The global economy is already ready for a historic contraction

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The global economy was facing the worst collapse since World War II, as the coronavirus started to strike in March, well before the peak of the crisis, according to the latest Brookings-FT tracking index.

The index comes as the IMF prepares to hold virtual spring meetings this week when it releases forecasts showing the deepest contraction in the world economy since the Great Depression of the 1930s.

With confidence indicators falling from a cliff, financial markets in turmoil and real economic indicators plunging, bankruptcies and job losses will leave deep scars on the global economy and hinder its recovery for long, according to the data .

Kristalina Georgieva, Managing Director of the IMF, said that 170 of its 189 member countries would experience a drop in output per capita in 2020. “The bleak outlook applies to both advanced and developing economies. This crisis knows no borders. Everyone hurts, ”she said.

Three months ago, the fund forecast increased prosperity in 160 countries.

Since no country is immune to the Covid-19 crisis, a recovery after the closings have been relaxed will likely be slower than expected, said Professor Eswar Prasad of the Brookings Institution, who complains of the lack of a coordinated political response from governments. .

Linear diagram of the composite relative strength index of a series of indicators showing a global economy at the edge of the cliff

“The failure of national governments to come together even at such a critical time to forge a united front against the pandemic highlights a dangerous divide in international cooperation. This further damages the confidence of businesses and consumers, who are already in free fall, “said Professor Prasad.

“The American economy is almost at a standstill. . . France, Germany and the United Kingdom are facing historic recessions as all activity and trade indicators fall, “he added.

The Brookings-FT Global Economic Recovery (Tiger) Tracking Index compares indicators of real activity, financial markets and investor confidence with their historical averages for the global economy and for each country.

It showed historically significant declines for financial indicators, real economic data and confidence indicators in March, long before the worst effects on the economies of most countries.

Line chart of the index against previous confidence levels showing that confidence has fallen off a cliff

Only in China did the data stabilize, having fallen sharply much earlier after being blocked for the first time after the emergence of a coronavirus in Wuhan.

Professor Prasad said, “In some ways, China’s run economy is designed to better withstand shocks as massive as market economies. But the economy is not out of the woods yet, especially with rising unemployment, domestic and foreign demand are expected to remain weak and given the risks of a second wave of infection. “

Many other emerging economies are facing not only an economic and health crisis, but also a capital flight worse than during the global financial crisis of 2008-2009 and a sudden drop in demand for their exports.

The gloomy reading of the Tiger Index is consistent with other economic indexes and forecasts, which increasingly point to the most difficult times for the world economy in nearly a century.

The Peterson Institute of International Economics predicts that unemployment in the United States will reach almost 20% in the second quarter of this year and that the euro area will experience a 12% drop in gross domestic product.

In the United Kingdom, the National Institute for Economic and Social Research predicts that by the end of the second quarter British production will be 25% lower than at the start of the year, before starting to recover.

Economists are divided on the speed of any recovery once the bottlenecks are lifted, although they all agree that it will depend on the lingering risks of the Covid-19 pandemic and the health systems in many countries.

Karen Dynan of the Peterson Institute placed herself on the positive side of the spectrum with the belief that the recoveries would be reasonably strong, although she said there would be “setbacks” as the blockages were gradually eased.

“I see a spike in the unemployment rate around 20 percent, but it goes down pretty quickly in the third and fourth quarters, so it’s at a figure early next year,” she said.

Professor Prasad was less optimistic. “Demand has been devastated, manufacturing supply chains are severely disrupted and a financial crisis is unfolding simultaneously,” he said.

“Unlike the 2008-2009 crisis that was triggered by liquidity shortages in the financial markets, the current crisis is causing more fundamental solvency problems for many businesses and industries beyond finance.”

With central banks increasingly active and governments preparing historically important insurance contracts for households and businesses, the IMF will say this week that there will likely be a “partial recovery” in 2021. But Ms. Georgieva said warned that the outlook could further worsen if the pandemic continued to spread around the world.

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