quarter, this reduces our 2020 annual growth outlook to -3.0% year-on-year. As the worldwide spreading of Covid-19 poses further headwinds for the Chinese economy, additional stimulus measures will be necessary for the economy to recover fully by the end of the year. We thus expect that the authorities will step up easing measures over the next weeks to provide additional support, especially for sectors, companies and individuals hit the most by the coronavirus.