The world economy has fallen into recession, suffering from a “wicked cocktail” of coronavirus and the dramatic action to limit its spread, according to four former IMF chief economists.
As the virus has spread from China to the rest of the world, economists no longer feel they have to wait for data to confirm the world is in recession, even though official forecasts remain more optimistic. The former top officials agreed that addressing the public health needs was the first priority, but said that with a sharp downturn likely, governments should be preparing to spend significant sums to protect businesses and households.
Serving policymakers and officials have so far sought to contain alarm over the economic consequences of the coronavirus. Mark Carney, Bank of England governor, has declined to predict a UK recession while Christine Lagarde, European Central Bank president, said only that it would be a “major shock”. Gita Gopinath, IMF chief economist, said it was hard to predict what might happen but that the pandemic did not look like a normal recession.
Data from China has shown a much steeper drop in services than a normal downturn would predict for instance. “There’s not an easy lesson,” Ms Gopinath said, adding: “This should be a transitory shock if there is an aggressive policy response that can stop [it] morphing into a major financial crisis.”
She also said there was no reason why the economic effects of a health crisis should linger, in the way that long periods of slow growth have tended to follow financial crises as households and companies work off their debts.
But her predecessors at the IMF were less guarded in their assessment. Kenneth Rogoff, a Harvard University professor, said: “A global recession seems baked in a cake at this point with odds over 90 per cent.” Maurice Obstfeld, a professor at University of California, Berkeley, said recent events were “a wicked cocktail for the global growth”.
He added: “I do not see how, given the events in China, Europe and the US, you are not going to see a severe slowdown.” Olivier Blanchard, senior fellow at the Peterson Institute, said there was “no question in my mind that [global economic] growth will be negative” for the first six months of 2020. The second half would depend on when peak infection was reached, he said, adding that his “own guess” was that this period would probably be negative as well.
Raghuram Rajan, professor at Chicago Booth School of Business and a former Indian central bank governor, said the depth of any economic hit would depend on the authorities’ success in containing the pandemic, which he hoped would be decisive and rapid. “Anything prolonged obviously creates more stress for the system,” he said.
A long outbreak could also lead to a second round of consequences, where workers were let go and there was another fall in demand, eroding long-term confidence, he warned. “These kinds of effects — firms closing down — depend on how prolonged the first round is, and what steps we take to alleviate that first round. So, it is up in the air,” he said.
The IMF defines a global recession as being when growth — normally about 3.5 to 4 per cent a year — falls below 2.5 per cent. Not all of the IMF alumni believe this definition is sensible in the circumstances, but all said the conditions for a global recession were met regardless of the precise definition.
The IMF has said that the impact of the virus will be “significant” and that growth in 2020 will be lower than in 2019, which was 2.9 per cent. To help offset the slowdown Profs Obstfeld and Rajan called for cash help to vulnerable households while Prof Blanchard said it was necessary to “prepare fiscal measures, including transfers and backstops to banks”. He concluded: “Do whatever it takes.”
Other economists were also clear that the economic effects of coronavirus will be serious. Vítor Constâncio, former vice-president of the European Central Bank, said: “The recession is coming from a demand deficiency and the disturbance on the supply chains. The most affected sectors will be leisure amenities, tourism, travel, transportation, energy, financials.” He continued: “[It is] possible that banks’ risk aversion and lack of market liquidity for bond issuance may affect credit and provoke liquidity squeezes.”
Erik Nielsen, chief economist of Italy’s UniCredit, noted that four consecutive quarters of negative global growth followed the 2008 financial crisis but said he expected the impact of coronavirus to last only a couple of quarters. But he also predicted that the quarterly fall could be as deep as the 3.2 per cent contraction that the global economy experienced in the first quarter of 2009. Gilles Moec, chief economist at French insurer Axa, said that trying to plot the disruption from the virus was almost impossible.
“Our forecasting models are not set up to deal with this scenario,” he said. Pointing to the lack of large-scale virus testing in the US, Danny Blanchflower, a Dartmouth College professor, said: “The worst is yet to come . . . I assume consumer confidence is going to collapse.”