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Coronavirus Will ‘Very Likely’ Lead To Worst Financial Crisis ‘Since Great Depression,’ IMF Says

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The coronavirus sweeping across the world will likely lead to the worst financial crisis since the Great Depression, the International Monetary Fund (IMF) said Tuesday.

The IMF predicted the global economy will shrink by 3% in 2020, a dramatic change from its prediction in January, when the IMF projected global gross domestic product (GDP) would rise 3.4% this year.

“It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago,” Gita Gopinath, the IMF’s chief economist, said in the latest “World Economic Outlook” report.

The latest IMF forecasts projects the U.S. economy will shrink by 5.9% this year, with the Euro Zone contracting by 7.5%. Italy and Spain, where the virus is widespread, are expected to be particularly hard hit, with their economies contracting by by 9.1% and 8%, respectively.

“For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession. For this year, growth in advanced economies is projected at -6.1 percent. Emerging market and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0 percent in 2020, and -2.2 percent if you exclude China. Income per capita is projected to shrink for over 170 countries,” Gopinath said.

And that’s the better-case scenario. “Assuming the pandemic fades in the second half of 2020 and that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains, we project global growth in 2021 to rebound to 5.8 percent. This recovery in 2021 is only partial as the level of economic activity is projected to remain below the level we had projected for 2021, before the virus hit. The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars, greater than the economies of Japan and Germany, combined.”

The global economy will recover a bit in 2021, but not fully.

“A partial recovery is projected for 2021, with above trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound,” Gopinath said.

Other financial institutes have projections that are just as grim. The World Trade Organization (WTO) said last week that global trade will shrink by between 13% and 32% this year. The Organization for Economic Coordination and Development (OECD) has also said that the effects of the virus on the global economy will resonate for “for a long time to come.”

Gopinath also said things just may get worse.

“What I have described is a baseline scenario but, given the extreme uncertainty around the duration and intensity of the health crisis, we also explore alternative, more adverse scenarios. The pandemic may not recede in the second half of this year, leading to longer durations of containment, worsening financial conditions, and further breakdowns of global supply chains. In such cases, global GDP would fall even further: an additional 3 percent in 2020 if the pandemic is more protracted this year, while, if the pandemic continues into 2021, it may fall next year by an additional 8 percent compared to our baseline scenario,” she said.

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