The head of the International Monetary Fund has said the recovery in the global economy since the spring is fragile and warned Rishi Sunak and his fellow policymakers against an over-hasty withdrawal of support.
In a speech intended as a curtain-raiser for next week’s annual meeting of the Washington-based organisation, Kristalina Georgieva said the unprecedented action taken by central banks and finance ministries had been a key factor in softening the impact of the Covid-19 pandemic.
Georgieva said the IMF’s next World Economic Outlook – published next week – would show a small improvement on the 4.9% drop in global output that had been expected in June. Despite the upward revision, the WEO is likely to predict that this year will be the deepest slump in the global economy since the second world war.
The World Trade Organization also said it was less gloomy about 2020 than it had been six months ago but was less upbeat about the prospects for 2021. The Geneva-based WTO said it expected global trade in goods of 9.2% comparedwith a forecast of a 13-32% drop in April. Next year, the WTO has pencilled in trade growth of 7.2% against its April expectation of a 21-24% increase.
Georgieva said that the world faced a “long ascent” and that it was vital that all countries, rich and small, should be attached to the same rope.
“The IMF in June projected a severe global GDP contraction in 2020. The picture today is less dire,” Georgieva said. “We now estimate that developments in the second and third quarters were somewhat better than expected, allowing for a small upward revision to our global forecast for 2020. And we continue to project a partial and uneven recovery in 2021.
“We have reached this point, largely because of extraordinary policy measures that put a floor under the world economy.”
Governments, Georgieva said, had provided about $12tn (£9tn) in fiscal support to households and firms, but some had been able to do more than others. “For advanced economies, it is whatever it takes,” she said. “Poorer nations strive for whatever is possible.”
The chancellor is scaling back support for the UK economy at the end of this month, when the furlough scheme is replaced by the less generous job support scheme. He told the Conservative party conference this week that he had a “sacred responsibility” to balance the books.
Georgieva said governments should avoid a premature withdrawal of policy support. “Where the pandemic persists, it is critical to maintain lifelines across the economy, to firms and workers – such as tax deferrals, credit guarantees, cash transfers, and wage subsidies,” she said.
She identified the other priorities for policymakers as: to defend people’s health; to prepare their countries for the structural change triggered by the pandemic; and to deal with debt, especially in poor countries.
“The global economy is coming back from the depths of the crisis. But this calamity is far from over. All countries are now facing what I would call ‘the long ascent’ – a difficult climb that will be long, uneven, and uncertain. And prone to setbacks,” she said.
“As we embark on this ascent, we are all joined by a single rope, and we are only as strong as the weakest climbers. They will need help on the way up.”
Georgieva said there was a risk of severe economic scarring from higher unemployment, bankruptcies and the disruption of education.
The hit to both human and physical capital would reduce the capacity of the global economy and result in output remaining well below the IMF’s pre-crisis projections for years to come. “For almost all countries, this will be a setback to the improvement of living standards,” she said.