'It is only gaining momentum': the global economy faces a crisis worse than the Great Depression

Coronavirus strangled the global economy, but soon it will loosen its grip and business activity will quickly recover. It will not do without consequences: the crisis will be the worst since the Great Depression of almost a century ago, and the bill for treatment will exceed $ 9 trillion, the International Monetary Fund recently calculated. A month later, he admitted that he was mistaken. Writes about it with the BBC.

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Everything turned out to be much more serious.

“The crisis is only gaining momentum, and the forecast is already worse than even our pessimistic expectations,” said IMF head Kristalina Georgieva. “If medicine does not overcome the virus, many economies will suffer even more.”

IMF economists became discouraged a couple of weeks after the West began to gradually move to quarantine. In mid-April, they lost faith in the near future and predicted a global economy decline of 3% this year, while last fall they expected it to grow by the same three percent.

For the first time in modern history, the forecast has changed so dramatically in such a short time. But the IMF maintained optimism and belief in the best: it predicted a rebound of almost 6% next year, but warned that, firstly, this does not compensate for the fall, and secondly, it will happen only if the virus does not return in the second wave, and quarantine does not have to be re-entered.

In less than a month, it became clear that the predictions are becoming obsolete faster than they can be formalized and presented to the public.

“It is extremely likely that we will update our forecasts in June. And it’s already clear that we should expect bad news,” Georgieva said.

On the subject: The US economy showed the largest decline in 10 years due to coronavirus: what's next

Who will have worse

In the days following the publication of the previous IMF damage assessment, we learned that the three largest economies in the world, which account for more than half of global output and consumption, experienced the most severe fall in modern history.

Economic activity in China declined for the first time in almost half a century. The European Union has not seen such a decline in its entire existence. And the largest US economy in the world stumbled, and the longest ten-year recovery phase in its history came to an end.

Unemployment among Americans has broken all records since the Great Depression between the two world wars of the last century.

The coronavirus interrupted the recovery of the global economy after the previous crisis - the 2008-2009 recession. Its scale now seems ridiculous to economists compared to what the planet faces after the Great Quarantine, as the current depression is already called.

This means that a return to the previous pace of increasing wealth and reducing inequality on the planet risks becoming longer. Last time it took a whole decade.

Then the world got away mainly by easing monetary policy - printing money and mitigating the financial crisis. This time it's more serious because the problem is not a lack of capital, but the virus and the associated costs and restrictions.

To restart the economy after quarantine, all countries of the world have already promised to allocate an additional $ 9 trillion from the treasury, Georgieva quoted the IMF fresh estimates.

“And we ask everyone just one thing: please spend as much as possible. And then some more,” she said.

Nobody has that kind of money, they will have to borrow it. Future generations will have to pay the bills: hard work, through increased taxes or inflation.

And if developed countries easily find lenders, then all the rest Covid-19 put in an awkward position. In harsh years, money is flowing out of emerging markets, and now is the time. The outflow of capital leads to devaluation, which increases the cost of not only new but also old debts, increasing the burden on the already full of treasury.

As a result, relatively poor developing countries like Russia, India, and Mexico will suffer even worse off from the coronacrisis, the UN warned and called for a $ 2,5 trillion anti-crisis package for them.

On the subject: Coronavirus ruins the world: how much you have to pay for resuscitation of the economy

This is not enough, the head of the IMF Georgieva upset the non-existent donors. She said on Tuesday that this assessment will also be revised upwards.

When to quarantine

But it is not all that bad.

In March, when the virus first demonstrated its deadly power, capital outflows from emerging markets reached nearly $ 100 billion, about four times more than for each of the three previous financial crises.

Georgieva said that April statistics paint the opposite picture: thanks to injections of liquidity from the central banks of the USA, the eurozone, the UK and Japan, risk appetite again woke up among investors, and capital began to return to emerging markets.

But this is all temporary relief. The future directly depends on the outcome of the battle against the virus. If it returns with renewed vigor, the damage will be much more serious, and forecasts will have to be revised again.

And the IMF has reason to fear such a development.

While Georgiev spoke at the virtual conference, economists of her organization published an assessment of the first steps of Europe towards a secure future.

They warned that the Old World is less prepared to lift restrictions than Asia, which was the first to accept the blow of the pandemic.

“Everyone has their own strategy, but Europe appears to be emerging from lockdown at an earlier stage in the epidemiological cycle than Asia. In addition, the capabilities of full-scale testing, contact tracing and isolation of outbreaks of infection in Europe are inferior to their Asian counterparts,” IMF experts warn.

“In both Asia and Europe, quarantine causes serious economic and psychological damage. The desire to remove it as quickly as possible is more than understandable. However, you need to proceed with caution, and you should not give in to the temptation to open more and faster. This is fraught with relapse of the disease.”

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