US, WASHINGTON (ORDO NEWS) — According to the chief economists of the International Monetary Fund (IMF), the world economy has entered a recession, it suffers from a “destructive cocktail” consisting of coronavirus and active actions aimed at limiting its spread.
This virus originating in China has spread all over the planet, and economists no longer need to wait for data to confirm that the world is in recession, although some official forecasts remain more optimistic.
Former senior financial officials agree that public health measures are the top priority, but a recession in their economy is likely, so governments must be prepared to spend significant amounts of money on protecting businesses and households.
Current politicians and officials are still trying to contain concerns about the economic consequences of coronavirus. Mark Carney of the Bank of England does not believe that a recession in the United Kingdom is bound to occur, while Christine Lagarde, president of the European Central Bank, said only that it would be a “severe shock”.
Gita Gopinath, IMF chief economist, believes it’s difficult to predict the course of events, but the pandemic that has swept the whole world does not look like a normal recession. Data from China indicates a significantly larger drop in the volume of services provided than would be the case with the usual economic slowdown.
“This is not an easy task,” said Ms. Gopinath. “This should be an interim shock if there is an aggressive political response that can stop its transformation into a major financial crisis.”
In her opinion, there is no reason for the long-term economic effects of the health crisis to be felt, as is the case after long periods of slow growth, which are usually followed by financial crises as households and companies try to free themselves from their debts .
However, former IMF staff are less cautious in their assessments. Here is what Kenneth Rogoff, a professor at Harvard University, said: “There seems to be no escape from a global recession, and its probability is over 90%”
Maurice Obstfeld, a professor at the University of California at Berkeley, believes the latest developments are a “disastrous cocktail for global growth.”
“Given the events in China, in Europe and in the United States, I don’t see how a very significant economic slowdown can be avoided,” he added.
Olivier Blanchard, a senior fellow at the Peterson Institute, “has no doubt that (global economic) growth will be negative” in the first six months of 2020. The second half of it will depend on the peak of infection and, in his opinion, this period will also be negative.
Raghuram Rajan, professor at the Chicago School of Business named after Buta (Chicago Booth School of Business) and former head of the Central Bank of India, is confident that the depth of the impact on the economy will depend on the success of the authorities in containing the pandemic. He hoped that the measures taken would be decisive and swift. “Any longer exposure creates stress for the existing system,” he added.
A prolonged outbreak of the virus can also lead to a second round of consequences, and then people will begin to lose their jobs, there will be another drop in demand, and all this will have a devastating effect on long-term confidence.
“This kind of impact – the closure of firms – depends on how long the first round will turn out to be, as well as on what measures we are taking to mitigate the impact of the first round,” he emphasized.
According to IMF experts, a global recession sets in at a time when economic growth — usually between 3.5% and 4% per year — drops to 2.5%. Not all current and former IMF staff believe that this definition applies to the current situation, but they are all convinced that the conditions for a global recession are already there, regardless of its exact definition.
According to IMF experts, the impact of coronavirus will be “significant”, and economic growth in 2020 will be lower than in 2019 (then it amounted to 2.9%).
In order to prevent a decrease in growth, Professor Obstfeld and Professor Rajan offer cash assistance to vulnerable households, while Professor Blanchard advocates “taking financial measures, including transfers and supporting banks.” “Everything that is possible must be done” is his conclusion.
Other economists also assume that the impact of coronavirus on the economy will be significant. “The recession arises from the lack of demand and the breakdown of supply chains. The most affected sectors will be leisure goods manufacturing, tourism, travel, transportation, energy, finance,” said Vítor Constâncio, former vice president of the European Central Bank. He continued: “It is possible that banks’ reluctance to take risks and the lack of market liquidity to issue bonds may affect loans and cause a liquidity shortage.”
Erick Nielsen, chief economist at UniCredit, an Italian bank, recalled that the financial crisis of 2008 was followed by four quarters of negative global growth. However, in his opinion, the effect of coronavirus will be felt only for a couple of blocks. He also believes that the quarterly decline in the global economy could amount to 3.2%, as it was in the first quarter of 2009.
Gilles Moec, chief economist at French insurance company Axa, is confident that it is almost impossible to predict the effects of the virus. “Our forecast models are not tuned to work with such scenarios,” he said.
Pointing to the lack of extensive testing in the United States to detect coronavirus, Danny Blanchflower, professor at Dartmouth College, emphasized: “The worst is yet to come … I believe consumer confidence will be shattered.”
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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.