Thoughts on World Economic Outlook - April 2020 by IMF

The IMF has recently published its April 2020 version of World Economic Outlook with the “The Great Lockdown” title. Although the full version of the report will follow up in May 2020, I would like to express my thoughts on the very first chapter of its April 2020 version as follows:

  • Given the uncertainty regarding the progression of the COVID-19, it is reasonable that different scenarios are shaped around different possible diffusion rates of the virus and the effectiveness of lockdown policies in dealing with it.

  • The main scenario considers a dissolution in the global economy focusing mostly on the second quarter of 2020 (April-June) and assumes a progressive recovery afterwards. That sums up to a 3% contraction in the global economy in 2020 and a 5.8% economic growth in 2021.

  • An introduction of a second wave of COVID-19 presented in a different scenario naturally worsens the forecasts of global economic growth.

  • However, the regional breakdown of these forecasts provides us with the interesting results to be highlighted:

Real GDP Growth Forecasts in 2020:

1-) Almost all regions’ real GDP growth forecasts are negative except Emerging and Developing Asia, which consists of China and India. Chinese economy is expected to grow 1.2% and India is expected to grow 1.9% in 2020. This is a really big statement when perhaps the most efficiently curve-bending economy during COVID-19, Korea, is expected to slowdown 1.2% in the same period.

2-) What about Sweden as it never had complete lockdowns? One may think it may be affected less economically as its local demand and supply may not be as negatively affected as other locked-down economies. Yet, it is not the case since Sweden’s real GDP is projected to shrink 6.8% in 2020.

3-) Another region that has a positive growing forecast in 2020 is Low-Income Countries in Sub-Saharan Africa. Overall, these countries are projected to grow 1.6% in 2020. There is an interesting news on this that might serve us an explanation. Uta Steinwehr reported the continent’s preparedness for a pandemic given “its vast knowledge in dealing with infectious diseases” as well as “the local commitment of innovative small and medium-sized companies to produce pharmaceutical products like masks or disinfectants” on the webpage of Deutsche Welle (DW). [Please see references]

Unemployment rate forecasts in 2020:

1-) There is a huge jump in the forecasts of unemployment rate especially in Euro-Area. As one probably expects, Mediterranean countries such as France, Italy, Spain as well as Portugal and Greece are marked the ones that are affected the most. In the Advanced Europe region, interesting forecasts are put forward with incredibly high levels of unemployment in 2020 for Ireland and Norway along with a relatively low level of unemployment for the UK.

2-) Parallel with its positive economic growth projections, Asia region is forecasted to experience a relatively low level of increase in its unemployment rate in 2020.

3-) North America does not sparkle likewise Euro-Area. For instance, the US is forecasted to have an unemployment rate of 10.4% in 2020.

Questioning the model behind these projections:

Does the model behind the provided projections take into account the differences in

  • policies of countries regarding the lockdown option versus Sweden’s approach and its timing (e.g. the UK’s timing was particularly different than that of other locked-down countries),

  • conditions of the economy when COVID-19 first hit the country in question since it directly affects the flexibility of implementing beneficial fiscal and monetary policies,

  • fiscal incentives provided to businesses and households and fiscal multipliers,

  • monetary policies and money multipliers,

  • sectoral (industrial) breakdown of economies (a heavy reliance on service sector versus on industrial or manufacturing sectors),

  • substitutability between local supply and foreign supply of the products especially whose supply chains are damaged.

A goodbye message from the author:

Whoa! The price of Arabica Coffee went up by 17.65% after COVID-19 while almost all commodity prices went down. It seems like during lockdowns, in coffee we trust! Interested in learning the supply and demand story behind it? There is a helpful article by Winnie Muli on the webpage of seeking alpha. [Please see references]

A see you next time message from the author:

I am looking forward to meeting you when the full report of WEO is published in May 2020, or I write another blog on another topic, whichever happens first!

References