Covid-19 will cause sharp fall in living standards, warns IMF

Covid-19 and extreme poverty
Most poverty interventions that operate in silos -- a cash handout here, a micro-credit programme there -- underutilise the potential to alleviate poverty.

Covid-19 will cause lasting damage to the living standards enjoyed by people across the world, the IMF says in its World Economic Outlook. The pandemic crisis will lead to job losses and bankruptcies across sectors, rendering several sectors of the economy unviable, warns the report, released on Tuesday.

The damage will last because all sectors will take time to achieve a slow and painful recovery and the national governments will be left with no choice but to raise tax rates on the rich and on corporates to keep the economies afloat, the IMF said in its biannual report.

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The IMF expects the global economy to shrink 4.4% in 2020, before growing at 5.2% in 2021. It suggests a less severe contraction than forecast in the June 2020 World Economic Outlook. This shows better-than anticipated second quarter GDP growth in advanced economies.

The contraction in 2020 and recovery in 2021 will leave the global economy growing at a modest 0.6% above the 2019 level. The forecast shows wide negative output gaps and higher unemployment rates in 2020 and in 2021 across both rich and emerging market economies.

The Indian economy may see more severe damage than expected earlier with the report predicting the gross domestic product to fall by 10.3% in the current financial year. The IMF had predicted a 4.5% slump in its June report.

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All developing economies and emerging markets will contract this year, IMF chief economist Gita Gopinath said at the release of the report. India’s GDP shrank much more severely than expected in the second quarter ended September, she said, adding “The economy is projected to contract by 10.3% in 2020, before rebounding by 8.8% in 2021.” The Indian economy that was struggling even before the coronavirus pandemic broke out contracted 23.9% in the June quarter, recording the worst performance among the G20 economies.

Gopinath warned world nations against withdrawing fiscal and monetary policy support prematurely, while hinting at a stronger recovery in the third quarter of FY21. The report said the economic recovery after the pandemic crisis will be long, uneven, and uncertain. With the COVID-19 pandemic showing no signs of slowing down, countries are slowly reopening. While China showed faster than expected recovery, very few countries will be able to emulate the Asian giant.