Predicting the future is always something of a challenge. Forecasting economic trends is invariably a risky business. Getting hold of reliable data is never easy and countries often like to paint unrealistically optimistic scenarios as one way of attracting foreign investment. However, the looking glass is murkier (and sadly gloomier) than ever at the moment. The pandemic has had such a profound and unprecedented economic impact that hazarding a guess about future directions of travel has never been trickier. Nevertheless, someone has to try. The International Monetary Fund (IMF) is usually regarded as one of the more reliable forecasters in that they operate with a degree of objectivity and independence that is not always possible when looking at the economic picture at the national level. Their forecasts are often used as a way of shaping government policy with regards to economic management and therefore usually demand to be listened to more seriously than most other similar exercises. In other words, what they say matters.
The IMF's Chief Economist Gita Gopinath recently announced that the Fund forecasts that the global economy will shrink by 4.9% in 2020. To put that in perspective, this would make it the worst economic contraction since the time of the Great Depression of the 1930s. What is particularly apparent in the accompanying announcement is the universality of the economic challenge. Ms Gopinath remarked that emerging markets, developing economies and advanced economies have all been badly affected. The Fund estimates that the crisis has cost governments across the globe more than $10 trillion in lost revenues and support measures such as additional spending, business loans and guarantees. As a result of this, global public debt is expected to hit a record 101% of GDP, a whopping increase of 19 percentage points compared to last year. To give yet another historical comparison this level of public debt actually surpasses those during the Second World War which was the previous public debt ratio record. Perhaps unsurprisingly in line of the IMF's longstanding advice to many countries even before the pandemic, the Fund states that it becomes particularly important that wasteful spending is reined in, the tax base is widened, tax avoidance is minimised and tax policies generally should become more progressive. These seem very sensible ideas but whether they actually lead to real changes in practice is another matter altogether.
The Fund adds that there is likely to be a very significant adverse aggregate demand shock as a result of social distancing and lockdowns. Investment is also likely to be subdued as firms defer capital expenditures given the nature of the crisis and the uncertainty that it creates. However, what is notable when looking more deeply into the figures is that although all economies have been badly affected it is advanced economies which will – in blunt numerical terms at least - bear the brunt of the damage done. 2020 GDP is estimated to fall for advanced economies by a massive 8% during the course of 2020 whereas for emerging and developing economies, it is 'only' 3%. However, to put that latter figure in perspective the Fund only forecast a 1% contraction in April and many of these emergency economies will be poorly equipped to cope with the fallout.
In terms of those most badly affected, France has seen one of the biggest expected contractions at around 12.5% this year, a massive 5% more than forecast in April. Spain's economy is also expected to contract by 12.8%. Looking at budget deficit forecasts is also a painful exercise. The US will take by far the biggest hit to its budget and is expected to be running a budgetary deficit of nearly 24% GDP this year. Brazil, South Africa and Japan are also badly affected with forecasts of around 15% budget deficits. The Fund is rightly calling for greater international collaboration to tackle the virus and its economic consequences. It is hopeful that there will be a sharp recovery in 2021 but most economies will fail to regain their pre-crisis output levels. In other words, there is hope of a rebound but it will be some time before we were back to where we were in 2019. Worryingly the Fund also expects the impact on low income households to be particularly severe. Considerable progress has been made in levelling up income levels and reducing poverty in poorer countries in the last 20 years. There is now a real danger that those hard-won gains could quickly be lost and it is important that global cooperation does indeed take place to make sure that this is not the case. In the absence of this, the long-term social and economic impacts of the pandemic could be devastating indeed with the 'have nots' suffering the most.
Wayne Bartlett is an author for accountingcpd. To see his courses, click here.
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